Filed Pursuant to Rule 424(B)(5)
Registration Number 333-110039
Prospectus Supplement dated September 16, 2004
(to Prospectus dated November 5, 2003)
$515,160,000 (APPROXIMATE)
ACE SECURITIES CORP. HOME EQUITY LOAN TRUST, SERIES 2004-HE2
ASSET BACKED PASS-THROUGH CERTIFICATES
ACE SECURITIES CORP.
Depositor
OCWEN FEDERAL BANK FSB
Servicer
WELLS FARGO BANK, NATIONAL ASSOCIATION
Master Servicer
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YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-9 IN THIS
PROSPECTUS SUPPLEMENT.
This prospectus supplement may be used to offer and sell the Offered
Certificates only if accompanied by the prospectus.
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OFFERED CERTIFICATES The trust created for the Series 2004-HE2 certificates
will hold a pool of first and second lien fixed-rate and
adjustable-rate, one- to four-family, residential
mortgage loans. The trust will issue ten classes of
Offered Certificates. You can find a list of these
classes, together with their initial certificate
principal balances and pass-through rates, in the table
below. Credit enhancement for all of the Offered
Certificates will be provided in the form of excess
interest, overcollateralization and subordination. In
addition, the Offered Certificates may benefit from a
series of interest rate cap payments pursuant to two
separate cap agreements which are intended partially to
mitigate interest rate risk. In addition, the Class A-1
Certificates will have the benefit of a financial
guaranty insurance policy issued by XL Capital Assurance
Inc.
[XL CAPITAL ASSURANCE LOGO]
INITIAL CERTIFICATE
CLASS PRINCIPAL BALANCE(1) PASS-THROUGH RATE
- ----------------------- ---------------------- ------------------------------
A-1.................... $ 282,154,000 One-Month LIBOR + 0.32%(2)(3)
A-2A................... $ 97,696,000 One-Month LIBOR + 0.38%(2)(3)
A-2B................... $ 24,000,000 One-Month LIBOR + 0.21%(2)(3)
A-2C................... $ 16,000,000 One-Month LIBOR + 0.55%(2)(3)
M-1.................... $ 37,260,000 One-Month LIBOR + 0.69%(2)(3)
M-2.................... $ 29,700,000 One-Month LIBOR + 1.20%(2)(3)
M-3.................... $ 8,100,000 One-Month LIBOR + 1.40%(2)(3)
M-4.................... $ 8,100,000 One-Month LIBOR + 1.85%(2)(3)
M-5.................... $ 6,750,000 One-Month LIBOR + 1.95%(2)(3)
M-6.................... $ 5,400,000 One-Month LIBOR + 3.40%(2)(3)
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(1) Approximate.
(2) The pass-through rate for each class of Offered Certificates will be subject
to the applicable Net WAC Pass-Through Rate as described in this prospectus
supplement under "Description of the Certificates-Pass-Through Rates."
(3) After the optional termination date, the margins applicable to the Class
A-1, Class A-2A, Class A-2B and Class A-2C Certificates will increase by 100%
and the margins applicable to the Class M-1, Class M-2, Class M-3, Class M-4,
Class M-5 and Class M-6 Certificates will increase by 50%.
The certificates offered by this prospectus supplement will be purchased by
Deutsche Bank Securities Inc. from the Depositor, and are being offered by
Deutsche Bank Securities Inc. from time to time for sale to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates will be approximately 100.00% of their initial Certificate
Principal Balance before deducting expenses.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR DETERMINED
THAT THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
DEUTSCHE BANK SECURITIES
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
We provide information to you about the Offered Certificates in two separate
documents that progressively provide more detail:
o the accompanying prospectus, which provides general information, some
of which may not apply to this series of certificates; and
o this prospectus supplement, which describes the specific terms of this
series of certificates.
Ace Securities Corp.'s principal offices are located at 6525 Morrison Blvd.,
Suite 318, Charlotte, North Carolina 28211, and its telephone number is
704-365-0569.
Table of Contents
Prospectus Supplement
SUMMARY OF PROSPECTUS SUPPLEMENT...............................................1
RISK FACTORS...................................................................9
USE OF PROCEEDS...............................................................17
THE MORTGAGE POOL.............................................................18
YIELD ON THE CERTIFICATES.....................................................63
DESCRIPTION OF THE CERTIFICATES...............................................84
THE ORIGINATORS..............................................................117
THE SERVICER.................................................................118
THE MASTER SERVICER..........................................................123
THE TRUSTEE..................................................................124
THE SECURITIES ADMINISTRATOR.................................................124
THE CUSTODIAN................................................................125
THE CREDIT RISK MANAGER......................................................125
POOLING AND SERVICING AGREEMENT..............................................125
THE CLASS A-1 POLICY.........................................................129
THE CERTIFICATE INSURER......................................................134
CAP AGREEMENTS AND THE CAP PROVIDER..........................................136
FEDERAL INCOME TAX CONSEQUENCES..............................................139
METHOD OF DISTRIBUTION.......................................................142
SECONDARY MARKET.............................................................142
LEGAL OPINIONS...............................................................143
EXPERTS......................................................................143
RATINGS......................................................................143
LEGAL INVESTMENT.............................................................144
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS....................................144
ANNEX I........................................................................1
[This Page Intentionally Left Blank]
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is a very broad overview of the certificates
offered by this prospectus supplement and the accompanying prospectus and does
not contain all of the information that you should consider in making your
investment decision. To understand the terms of the Offered Certificates,
carefully read this entire prospectus supplement and the entire accompanying
prospectus.
Title of Series..................... ACE Securities Corp. Home Equity Loan
Trust, Series 2004-HE2, Asset Backed
Pass-Through Certificates.
Cut-off Date........................ September 1, 2004.
Closing Date........................ On or about September 20, 2004.
Depositor........................... Ace Securities Corp., a Delaware
corporation. SEE "THE DEPOSITOR" IN THE
PROSPECTUS.
Originators......................... Ownit Mortgage Solutions, Inc. f/k/a
Oakmont Mortgage Company Inc., a
California corporation, with respect to
approximately 45.89% of the mortgage
loans and Encore Credit Corp., a
California corporation, with respect to
approximately 23.41% of the mortgage
loans, in each case, by aggregate
principal balance as of the Cut-off Date.
The remainder of the mortgage loans were
originated by various originators, none
of which have originated more than 10% of
the mortgage loans. SEE "THE ORIGINATORS"
IN THIS PROSPECTUS SUPPLEMENT.
Mortgage Loan Seller................ DB Structured Products, Inc., a Delaware
corporation.
Master Servicer..................... Wells Fargo Bank, National Association, a
national banking association.
Servicer............................ Ocwen Federal Bank FSB. SEE "THE
SERVICER" IN THIS PROSPECTUS SUPPLEMENT.
Trustee............................. HSBC Bank USA, National Association, a
national banking association, will be the
trustee of the trust. SEE "THE TRUSTEE"
IN THIS PROSPECTUS SUPPLEMENT.
Securities Administrator............ Wells Fargo Bank, National Association
will be the securities administrator. SEE
"THE SECURITIES ADMINISTRATOR" IN THIS
PROSPECTUS SUPPLEMENT.
Custodian........................... Wells Fargo Bank, National Association.
SEE "THE CUSTODIAN" IN THIS PROSPECTUS
SUPPLEMENT.
Certificate Insurer................. XL Capital Assurance Inc., a New York
monoline insurance company, will issue a
certificate guaranty insurance policy for
the benefit of the Class A-1
Certificates. SEE "THE CLASS A-1 POLICY"
AND "THE CERTIFICATE INSURER" IN THIS
PROSPECTUS SUPPLEMENT.
S-1
Distribution Dates.................. Distributions on the Offered Certificates
will be made on the 25th day of each
month, or, if that day is not a business
day, on the next succeeding business day,
beginning in October 2004.
Credit Risk Manager................. The Murrayhill Company, a Colorado
corporation. SEE "THE CREDIT RISK
MANAGER" IN THIS PROSPECTUS SUPPLEMENT.
Offered Certificates................ Only the certificates listed on the cover
of this prospectus supplement are being
offered by this prospectus supplement.
Each class of Offered Certificates will
have the initial certificate principal
balance and pass through rate set forth
or described in the table appearing on
the cover of this prospectus supplement.
THE TRUST
The Depositor will establish a trust with respect to the certificates under the
pooling and servicing agreement dated as of the Cut-off Date among the
Depositor, the Servicer, the Master Servicer, the Securities Administrator and
the Trustee. There are fifteen classes of certificates representing the trust.
SEE "DESCRIPTION OF THE CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. In general, distributions of interest and principal, if
applicable, on the Offered Certificates will be made only from payments received
in connection with the mortgage loans.
THE MORTGAGE LOANS
References to percentages of the mortgage loans under this section are
calculated based on the aggregate principal balance of the mortgage loans as of
the Cut-off Date.
The trust will contain approximately 3,362 conventional, one- to four-family,
first and second lien fixed-rate and adjustable-rate mortgage loans on
residential real properties (the "Mortgage Loans").
For purposes of calculating interest and principal distributions on the Class
A-1 Certificates and Class A-2A, Class A-2B and Class A-2C Certificates
(collectively, the "Class A-2 Certificates;" and together with the Class A-1
Certificates, the "Class A Certificates"), the Mortgage Loans have been divided
into two loan groups, designated as the "Group I Mortgage Loans" and the "Group
II Mortgage Loans." The Group I Mortgage Loans consist of first and second lien
fixed-rate and adjustable-rate mortgage loans with principal balances at
origination that conformed to Freddie Mac loan limits. The Group II Mortgage
Loans consist of first and second lien fixed-rate and adjustable-rate mortgage
loans with principal balances at origination that may or may not have conformed
to Freddie Mac loan limits.
The Class A-1 Certificates represent interests in the Group I Mortgage Loans.
The Class A-2 Certificates represent interests in the Group II Mortgage Loans.
The Class M-1, Class M-2, Class M-3, Class M-4, Class M-5 and Class M-6
Certificates (collectively, the "Mezzanine Certificates") represent interests in
all of the Mortgage Loans.
The Group I Mortgage Loans consist of 2,548 mortgage loans and have an aggregate
principal balance of approximately $362,899,536 as of the Cut-off Date. The
Group I Mortgage Loans have original terms to maturity of not greater than
approximately 30 years and have the following characteristics as of the Cut-off
Date:
Range of mortgage rates: 4.590% to 13.000%.
Weighted average mortgage rate: 6.935%.
Range of gross margins: 3.375% to 9.750%.
Weighted average gross margin: 6.118%.
Range of minimum mortgage rates: 4.590% to 11.340%.
Weighted average minimum mortgage rate: 6.688%.
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Range of maximum mortgage rates: 9.750% to 18.340%.
Weighted average maximum mortgage rate: 12.860%.
Weighted average remaining term
to stated maturity: 344 months.
Range of principal balances: $5,747 to $498,666.
Average principal balance: $142,425.
Range of original combined
loan-to-value ratios: 9.98% to 100.00%.
Weighted average original combined
loan-to value ratio: 81.80%.
Weighted average next adjustment date: July 22, 2006.
The Group II Mortgage Loans consist of 814 mortgage loans and have an aggregate
principal balance of approximately $177,100,580 as of the Cut-off Date. The
Group II Mortgage Loans have original terms to maturity of not greater than
approximately 30 years and have the following characteristics as of the Cut-off
Date:
Range of mortgage rates: 4.690% to 12.125%.
Weighted average mortgage rate: 6.878%.
Range of gross margins: 3.875% to 9.250%.
Weighted average gross margin: 5.885%.
Range of minimum mortgage rates: 4.690% to 9.250%.
Weighted average minimum mortgage rate: 6.419%.
Range of maximum mortgage rates: 10.500% to 17.250%.
Weighted average maximum mortgage rate: 12.585%.
Weighted average remaining term
to stated maturity: 337 months.
Range of principal balances: $9,913 to $1,000,000.
Average principal balance: $217,568.
Range of original combined
loan-to-value ratios: 20.24% to 100.00%.
Weighted average original combined
loan-to value ratio: 82.79%.
Weighted average next adjustment date: October 14, 2006.
The Mortgage Loans consist of 3,362 mortgage loans and in the aggregate have a
principal balance of approximately $540,000,117 as of the Cut-off Date and have
the following characteristics as of the Cut-off Date:
Range of mortgage rates: 4.590% to 13.000%.
Weighted average mortgage rate: 6.917%.
Range of gross margins: 3.375% to 9.750%.
Weighted average gross margin: 6.045%.
Range of minimum mortgage rates: 4.590% to 11.340%.
Weighted average minimum mortgage rate: 6.605%.
Range of maximum mortgage rates: 9.750% to 18.340%.
Weighted average maximum mortgage rate: 12.775%.
Weighted average remaining term
to stated maturity: 342 months.
Range of principal balances: $5,747 to $1,000,000.
Average principal balance: $160,619.
Range of original combined
loan-to-value ratios: 9.98% to 100.00%.
Weighted average original combined
loan-to value ratio: 82.13%.
Weighted average next adjustment date: August 17, 2006.
The mortgage rate on each adjustable-rate Mortgage Loan will adjust
semi-annually on each adjustment date to equal the sum of (A) Six-Month LIBOR
(as defined herein) and (B) the related gross margin, subject to periodic and
lifetime limitations, as described under "The Mortgage Pool" in this prospectus
supplement. SEE ALSO "THE MORTGAGE POOL-THE INDEX" IN THIS PROSPECTUS
SUPPLEMENT.
The first adjustment date on the adjustable-rate Mortgage Loans will occur after
an initial period of approximately two, three or five years from the date of
origination, as more fully described under "The Mortgage Pool" in this
prospectus supplement.
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FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE LOANS, SEE "THE MORTGAGE POOL"
IN THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATES
OFFERED CERTIFICATES. The Class A Certificates and the Mezzanine Certificates
are the only classes of certificates offered by this prospectus supplement. The
Offered Certificates will have the characteristics shown in the table on the
cover of this prospectus supplement and as described in this prospectus
supplement.
The pass-through rate on each class of Offered Certificates is variable and will
be calculated for each Distribution Date as described below and under
"Description of the Certificates- Pass-Through Rates" in this prospectus
supplement. The pass-through rate on each class of Offered Certificates is a
rate per annum based on one-month LIBOR plus an applicable spread, subject to a
rate cap calculated based on the weighted average mortgage rate of the Mortgage
Loans in the related loan group, less the fee rates payable to the Servicer, the
Credit Risk Manager and the Master Servicer (collectively, the "Administration
Costs") and, with respect to the Class A-1 Certificates, the premium payable to
the Certificate Insurer for providing the Class A-1 Policy, and in addition, in
the case of the Mezzanine Certificates based on both loan groups, weighted in
proportion to the results of subtracting from the aggregate principal balance of
each loan group the certificate principal balance of the related Class A
Certificates, and in each case, adjusted for the actual number of days in the
interest accrual period. The initial spread relating to the Class A-1
Certificates is 0.32% per annum. The initial spread relating to the Class A-2A
Certificates is 0.38% per annum. The initial spread relating to the Class A-2B
Certificates is 0.21% per annum. The initial spread relating to the Class A-2C
Certificates is 0.55% per annum. The initial spread relating to the Class M-1
Certificates is 0.69% per annum. The initial spread relating to the Class M-2
Certificates is 1.20% per annum. The initial spread relating to the Class M-3
Certificates is 1.40% per annum. The initial spread relating to the Class M-4
Certificates is 1.85% per annum. The initial spread relating to the Class M-5
Certificates is 1.95% per annum. The initial spread relating to the Class M-6
Certificates is 3.40% per annum. Each spread is subject to increase as more
fully described under "Description of the Certificates-Pass-Through Rates" in
this prospectus supplement.
The Offered Certificates will be sold by the Depositor to Deutsche Bank
Securities Inc. (the "Underwriter") on the Closing Date.
The Offered Certificates will be represented initially by one or more global
certificates registered in the name of a nominee of the Depository Trust Company
in the United States, or of Clearstream and the Euroclear System (each, as
defined herein), in Europe in minimum denominations of $25,000 and integral
multiples of $1.00 in excess of the minimum denominations. SEE "DESCRIPTION OF
THE CERTIFICATES-BOOK-ENTRY CERTIFICATES" IN THIS PROSPECTUS SUPPLEMENT.
CLASS B CERTIFICATES. The Class B-1 Certificates and Class B-2 Certificates
(together, the "Class B Certificates") are not offered by this prospectus
supplement. The Class B Certificates represent interests in all of the Mortgage
Loans. The Class B-1 Certificates and Class B-2 Certificates will have an
initial certificate principal balance of approximately $9,450,000 and
$8,100,000, respectively. The pass-through rate applicable to each class of
Class B Certificates is a rate per annum based on one-month LIBOR plus an
applicable spread, subject to a rate cap calculated based on the weighted
average mortgage rate of the Mortgage Loans, less the Administration Costs,
weighted in proportion to the results of subtracting from the aggregate
principal balance of each loan group the certificate principal balance of the
related Class A Certificates and adjusted for the actual number of days in the
interest accrual period. The initial spread relating to the Class B-1
Certificates is 3.50% per annum. The initial spread relating to the Class B-2
Certificates is 3.50% per annum. The spread applicable to each class of Class B
Certificates is subject to increase as more fully described under "Description
of the Certificates-Pass-Through Rates" in this prospectus supplement. The Class
B Certificates in the aggregate initially evidence an interest of approximately
3.25% in the trust.
CLASS CE CERTIFICATES. The Class CE Certificates are not offered by this
prospectus supplement.
S-4
The Class CE Certificates will have an initial certificate principal balance of
approximately $7,290,017, which is equal to the initial overcollateralization
required by the pooling and servicing agreement. The Class CE Certificates
initially evidence an interest of approximately 1.35% in the trust.
Class P Certificates. The Class P Certificates are not offered by this
prospectus supplement. The Class P Certificates will have an initial certificate
principal balance of $100 and will not be entitled to distributions in respect
of interest. The Class P Certificates will be entitled to all prepayment charges
received in respect of the Mortgage Loans.
RESIDUAL CERTIFICATES. The Class R Certificates or Residual Certificates, which
are not offered by this prospectus supplement, represent the residual interests
in the trust.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Offered
Certificates and the Class B Certificates consists of excess interest,
overcollateralization and subordination, each as described in this section and
under "Description of the Certificates-Credit Enhancement" and
"-Overcollateralization Provisions" in this prospectus supplement. The Class A-1
Certificates also have the benefit of a financial guaranty insurance policy
provided by the Certificate Insurer as described under "The Class A-1 Policy" in
this prospectus supplement. In addition, the Offered Certificates and the Class
B Certificates will have the benefit of two separate cap agreements provided by
The Royal Bank of Scotland plc (the "Cap Provider") as described under "The Cap
Agreements and the Cap Provider" in this prospectus supplement.
EXCESS INTEREST. The Mortgage Loans bear interest each month in an amount that
in the aggregate is expected to exceed the amount needed to distribute monthly
interest on the Offered Certificates and the Class B Certificates and to pay
certain fees and expenses of the trust. Any excess interest from the Mortgage
Loans each month will be available to absorb realized losses on the Mortgage
Loans and to maintain or restore overcollateralization at required levels.
SUBORDINATION. The rights of the holders of the Mezzanine Certificates, the
Class B Certificates and Class CE Certificates to receive distributions will be
subordinated, to the extent described in this prospectus supplement, to the
rights of the holders of the Class A Certificates.
In addition, to the extent described under "Description of the
Certificates--Allocation of Losses; Subordination" in this prospectus
supplement,
o the rights of the holders of the Class M-2, Class M-3, Class M-4, Class M-5,
Class M-6, Class B-1, Class B-2 and Class CE Certificates will be subordinated
to the rights of the holders of the Class M-1 Certificates;
o the rights of the holders of the Class M-3, Class M-4, Class M-5, Class M-6,
Class B-1, Class B-2 and Class CE Certificates will be subordinated to the
rights of the holders of the Class M-2 Certificates;
o the rights of the holders of the Class M-4, Class M-5, Class M-6, Class B-1,
Class B-2 and Class CE Certificates will be subordinated to the rights of the
holders of the Class M-3 Certificates;
o the rights of the holders of the Class M-5, Class M-6, Class B-1, Class B-2
and Class CE Certificates will be subordinated to the rights of the holders of
the Class M-4 Certificates;
o the rights of the holders of the Class M-6, Class B-1, Class B-2 and Class CE
Certificates will be subordinated to the rights of the holders of the Class M-5
Certificates;
o the rights of the holders of the Class B-1, Class B-2 and Class CE
Certificates will be subordinated to the rights of the holders of the Class M-6
Certificates; and
o the rights of the holders of the Class B-2 Certificates and Class CE
Certificates will be subordinated to the rights of the holders of the Class B-1
Certificates.
S-5
o the rights of the holders of the Class CE Certificates will be subordinated to
the rights of the holders of the Class B-2 Certificates.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
the more senior certificates protection against realized losses on the Mortgage
Loans, as described under "Description of the Certificates--Allocation of
Losses; Subordination" in this prospectus supplement.
OVERCOLLATERALIZATION. The aggregate principal balance of the Mortgage Loans as
of the Cut-off Date will exceed the aggregate certificate principal balance of
the Class A Certificates, the Mezzanine Certificates, the Class B Certificates
and the Class P Certificates on the Closing Date by approximately $7,290,017,
which is equal to the initial Certificate Principal Balance of the Class CE
Certificates. This amount represents approximately 1.35% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date, and is the
initial amount of overcollateralization required to be provided by the mortgage
pool under the pooling and servicing agreement. SEE "DESCRIPTION OF THE
CERTIFICATES-OVERCOLLATERALIZATION PROVISIONS" IN THIS PROSPECTUS SUPPLEMENT.
THE CLASS A-1 POLICY. An irrevocable and unconditional certificate guaranty
insurance policy (the "Class A-1 Policy") will be issued by the Certificate
Insurer with respect to the Class A-1 Certificates. The Class A-1 Policy will
guarantee the timely distribution of interest and the ultimate distribution of
principal on the Class A-1 Certificates to the extent described in this
prospectus supplement. If the Certificate Insurer were unable to pay under the
Class A-1 Policy, the Class A-1 Certificates could be subject to losses.
NO CLASS OF CERTIFICATES OTHER THAN THE CLASS A-1 CERTIFICATES WILL BE COVERED
BY THE CLASS A-1 POLICY.
CAP AGREEMENTS. For each Distribution Date occurring on or prior to the
Distribution Date in April 2007, the Class A-1 Certificates, the Mezzanine
Certificates and the Class B Certificates will have the benefit of a cap
agreement (the "Group I Cap Agreement") which is intended partially to mitigate
interest rate risk. The Group I Cap Agreement requires the Cap Provider to make
a cap payment in an amount equal to the product of:
(1) the excess, if any, of one-month LIBOR over a specified strike rate
for the related Distribution Date (provided, however, that if one-month LIBOR
exceeds 9.00% the payment due will be calculated as if one-month LIBOR were
9.00%);
(2) the related scheduled notional amount, which is based on the
expected amortization of the Group I Mortgage Loans; and
(3) a fraction, the numerator of which is the actual number of days
elapsed from the previous Distribution Date to but excluding the current
Distribution Date (or, for the first Distribution Date, the actual number of
days elapsed from the Closing Date to but excluding the first Distribution
Date), and the denominator of which is 360.
For each Distribution Date occurring on or prior to the Distribution Date in
June 2007, the Class A-2 Certificates, the Mezzanine Certificates and the Class
B Certificates will have the benefit of a cap agreement (the "Group II Cap
Agreement") which is intended partially to mitigate interest rate risk. The
Group II Cap Agreement requires the Cap Provider to make a cap payment in an
amount equal to the product of:
(1) the excess, if any, of one-month LIBOR over a specified strike rate
for the related Distribution Date (provided, however, that if one-month LIBOR
exceeds 9.00% the payment due will be calculated as if one-month LIBOR were
9.00%);
(2) the related scheduled notional amount, which is based on the
expected amortization of the Group II Mortgage Loans; and
(3) a fraction, the numerator of which is the actual number of days
elapsed from the previous Distribution Date to but excluding the current
Distribution Date (or, for the first Distribution Date, the actual number of
days
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elapsed from the Closing Date to but excluding the first Distribution Date), and
the denominator of which is 360.
Cap payments, if any, made by the Cap Provider will be deposited into a reserve
fund and will be available for distribution on the Offered Certificates and the
Class B Certificates, in respect of any interest shortfall amounts resulting
from the application of the applicable rate cap, to the limited extent described
herein. SEE "DESCRIPTION OF THE CERTIFICATES" AND "THE CAP AGREEMENTS AND THE
CAP PROVIDER" IN THIS PROSPECTUS SUPPLEMENT.
ALLOCATION OF LOSSES. If, on any Distribution Date, there is not sufficient
excess interest or overcollateralization (represented by the Class CE
Certificates) to absorb realized losses on the Mortgage Loans as described under
"Description of the Certificates--Overcollateralization Provisions" in this
prospectus supplement, then realized losses on the Mortgage Loans will be
allocated to the Class B-2, Class B-1, Class M-6, Class M-5, Class M-4, Class
M-3, Class M-2 and Class M-1 Certificates, in that order, in each case until the
certificate principal balance of each such class has been reduced to zero. The
pooling and servicing agreement does not permit the allocation of realized
losses on the Mortgage Loans to the Class A Certificates; however, investors in
the Class A Certificates should realize that under certain loss scenarios, there
will not be enough principal and interest on the Mortgage Loans to pay the Class
A Certificates all interest and principal amounts to which these certificates
are then entitled; provided however that, subject to the limitations described
in this prospectus supplement and the Class A-1 Policy, the Class A-1
Certificates will have the benefit of the Class A-1 Policy which guarantees the
timely distribution of interest and the ultimate distribution of principal to
the Class A-1 Certificates. SEE "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF
LOSSES; SUBORDINATION" IN THIS PROSPECTUS SUPPLEMENT.
Once realized losses are allocated to the Class B Certificates and the Mezzanine
Certificates, their certificate principal balances will be permanently reduced
by the amount so allocated. However, the amount of any realized losses allocated
to the Class B Certificates and the Mezzanine Certificates may be distributed to
the holders of those certificates according to the priorities set forth under
"Description of the Certificates--Overcollateralization Provisions" in this
prospectus supplement.
P&I ADVANCES
The Servicer is required to advance delinquent payments of principal and
interest on the Mortgage Loans, subject to the limitations described under
"Description of the Certificates--P&I Advances" in this prospectus supplement. A
successor servicer (which may be the Master Servicer) will be obligated to make
any required delinquency advance if the Servicer fails in its obligation to do
so, to the extent provided in the pooling and servicing agreement. The Servicer
or any successor servicer, as the case may be, is entitled to be reimbursed for
these advances, and therefore these advances are not a form of credit
enhancement. SEE "DESCRIPTION OF THE CERTIFICATES--P&I ADVANCES" IN THIS
PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE SECURITIES--ADVANCES IN RESPECT OF
DELINQUENCIES" IN THE PROSPECTUS.
OPTIONAL TERMINATION
At its option and subject to certain conditions, the Class CE Certificateholder
may purchase all of the Mortgage Loans in the mortgage pool, together with any
properties in respect of the Mortgage Loans acquired on behalf of the trust, and
thereby effect termination and early retirement of the certificates, after the
aggregate principal balance of the Mortgage Loans (and properties acquired in
respect of the Mortgage Loans), remaining in the trust has been reduced to less
than 10% of the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date. Subject to certain additional conditions set forth in the pooling
and servicing agreement, in the event that the Class CE Certiicateholder fails
to exercise its optional termination right, the Servicer, may, at its option,
exercise such optional termination right. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE
SECURITIES--TERMINATION" IN THE PROSPECTUS.
S-7
FEDERAL INCOME TAX CONSEQUENCES
Multiple elections will be made to treat designated portions of the trust
(exclusive of the Reserve Fund and the Cap Agreements) as real estate mortgage
investment conduits (each a "REMIC") for federal income tax purposes. SEE
"MATERIAL FEDERAL INCOME TAX CONSIDERATIONS--REMICS --CHARACTERIZATION OF
INVESTMENTS IN REMIC SECURITIES" IN THE PROSPECTUS.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, SEE "FEDERAL INCOME TAX CONSEQUENCES" IN
THIS PROSPECTUS SUPPLEMENT AND "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS" IN
THE PROSPECTUS.
RATINGS
It is a condition to the issuance of the certificates that the Offered
Certificates receive at least the following ratings from Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P") and Moody's Investors
Service, Inc. ("Moody's"):
Offered
Certificates S&P Moody's
- -------------------- ----------- ---------------
Class A-1 AAA Aaa
Class A-2A AAA Aaa
Class A-2B AAA Aaa
Class A-2C AAA Aaa
Class M-1 AA+ Aa2
Class M-2 AA A2
Class M-3 A+ A3
Class M-4 A Baa1
Class M-5 A Baa2
Class M-6 A- Baa3
A security rating does not address the frequency of prepayments on the Mortgage
Loans or the corresponding effect on yield to investors. The ratings on the
Class A-1 Certificates are provided without regard to the Class A-1 Policy. SEE
"YIELD ON THE CERTIFICATES" AND "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND
"YIELD CONSIDERATIONS" IN THE PROSPECTUS.
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). SEE
"LEGAL INVESTMENT" IN THIS PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
It is expected that the Offered Certificates may be purchased by a pension or
other employee benefit plan subject to the Employee Retirement Income Security
Act of 1974 or Section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code") so long as certain conditions are met. A fiduciary of an employee
benefit plan must determine that the purchase of a certificate is consistent
with its fiduciary duties under applicable law and does not result in a
nonexempt prohibited transaction under applicable law. SEE "CONSIDERATIONS FOR
BENEFIT PLAN INVESTORS" IN THIS PROSPECTUS SUPPLEMENT AND "ERISA CONSIDERATIONS"
IN THE PROSPECTUS.
S-8
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CONSIDER CAREFULLY,
IDENTIFIES SIGNIFICANT RISKS ASSOCIATED WITH AN INVESTMENT IN THE CERTIFICATES.
THE MORTGAGE LOANS WERE UNDERWRITTEN TO STANDARDS WHICH DO NOT CONFORM TO THE
STANDARDS OF FANNIE MAE OR FREDDIE MAC.
The underwriting standards of the originators are intended to assess
the ability and willingness of the mortgagor to repay the debt and to evaluate
the adequacy of the property as collateral for the mortgage loan. The
originators consider, among other things, a mortgagor's credit history,
repayment ability and debt service-to-income ratio, as well as the value, type
and use of the mortgaged property. As further described in this prospectus
supplement, the underwriting standards of the originators do not conform to
Fannie Mae and Freddie Mac guidelines.
In addition, mortgage loans originated by the originators generally
bear higher rates of interest than mortgage loans originated in accordance with
Fannie Mae and Freddie Mac guidelines and may experience rates of delinquency,
foreclosure and bankruptcy that are higher, and that may be substantially
higher, than those experienced by mortgage loans underwritten in accordance with
Fannie Mae and Freddie Mac guidelines.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated in accordance with
Fannie Mae and Freddie Mac guidelines. No assurance can be given that the values
of the related mortgaged properties have remained or will remain at the levels
in effect on the dates of origination of the related Mortgage Loans. SEE "THE
MORTGAGE POOL--UNDERWRITING STANDARDS" IN THIS PROSPECTUS SUPPLEMENT.
MORTGAGE LOANS WITH HIGH COMBINED LOAN-TO-VALUE RATIOS LEAVE THE RELATED
MORTGAGOR WITH LITTLE OR NO EQUITY IN THE RELATED MORTGAGED PROPERTY.
Approximately 35.93% of the Group I Mortgage Loans and approximately
39.63% of the Group II Mortgage Loans, in each case, by the related aggregate
principal balance as of the Cut-off Date, had a combined loan-to-value ratio at
origination in excess of 80%. No Mortgage Loan had a combined loan-to-value
ratio at origination in excess of 100%.
An overall decline in the residential real estate market, a rise in
interest rates over a period of time and the condition of a mortgaged property,
as well as other factors, may have the effect of reducing the value of the
mortgaged property from the appraised value at the time the Mortgage Loan was
originated. If there is a reduction in the value of the mortgaged property, the
combined loan-to-value ratio may increase over what it was at the time the
Mortgage Loan was originated. Such an increase may reduce the likelihood of
liquidation or other proceeds being sufficient to satisfy the Mortgage Loan, and
any losses to the extent not covered by the credit enhancement may affect the
yield to maturity of your certificates. There can be no assurance that the value
of a mortgaged property estimated in any appraisal or review is equal to the
actual value of that mortgaged property at the time of that appraisal or review.
Investors should note that the values of the mortgaged properties may be
insufficient to cover the outstanding principal balance of the Mortgage Loans.
There can be no assurance that the combined loan-to-value ratio of any Mortgage
Loan determined at any time after origination will be less than or equal to its
combined loan-to-value ratio at origination.
S-9
DEVELOPMENTS IN SPECIFIED STATES COULD HAVE A DISPROPORTIONATE EFFECT ON THE
MORTGAGE LOANS DUE TO THE GEOGRAPHIC CONCENTRATION OF THE MORTGAGED PROPERTIES.
Approximately 54.04% of the Group I Mortgage Loans and approximately
77.84% of the Group II Mortgage Loans, in each case, by the related aggregate
principal balance as of the Cut-off Date, are secured by mortgaged properties
located in the State of California. Approximately 1.10% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date, are located in a
single California zip code, which is the largest concentration of Mortgage Loans
in a single zip code. If the California residential real estate market should
experience an overall decline in property values after the dates of origination
of the Mortgage Loans, the rates of delinquencies, foreclosures, bankruptcies
and losses on the Mortgage Loans may increase over historical levels of
comparable type loans, and may increase substantially. In addition, properties
located in California may be more susceptible than homes located in other parts
of the country to certain types of uninsured hazards, such as earthquakes,
hurricanes, as well as floods, mudslides and other natural disasters.
Hurricane Charley, which struck Tampa, Florida and surrounding areas on
August 13 and 14, 2004 and Hurricane Frances which struck the east coast of
Florida in early September 2004, may have adversely affected any mortgaged
properties located in those areas. In addition, Hurricane Ivan may have affected
or may affect in the future mortgaged properties located in its path. The
Mortgage Loan Seller will make a representation and warranty that each mortgaged
property is free of material damage and in good repair as of the closing date.
In the event that a mortgaged property is materially damaged as of the closing
date due to Hurricane Charley, Hurricane Frances or Hurricane Ivan, the Mortgage
Loan Seller will be required to repurchase the related mortgage loan from the
trust. Approximately 1.11% of the Group I Mortgage Loans and approximately 0.36%
of the Group II Mortgage Loans, in each case, by the related aggregate principal
balance as of the Cut-off Date, included in the mortgage pool are located in
areas which may have been affected by Hurricane Charley or Hurricane Frances. In
addition, no assurance can be given as to the effect of these events on the rate
of delinquencies and losses on the Mortgage Loans secured by mortgaged
properties that may have been affected by Hurricane Charley, Hurricane Frances
or Hurricane Ivan. Any adverse impact as a result of this event may be borne by
the holders of the offered certificates, particularly if the Mortgage Loan
Seller fails to repurchase any Mortgage Loan that breaches this representation
and warranty.
SECOND LIEN MORTGAGE LOANS RISK.
Approximately 7.55% of the Group I Mortgage Loans and approximately
13.31% of the Group II Mortgage Loans, in each case, by the related aggregate
principal balance as of the Cut-off Date, are secured by second liens on the
related mortgaged properties. The proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding balance of
such Mortgage Loans only to the extent that the claims of the related senior
mortgages have been satisfied in full, including any related foreclosure costs.
In circumstances when it has been determined to be uneconomical to foreclose on
the mortgaged property, the servicer may write off the entire balance of such
Mortgage Loan as a bad debt. The foregoing considerations will be particularly
applicable to Mortgage Loans secured by second liens that have high combined
loan-to-value ratios because it is comparatively more likely that the servicer
would determine foreclosure to be uneconomical in the case of such Mortgage
Loans. The rate of default of second lien Mortgage Loans may be greater than
that of Mortgage Loans secured by first liens on comparable properties.
BALLOON MORTGAGE LOAN RISK.
Mortgage Loans that are balloon loans pose a risk because a borrower
must make a large lump sum payment of principal at the end of the loan term. If
the borrower is unable to pay the lump sum or refinance such amount, the
servicer will not be obligated to advance the principal portion of
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that lump sum payment, you may suffer a loss. Approximately 5.66% of the Group I
Mortgage Loans and approximately 10.18% of the Group II Mortgage Loans, in each
case, by related aggregate principal balance as of the Cut-off Date, are balloon
loans.
INTEREST ONLY MORTGAGE LOAN RISK.
Approximately 30.24% of the Group I Mortgage Loans and approximately
39.79% of the Group II Mortgage Loans, in each case, by related aggregate
principal balance as of the Cut-off Date, require the borrowers to make monthly
payments only of accrued interest for the first two, three, five or ten years
following origination. After such interest-only period, the borrower's monthly
payment will be recalculated to cover both interest and principal so that the
Mortgage Loan will amortize fully prior to its final payment date. If the
monthly payment increases, the related borrower may not be able to pay the
increased amount and may default or may refinance the related Mortgage Loan to
avoid the higher payment. Because no principal payments may be made or advanced
on such Mortgage Loans for two, three, five or ten years following origination,
the certificateholders will receive smaller principal distributions during such
period than they would have received if the related borrowers were required to
make monthly payments of interest and principal for the entire lives of such
Mortgage Loans. This slower rate of principal distributions may reduce the
return on an investment in the Offered Certificates that are purchased at a
discount.
THE MEZZANINE CERTIFICATES WILL BE MORE SENSITIVE TO LOSSES ON THE MORTGAGE
LOANS THAN THE CLASS A CERTIFICATES BECAUSE THEY ARE SUBORDINATE TO THE CLASS A
CERTIFICATES.
The weighted average lives of, and the yields to maturity on, the Class
M-1, Class M-2, Class M-3, Class M-4, Class M-5 and Class M-6 Certificates will
be progressively more sensitive, in that order, to the rate and timing of
mortgagor defaults and the severity of ensuing losses on the Mortgage Loans. If
the actual rate and severity of losses on the Mortgage Loans is higher than
those assumed by an investor in these certificates, the actual yield to maturity
of these certificates may be lower than the yield anticipated by the investor
based on such assumption. The timing of losses on the Mortgage Loans will also
affect an investor's actual yield to maturity, even if the rate of defaults and
severity of losses over the life of the mortgage pool are consistent with an
investor's expectations. In general, the earlier a loss occurs, the greater the
effect on an investor's yield to maturity. Realized losses on the Mortgage
Loans, to the extent they exceed the amount of excess interest,
overcollateralization and the aggregate certificate principal balance of the
Class B Certificates, following distributions of principal on the related
Distribution Date, will reduce the certificate principal balances of the
Mezzanine Certificates beginning with the class of Mezzanine Certificates then
outstanding with the lowest payment priority. As a result of such reductions,
less interest will accrue on each such class of Mezzanine Certificates than
would otherwise be the case. However, the amount of any realized losses
allocated to the Mezzanine Certificates may be distributed to the holders of
those certificates according to the priorities set forth under "Description of
the Certificates--Overcollateralization Provisions" in this prospectus
supplement.
THE MEZZANINE CERTIFICATES GENERALLY WILL NOT BE ENTITLED TO RECEIVE PRINCIPAL
PAYMENTS UNTIL OCTOBER 2007 WHICH MAY RESULT IN A GREATER RISK OF LOSS RELATING
TO THESE CERTIFICATES.
Unless the aggregate certificate principal balance of the Class A
Certificates has been reduced to zero, the Mezzanine Certificates will not be
entitled to any principal distributions until at least October 2007 or a later
date as provided in this prospectus supplement or during any period in which
delinquencies on the Mortgage Loans exceed the levels set forth under
"Description of the Certificates--Principal Distributions on the Offered
Certificates and the Class B Certificates" in this prospectus supplement. As a
result, the weighted average lives of the Mezzanine Certificates will be longer
than would be the case if distributions of principal were allocated among all of
the certificates at the same time. As a result of the longer weighted average
lives of the Mezzanine Certificates, the
S-11
holders of these certificates have a greater risk of suffering a loss on their
investments. Further, because such certificates might not receive any principal
if the delinquency levels set forth under "Description of the
Certificates--Principal Distributions on the Offered Certificates and the Class
B Certificates" in this prospectus supplement are exceeded, it is possible for
such certificates to receive no principal distributions on a particular
Distribution Date even if no losses have occurred on the mortgage pool.
THE OFFERED CERTIFICATES WILL BE LIMITED OBLIGATIONS SOLELY OF THE TRUST FUND
AND NOT OF ANY OTHER PARTY.
The Offered Certificates will not represent an interest in or
obligation of the depositor, the servicer, the master servicer, the securities
administrator, the originators, the trustee or any of their respective
affiliates. Neither the Offered Certificates nor the underlying Mortgage Loans
will be guaranteed or insured by any governmental agency or instrumentality, or
by the depositor, the servicer, the master servicer, the securities
administrator, the originators, the trustee or any of their respective
affiliates. Proceeds of the assets included in the trust will be the sole source
of payments on the Offered Certificates, and there will be no recourse to the
depositor, the servicer, the originators, the master servicer, the securities
administrator, the trustee, the Certificate Insurer or any other entity in the
event that these proceeds are insufficient or otherwise unavailable to make all
payments provided for under the Offered Certificates.
THE DIFFERENCE BETWEEN THE PASS-THROUGH RATES ON THE CLASS A CERTIFICATES AND
MEZZANINE CERTIFICATES AND THE MORTGAGE RATES ON THE MORTGAGE LOANS MAY RESULT
IN INTEREST SHORTFALLS ON SUCH CERTIFICATES.
The yield to maturity on the Class A Certificates and the Mezzanine
Certificates may be affected by the resetting of the mortgage rates on the
adjustable-rate Mortgage Loans included in the mortgage pool on their related
adjustment dates. In addition, because the mortgage rate for approximately
77.94% of the Mortgage Loans, by aggregate principal balance as of the Cut-off
Date, adjusts based on Six-Month LIBOR plus a fixed percentage amount, such rate
could be higher than prevailing market interest rates, and this may result in an
increase in the rate of prepayments on such Mortgage Loans after their
adjustments. Finally, the mortgage rates on such adjustable-rate Mortgage Loans
are based on Six-Month LIBOR while the pass-through rates on the Class A
Certificates and the Mezzanine Certificates are based on one-month LIBOR.
Consequently, the application to such certificates of the rate cap, which is
generally equal to the weighted average coupon on the Mortgage Loans, net of
certain fees of the trust, could adversely affect the yield to maturity on such
certificates. In addition, the rate cap will decrease if Mortgage Loans with
relatively high mortgage rates prepay at a faster rate than Mortgage Loans with
relatively low mortgage rates.
In addition, the rate cap applicable to the Class A-1 Certificates is
adjusted based on the premium payable to the Certificate Insurer for providing
the Class A-1 Policy.
If the pass-through rates on the Class A Certificates or the Mezzanine
Certificates are limited for any Distribution Date, the resulting interest
shortfalls may be recovered by the holders of these certificates on the same
Distribution Date or on future Distribution Dates on a subordinated basis to the
extent that on such Distribution Date or future Distribution Dates there are
available funds remaining after certain other distributions on the Offered
Certificates, the Class B Certificates and the payment of certain fees and
expenses of the trust. SEE "YIELD ON THE CERTIFICATES--SPECIAL YIELD
CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT.
S-12
THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES AND
THE MEZZANINE CERTIFICATES WILL BE AFFECTED BY PREPAYMENT SPEEDS AND BY THE
PRIORITY OF PAYMENT ON SUCH CERTIFICATES.
The rate and timing of distributions allocable to principal on the
Class A Certificates and the Mezzanine Certificates will depend, in general, on
the rate and timing of principal payments (including prepayments and collections
upon defaults, liquidations and repurchases) on the Mortgage Loans and the
allocation thereof to pay principal on such certificates as described in
"Description of the Certificates--Principal Distributions on the Offered
Certificates and the Class B Certificates" in this prospectus supplement. As is
the case with mortgage backed pass-through certificates generally, the Offered
Certificates are subject to substantial inherent cash-flow uncertainties because
the Mortgage Loans may be prepaid at any time. However, with respect to
approximately 88.08% of the Mortgage Loans, by aggregate principal balance of
the Mortgage Loans as of the Cut-off Date, a prepayment may subject the related
mortgagor to a prepayment charge. A prepayment charge may or may not act as a
deterrent to prepayment of the related Mortgage Loan. SEE "THE MORTGAGE POOL" IN
THIS PROSPECTUS SUPPLEMENT.
Generally, when prevailing interest rates are increasing, prepayment
rates on mortgage loans tend to decrease; a decrease in the prepayment rates on
the Mortgage Loans will result in a reduced rate of return of principal to
investors in the Class A Certificates and the Mezzanine Certificates at a time
when reinvestment at such higher prevailing rates would be desirable.
Conversely, when prevailing interest rates are declining, prepayment rates on
mortgage loans tend to increase; an increase in the prepayment rates on the
Mortgage Loans will result in a greater rate of return of principal to investors
in the Class A Certificates and Mezzanine Certificates at a time when
reinvestment at comparable yields may not be possible.
Distributions of principal will be made to the holders of the Mezzanine
Certificates according to the priorities described in this prospectus
supplement. The timing of commencement of principal distributions and the
weighted average life of each such class of certificates will be affected by the
rates of prepayment on the Mortgage Loans experienced both before and after the
commencement of principal distributions on such classes. For further information
regarding the effect of principal prepayments on the weighted average lives of
the Offered Certificates, SEE "YIELD ON THE CERTIFICATES" IN THIS PROSPECTUS
SUPPLEMENT, INCLUDING THE TABLE ENTITLED "PERCENT OF INITIAL CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT
ASSUMPTION."
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON A VARIETY OF
FACTORS.
The yield to maturity on the Offered Certificates will depend on:
o the applicable pass-through rate thereon;
o the applicable purchase price;
o the rate and timing of principal payments (including
prepayments and collections upon defaults, liquidations and
repurchases) and the allocation thereof to reduce the
certificate principal balance of the Offered Certificates; and
o the rate, timing and severity of realized losses on the
Mortgage Loans, adjustments to the mortgage rates on the
adjustable-rate Mortgage Loans included in the mortgage pool,
the amount of excess interest generated by the Mortgage Loans
and the allocation to the Offered Certificates of certain
interest shortfalls.
S-13
In general, if the Offered Certificates are purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if the Offered Certificates
are purchased at a discount and principal distributions thereon occur at a rate
slower than that anticipated at the time of purchase, the investor's actual
yield to maturity will be lower than that originally assumed.
The proceeds to the Depositor from the sale of the Offered Certificates
were determined based on a number of assumptions, including a prepayment
assumption of 28% CPR with respect to the adjustable- rate Mortgage Loans and
100% PPC with respect to the fixed-rate Mortgage Loans as described in this
prospectus supplement under "Yield on the Certificates" and weighted average
lives corresponding thereto. No representation is made that the Mortgage Loans
will prepay at such rate or at any other rate. The yield assumptions for the
Offered Certificates will vary as determined at the time of sale.
THE YIELD TO MATURITY ON THE MEZZANINE CERTIFICATES WILL BE PARTICULARLY
SENSITIVE TO THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS.
The multiple class structure of the Mezzanine Certificates causes the
yield of these classes to be particularly sensitive to changes in the rates of
prepayment of the Mortgage Loans. Because distributions of principal will be
made to the holders of such certificates according to the priorities described
in this prospectus supplement, the yield to maturity on such classes of
certificates will be sensitive to the rates of prepayment on the Mortgage Loans
experienced both before and after the commencement of principal distributions on
such classes. The yield to maturity on such classes of certificates will also be
extremely sensitive to losses due to defaults on the Mortgage Loans (and the
timing thereof), to the extent these losses are not covered by excess cashflow
otherwise payable to the Class CE Certificates, to the Class B Certificates or
to a class of Mezzanine Certificates with a lower payment priority. Furthermore,
as described in this prospectus supplement, the timing of receipt of principal
and interest by the Mezzanine Certificates may be adversely affected by losses
even if these classes of certificates do not ultimately bear such loss.
VIOLATION OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE LOANS
AND YOUR CERTIFICATES.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosure, and require licensing of the originators.
In addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the Mortgage Loans.
The Mortgage Loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the
mortgagors regarding the terms of the Mortgage Loans;
o the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age,
race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right
under the Consumer Credit Protection Act, in the extension of
credit;
o the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the mortgagor's credit
experience; and
S-14
o the Depository Institutions Deregulation and Monetary Control
Act of 1980, which preempts certain state usury laws.
Violations of certain provisions of these federal and state laws may
limit the ability of the servicer to collect all or part of the principal of or
interest on the Mortgage Loans and in addition could subject the trust to
damages and administrative enforcement. In particular, the failure of the
originators to comply with certain requirements of the Federal Truth-in-Lending
Act, as implemented by Regulation Z, could subject the trust to monetary
penalties, and result in the mortgagors' rescinding the Mortgage Loans against
the trust. In addition to federal law, some states have enacted, or may enact,
laws or regulations that prohibit inclusion of some provisions in Mortgage Loans
that have interest rates or origination costs in excess of prescribed levels,
and require that mortgagors be given certain disclosures prior to the
consummation of the Mortgage Loans and restrict the servicer's ability to
foreclose in response to mortgagor defaults. The failure of the originators to
comply with these laws could subject the trust to significant monetary
penalties, could result in the mortgagors rescinding the Mortgage Loans against
the trust and/or limit the servicer's ability to foreclose upon the related
mortgaged properties in the event of mortgagor defaults.
The mortgage loan seller will represent that, as of the Closing Date,
each Mortgage Loan is in compliance with applicable federal and state laws and
regulations. In the event of a breach of such representation, the mortgage loan
seller will be obligated to cure such breach or repurchase or replace the
affected Mortgage Loan in the manner described in the prospectus. If the
mortgage loan seller is unable or otherwise fails to satisfy such obligations,
the yield on the Offered Certificates may be materially and adversely affected.
INTEREST GENERATED BY THE MORTGAGE LOANS MAY BE INSUFFICIENT TO MAINTAIN OR
RESTORE OVERCOLLATERALIZATION.
The Mortgage Loans are expected to generate more interest than is
needed to pay interest owed on the Offered Certificates and the Class B
Certificates and to pay certain fees and expenses of the trust. Any remaining
interest generated by the Mortgage Loans will then be used to absorb losses that
occur on the Mortgage Loans. After these financial obligations of the trust are
covered, available excess interest generated by the Mortgage Loans will be used
to maintain or restore the overcollateralization. We cannot assure you, however,
that enough excess interest will be generated to maintain or restore the
required level of overcollateralization. The factors described below will affect
the amount of excess interest that the Mortgage Loans will generate:
o Every time a Mortgage Loan is prepaid in full, excess interest
may be reduced because such Mortgage Loan will no longer be
outstanding and generating interest or, in the case of a
partial prepayment, will be generating less interest.
o Every time a Mortgage Loan is liquidated or written off,
excess interest may be reduced because such Mortgage Loan will
no longer be outstanding and generating interest.
o If the rates of delinquencies, defaults or losses on the
Mortgage Loans are higher than expected, excess interest will
be reduced by the amount necessary to compensate for any
shortfalls in cash available to make required distributions on
the Offered Certificates and the Class B Certificates.
o The adjustable-rate Mortgage Loans have mortgage rates that
adjust less frequently than, and on the basis of an index that
is different from the index used to determine, the
pass-through rates on the Offered Certificates and the Class B
Certificates, and the fixed-rate Mortgage Loans have mortgage
rates that do not adjust. As a result, the pass-through rates
on the Offered Certificates and the Class B Certificates may
increase
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relative to mortgage rates on the Mortgage Loans, requiring
that a greater portion of the interest generated by the
Mortgage Loans be applied to cover interest on such
certificates.
INTEREST PAYMENTS ON THE MORTGAGE LOANS MAY BE INSUFFICIENT TO PAY INTEREST ON
YOUR CERTIFICATES.
When a Mortgage Loan is prepaid in full, the mortgagor is charged
interest only up to the date on which payment is made, rather than for an entire
month. This may result in a shortfall in interest collections available for
payment on the next Distribution Date. The servicer is required to cover a
portion of the shortfall in interest collections that are attributable to
prepayments in full on the Mortgage Loans, but only up to the servicing fee
payable to the servicer for the related interest accrual period. If the credit
enhancement is insufficient to cover this shortfall in excess of the amount the
servicer covers, you may incur a loss. In addition, the servicer will not cover
shortfalls in interest collections due to bankruptcy proceedings or the
application of the Servicemembers Civil Relief Act (the "Relief Act") or similar
state or local laws.
On any Distribution Date, any shortfalls resulting from the application
of the Relief Act or similar state or local laws and any prepayment interest
shortfalls to the extent not covered by compensating interest paid by the
servicer will be allocated, first, to the Class CE Certificates, second, to the
Class B-2 Certificates, third, to the Class B-1 Certificates, fourth, to the
Class M-6 Certificates, fifth, to the Class M-5 Certificates, sixth, to the
Class M-4 Certificates, seventh, to the Class M-3 Certificates, eighth, to the
Class M-2 Certificates, ninth, to the Class M-1 Certificates and tenth, to the
Class A Certificates, on a PRO rata basis, based on their respective senior
interest distribution amounts for such Distribution Date before such reduction.
The holders of the Offered Certificates and the Class B Certificates will be
entitled to reimbursement for any such interest shortfalls but only to the
extent of available funds and in the order of priority set forth under
"Description of the Certificates--Overcollateralization Provisions." If these
shortfalls are allocated to the Offered Certificates the amount of interest paid
to those certificates will be reduced, adversely affecting the yield on your
investment.
THE LIQUIDITY OF YOUR CERTIFICATES MAY BE LIMITED.
The Underwriter has no obligation to make a secondary market in the
classes of Offered Certificates. There is therefore no assurance that a
secondary market will develop or, if it develops, that it will continue.
Consequently, you may not be able to sell your certificates readily or at prices
that will enable you to realize your desired yield. The market values of the
certificates are likely to fluctuate; these fluctuations may be significant and
could result in significant losses to you.
The secondary markets for asset-backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
THE CAP AGREEMENTS ARE SUBJECT TO COUNTERPARTY RISK
The assets of the trust include the Cap Agreements which will require
the counterparty thereunder to make certain payments for the benefit of the
holders of the Offered Certificates and the Class B Certificates. To the extent
that distributions on the Offered Certificates and the Class B Certificates
depend in part on payments to be received by the trustee under the Cap
Agreements, the ability of the trustee to make such distributions on the Offered
Certificates and the Class B Certificates will be subject to the credit risk of
the counterparty to the Cap Agreements. Although there is a mechanism in place
to facilitate replacement of the Cap Agreements upon the default or credit
S-16
impairment of the counterparty, there can be no assurance that any such
mechanism will result in the ability of the trustee to obtain suitable
replacement Cap Agreements.
THE RETURN ON YOUR CERTIFICATES COULD BE REDUCED BY SHORTFALLS DUE TO THE
APPLICATION OF THE RELIEF ACT.
The Relief Act and similar state or local laws provide relief to
mortgagors who enter active military service and to mortgagors in reserve status
who are called to active military service after the origination of their
mortgage loans. The ongoing military operations of the United States in Iraq and
Afghanistan have caused an increase in the number of citizens in active military
duty, including those citizens previously in reserve status. Under the Relief
Act the interest rate applicable to a mortgage loan for which the related
mortgagor is called to active military service will be reduced from the
percentage stated in the related mortgage note to 6.00%. This interest rate
reduction and any reduction provided under similar state or local laws could
result in an interest shortfall because neither the master servicer nor the
servicer will be able to collect the amount of interest which otherwise would be
payable with respect to such Mortgage Loan if the Relief Act or similar state or
local law was not applicable thereto. This shortfall will not be paid by the
mortgagor on future due dates or advanced by the master servicer or the servicer
and, therefore, will reduce the amount available to pay interest to the
certificateholders on subsequent Distribution Dates. We do not know how many
Mortgage Loans in the mortgage pool have been or may be affected by the
application of the Relief Act or similar state or local law.
POSSIBLE REDUCTION OR WITHDRAWAL OF RATINGS ON THE OFFERED CERTIFICATES.
Each rating agency rating the Offered Certificates may change or
withdraw its initial ratings at any time in the future if, in its judgment,
circumstances warrant a change. No person is obligated to maintain the ratings
at their initial levels. If a rating agency reduces or withdraws its rating on
one or more classes of the Offered Certificates, the liquidity and market value
of the affected certificates is likely to be reduced.
SUITABILITY OF THE OFFERED CERTIFICATES AS INVESTMENTS.
The Offered Certificates are not suitable investments for any investor
that requires a regular or predictable schedule of monthly payments or payment
on any specific date. The Offered Certificates are complex investments that
should be considered only by investors who, either alone or with their
financial, tax and legal advisors, have the expertise to analyze the prepayment,
reinvestment, default and market risk, the tax consequences of an investment and
the interaction of these factors.
ALL CAPITALIZED TERMS USED IN THIS PROSPECTUS SUPPLEMENT WILL HAVE THE
MEANINGS ASSIGNED TO THEM UNDER "DESCRIPTION OF THE CERTIFICATES--GLOSSARY" OR
IN THE PROSPECTUS UNDER "INDEX OF DEFINED TERMS."
USE OF PROCEEDS
DB Structured Products, Inc. (the "Mortgage Loan Seller"), will sell
the Mortgage Loans to Ace Securities Corp. (the "Depositor") and the Depositor
will convey the Mortgage Loans to the trust fund in exchange for and
concurrently with the delivery of the certificates. Net proceeds from the sale
of the Offered Certificates will be applied by the Depositor to the purchase of
the Mortgage Loans from the Mortgage Loan Seller. Such net proceeds together
with certain classes of certificates not offered by this prospectus supplement
will represent the purchase price to be paid by the Depositor to the Mortgage
Loan Seller for the Mortgage Loans. The Mortgage Loans were previously purchased
by the Mortgage Loan Seller directly from the originators.
S-17
THE MORTGAGE POOL
GENERAL
The pool of mortgage loans (the "Mortgage Pool") will consist of
approximately 3,362 conventional, one- to four-family, first and second lien,
fixed-rate and adjustable-rate mortgage loans (the "Mortgage Loans") on
residential real properties (the "Mortgaged Properties") and having an aggregate
principal balance as of the Cut-off Date of approximately $540,000,117, after
application of scheduled payments due on or before the Cut-off Date whether or
not received, and subject to a permitted variance of plus or minus 5%. The
Mortgage Loans have original terms to maturity of not greater than approximately
30 years. For purposes of calculating interest and principal distributions on
the Class A Certificates, the Mortgage Loans have been divided into two loan
groups, designated as the "Group I Mortgage Loans" and the "Group II Mortgage
Loans." The Group I Mortgage Loans consist of 2,548 fixed-rate and
adjustable-rate mortgage loans having an aggregate principal balance as of the
Cut-off Date of approximately $362,899,536, after application of scheduled
payments due on or before the Cut-off Date whether or not received, and subject
to a permitted variance of plus or minus 5%. The principal balances of the Group
I Mortgage Loans at origination conformed to Freddie Mac loan limits. The Group
II Mortgage Loans consist of 814 fixed-rate and adjustable-rate mortgage loans
having an aggregate principal balance as of the Cut-off Date of approximately
$177,100,580, after application of scheduled payments due on or before the
Cut-off Date whether or not received, and subject to a permitted variance of
plus or minus 5%. The principal balances of the Group II Mortgage Loans at
origination may or may not have conformed to Freddie Mac loan limits.
Approximately 59.49% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, provide for level monthly payments in an amount
sufficient fully to amortize the Mortgage Loans over their terms or, in the case
of adjustable rate Mortgage Loans, monthly payments that will be adjusted to an
amount that will amortize such Mortgage Loans fully over their terms.
Approximately 7.14% of the Mortgage Loans, by aggregate principal balance as of
the Cut-off Date, are balloon loans (the "Balloon Loans"), which require the
related mortgagors to make balloon payments on the maturity date of such Balloon
Loans that are larger than the monthly payments made by such mortgagors on prior
due dates in order to amortize such Balloon Loans fully over their terms.
Approximately 33.37% of the Mortgage Loans, by aggregate principal balance as of
the Cut-off Date, are interest only loans (the "Interest Only Loans") which
require the related mortgagors to make monthly payments of only accrued interest
for the first two, three, five or ten years following origination. After such
interest-only period, the mortgagor's monthly payment will be recalculated to
cover both interest and principal so that such Mortgage Loan will amortize fully
on or prior to its final payment date.
Approximately 90.56% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, are secured by first mortgages or deeds of trust
or other similar security instruments creating first liens on residential
properties ("First Lien Mortgage Loans"). Approximately 9.44% of the Mortgage
Loans, by aggregate principal balance as of the Cut-off Date, are secured by
second mortgages or deeds of trust or other similar security instruments
creating second liens on residential properties ("Second Lien Mortgage Loans").
The Mortgaged Properties consist of attached, detached or semi-detached, one to
four-family dwelling units, individual condominium units and individual units in
planned unit developments.
References to percentages of the Mortgage Loans, unless otherwise
noted, are calculated based on the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date.
The mortgage rate (the "Mortgage Rate") on each Mortgage Loan is the
per annum rate of interest specified in the related mortgage note as reduced by
application of the Relief Act or similar state or local laws and bankruptcy
adjustments. Approximately 22.06% of the Mortgage Loans are
S-18
fixed-rate mortgage loans and approximately 77.94% of the Mortgage Loans are
adjustable-rate mortgage loans. The adjustable-rate mortgage loans are referred
to herein as "ARM Loans". All of the ARM Loans provide for semi-annual
adjustment to the Mortgage Rates applicable thereto based on Six-Month LIBOR (as
described below). The first adjustment with respect to each ARM Loan will not
occur until after an initial period of two, three or five years from the date of
origination thereof (each, a "Delayed First Adjustment Mortgage Loan"). In
connection with each Mortgage Rate adjustment, the ARM Loans have corresponding
adjustments to their monthly payment amount, in each case on each applicable
adjustment date (each such date, an "Adjustment Date"). On each Adjustment Date,
the Mortgage Rate on each ARM Loan will be adjusted generally to equal the sum
of Six-Month LIBOR and a fixed percentage amount (the "Gross Margin") for that
ARM Loan specified in the related mortgage note. The Mortgage Rate on each ARM
Loan, however, including each Delayed First Adjustment Mortgage Loan, will not
increase or decrease by more than the initial periodic rate cap (the "Periodic
Rate Cap") specified in the related mortgage note on the initial Adjustment Date
or increase or decrease by more than the subsequent periodic rate cap (the
"Subsequent Periodic Rate Cap") specified in the related mortgage note on any
subsequent Adjustment Date and will not exceed a specified maximum mortgage rate
(the "Maximum Mortgage Rate") over the life of the ARM Loan or be less than a
specified minimum mortgage rate (the "Minimum Mortgage Rate") over the life of
the ARM Loan. The weighted average initial Periodic Rate Cap and Subsequent
Periodic Rate Cap for the ARM Loans is approximately 2.737% per annum and 1.102%
per annum, respectively. Effective with the first monthly payment due on each
ARM Loan after each related Adjustment Date, the monthly payment amount will be
adjusted to an amount that will fully amortize the outstanding principal balance
of the related ARM Loan over its remaining term and pay interest at the Mortgage
Rate as so adjusted. Due to the application of the Periodic Rate Caps and the
Maximum Mortgage Rates, the Mortgage Rate on each ARM Loan, as adjusted on any
related Adjustment Date, may be less than the sum of the Index, calculated as
described in this prospectus supplement, and the related Gross Margin. See
"--The Index" in this prospectus supplement. None of the ARM Loans permit the
related mortgagor to convert the adjustable Mortgage Rate thereon to a fixed
Mortgage Rate.
Substantially all of the Mortgage Loans have scheduled monthly payments
due on the first day of the month (with respect to each Mortgage Loan, the "Due
Date"). Each Mortgage Loan will contain a customary "due-on-sale" clause which
provides that the Mortgage Loan must be repaid at the time of a sale of the
related Mortgaged Property or assumed by a creditworthy purchaser of the related
Mortgaged Property.
Approximately 88.08% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge (a "Prepayment Charge") in limited
circumstances on certain prepayments as provided in the related mortgage note.
Each such Mortgage Loan provides for payment of a Prepayment Charge on certain
partial prepayments and all prepayments in full made up to five years from the
date of origination of the Mortgage Loan, as provided in the related mortgage
note. The amount of the Prepayment Charge is as provided in the related mortgage
note, but, in most cases, is equal to six months' interest on any amounts
prepaid in excess of 20% of the original principal balance of the related
Mortgage Loan in any 12 month period, as permitted by law. The holders of the
Class P Certificates will be entitled to all Prepayment Charges received on the
Mortgage Loans, and these amounts will not be available for distribution on the
other classes of certificates. Under the limited instances described under the
terms of the pooling and servicing agreement, the servicer may waive the payment
of any otherwise applicable Prepayment Charge with respect to the Mortgage
Loans. As of July 1, 2003, the Alternative Mortgage Parity Act of 1982 (the
"Parity Act"), which regulates the ability of originators to impose prepayment
charges, was amended, and as a result, the originators will be required to
comply with state and local laws in originating mortgage loans with prepayment
charge provisions with respect to loans originated on or after July 1, 2003. The
Depositor makes no representations as to the effect that the prepayment charges
and the recent amendment of the Parity Act may have on the prepayment
performance of the Mortgage Loans. However, the recent amendment of the Parity
Act does not retroactively affect loans originated before July 1, 2003.
Investors should conduct their own analysis of the effect, if any, that the
Prepayment Charges,
S-19
decisions by the servicer with respect to the waiver of the Prepayment Charges
and the recent amendment to the Parity Act, may have on the prepayment
performance of the Mortgage Loans. The Depositor makes no representation as to
the effect that the Prepayment Charges, decisions by the servicer with respect
to the waiver of the Prepayment Charges and the recent amendment to the Parity
Act, may have on the prepayment performance of the Mortgage Loans. See "Certain
Legal Aspects of the Loans-Enforceability of Prepayment and Late Payment Fees"
in the prospectus.
MORTGAGE LOAN CHARACTERISTICS
The average principal balance of the Mortgage Loans at origination was
approximately $161,151. No Mortgage Loan had a principal balance at origination
greater than approximately $1,000,000 or less than approximately $10,000. The
average principal balance of the Mortgage Loans as of the Cut-off Date was
approximately $160,619. No Mortgage Loan had a principal balance as of the
Cut-off Date greater than approximately $1,000,000 or less than approximately
$5,747.
The Mortgage Loans had Mortgage Rates as of the Cut-off Date ranging
from approximately 4.590% per annum to approximately 13.000% per annum, and the
weighted average Mortgage Rate was approximately 6.917% per annum. As of the
Cut-off Date, the ARM Loans had Gross Margins ranging from approximately 3.375%
per annum to approximately 9.750% per annum, Minimum Mortgage Rates ranging from
approximately 4.590% per annum to approximately 11.340% per annum and Maximum
Mortgage Rates ranging from approximately 9.750% per annum to approximately
18.340% per annum. As of the Cut-off Date, the weighted average Gross Margin was
approximately 6.045%, the weighted average Minimum Mortgage Rate was
approximately 6.605% per annum and the weighted average Maximum Mortgage Rate
was approximately 12.775% per annum. The latest first Adjustment Date following
the Cut-off Date on any ARM Loan occurs on August 1, 2009 and the weighted
average next Adjustment Date for all of the ARM Loans following the Cut-off Date
is August 17, 2006.
The weighted average combined loan-to-value ratio of the Mortgage Loans
at origination was approximately 82.13%. At origination, no Mortgage Loan had a
combined loan-to-value ratio greater than approximately 100.00% or less than
approximately 9.98%.
The weighted average remaining term to stated maturity of the Mortgage
Loans was approximately 342 months as of the Cut-off Date. None of the Mortgage
Loans will have a first due date prior to November 2001 or after October 2004 or
will have a remaining term to stated maturity of less than 112 months or greater
than 360 months as of the Cut-off Date. The latest maturity date of any Mortgage
Loan is September 1, 2034.
As of the Cut-off Date, the weighted average FICO Score for the
Mortgage Loans that were scored is approximately 650. No Mortgage Loan which was
scored had a FICO Score as of the Cut-off Date greater than 807 or less than
500.
The Mortgage Loans are expected to have the following additional
characteristics as of the Cut-off Date (the sum in any column may not equal the
total indicated due to rounding):
S-20
COLLATERAL TYPE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
COLLATERAL TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Fixed Rate.............................. 1,354 $ 119,150,539 22.06%
ARM..................................... 2,008 420,849,578 77.94
------ --------------- -------
Total.......................... 3,362 $ 540,000,117 100.00%
====== =============== =======
LIEN PRIORITY OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LIEN PRIORITY LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
First Lien.............................. 2,383 $ 489,024,906 90.56%
Second Lien............................. 979 50,975,211 9.44
------ ---------------- -------
Total.......................... 3,362 $ 540,000,117 100.00%
====== ================ =======
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE MORTGAGE OUTSTANDING AT OUTSTANDING AT
AT ORIGINATION ($) LOANS ORIGINATION ORIGINATION
--------------------------------------- ---------------- ------------------- -------------------
0.01 - 50,000.00............ 574 $ 19,262,626 3.56%
50,000.01 - 100,000.00............ 702 51,933,291 9.59
100,000.01 - 150,000.00............ 592 74,484,373 13.75
150,000.01 - 200,000.00............ 502 87,658,375 16.18
200,000.01 - 250,000.00............ 302 67,959,684 12.54
250,000.01 - 300,000.00............ 253 69,806,214 12.88
300,000.01 - 350,000.00............ 161 51,946,706 9.59
350,000.01 - 400,000.00............ 123 46,338,756 8.55
400,000.01 - 450,000.00............ 65 27,555,679 5.09
450,000.01 - 500,000.00............ 64 30,461,640 5.62
500,000.01 - 550,000.00............ 11 5,842,274 1.08
550,000.01 - 600,000.00............ 6 3,425,250 0.63
600,000.01 - 650,000.00............ 2 1,247,500 0.23
650,000.01 - 700,000.00............ 1 652,000 0.12
700,000.01 - 750,000.00............ 2 1,445,000 0.27
750,000.01 - 800,000.00............ 1 768,750 0.14
950,000.01 - 1,000,000.00............ 1 1,000,000 0.18
------ --------------- -------
Total............................ 3,362 $ 541,788,118 100.00%
====== =============== =======
S-21
PRINCIPAL BALANCES OF THE MORTGAGE LOANS
AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
AS OF THE CUT-OFF DATE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
0.01 - 50,000.00............ 578 $ 19,384,405 3.59%
50,000.01 - 100,000.00............ 702 51,908,373 9.61
100,000.01 - 150,000.00............ 590 74,094,435 13.72
150,000.01 - 200,000.00............ 501 87,209,460 16.15
200,000.01 - 250,000.00............ 305 68,549,381 12.69
250,000.01 - 300,000.00............ 251 69,226,610 12.82
300,000.01 - 350,000.00............ 161 51,908,587 9.61
350,000.01 - 400,000.00............ 122 45,905,321 8.50
400,000.01 - 450,000.00............ 66 27,987,058 5.18
450,000.01 - 500,000.00............ 62 29,478,819 5.46
500,000.01 - 550,000.00............ 11 5,823,457 1.08
550,000.01 - 600,000.00............ 6 3,422,203 0.63
600,000.01 - 650,000.00............ 2 1,242,356 0.23
650,000.01 - 700,000.00............ 1 650,512 0.12
700,000.01 - 750,000.00............ 2 1,440,390 0.27
750,000.01 - 800,000.00............ 1 768,750 0.14
950,000.01 - 1,000,000.00............ 1 1,000,000 0.19
------ --------------- -------
Total............................ 3,362 $ 540,000,117 100.00%
====== =============== =======
S-22
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
California.................................. 1,682 $ 333,963,929 61.85%
Washington.................................. 238 28,617,813 5.30
Colorado.................................... 195 23,557,644 4.36
Oregon...................................... 157 16,306,782 3.02
Florida..................................... 104 15,775,133 2.92
Illinois.................................... 82 15,292,260 2.83
Arizona..................................... 133 14,698,809 2.72
Nevada...................................... 69 12,770,163 2.36
Texas....................................... 136 9,091,526 1.68
Georgia..................................... 65 7,418,907 1.37
Michigan.................................... 51 6,807,262 1.26
Ohio........................................ 63 6,225,120 1.15
New York.................................... 23 6,160,318 1.14
New Jersey.................................. 24 4,354,442 0.81
North Carolina.............................. 41 4,284,209 0.79
Maryland.................................... 21 3,547,796 0.66
Kentucky.................................... 35 3,512,715 0.65
Pennsylvania................................ 24 2,652,031 0.49
Minnesota................................... 18 2,549,733 0.47
Tennessee................................... 32 2,547,422 0.47
Virginia.................................... 20 2,407,369 0.45
Massachusetts............................... 7 2,125,566 0.39
Indiana..................................... 27 1,939,439 0.36
Missouri.................................... 18 1,711,817 0.32
Connecticut................................. 10 1,458,948 0.27
Utah........................................ 17 1,455,136 0.27
New Mexico.................................. 7 1,230,347 0.23
South Carolina.............................. 10 1,086,396 0.20
Wisconsin................................... 6 1,016,363 0.19
Hawaii...................................... 3 971,507 0.18
Kansas...................................... 4 606,844 0.11
Mississippi................................. 8 505,087 0.09
Alabama..................................... 7 474,728 0.09
Nebraska.................................... 1 465,370 0.09
Alaska...................................... 2 463,842 0.09
Idaho....................................... 3 369,719 0.07
Oklahoma.................................... 6 350,600 0.06
Louisiana................................... 2 300,343 0.06
Montana..................................... 3 239,151 0.04
West Virginia............................... 3 231,138 0.04
Iowa........................................ 2 203,277 0.04
Rhode Island................................ 1 130,929 0.02
Delaware.................................... 2 122,186 0.02
----- -------------- --------
Total........................... 3,362 $ 540,000,117 100.00%
===== ============== ========
S-23
MORTGAGE RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
4.500 - 4.999..................... 28 $ 6,445,859 1.19%
5.000 - 5.499..................... 88 20,526,978 3.80
5.500 - 5.999..................... 453 107,396,812 19.89
6.000 - 6.499..................... 422 93,849,843 17.38
6.500 - 6.999..................... 650 137,104,055 25.39
7.000 - 7.499..................... 265 45,768,257 8.48
7.500 - 7.999..................... 270 46,014,522 8.52
8.000 - 8.499..................... 151 17,417,355 3.23
8.500 - 8.999..................... 241 21,090,939 3.91
9.000 - 9.499..................... 120 9,177,381 1.70
9.500 - 9.999..................... 233 14,189,009 2.63
10.000 - 10.499..................... 73 4,102,579 0.76
10.500 - 10.999..................... 160 8,602,309 1.59
11.000 - 11.499..................... 131 5,481,894 1.02
11.500 - 11.999..................... 71 2,619,556 0.49
12.000 - 12.499..................... 5 184,130 0.03
13.000 - 13.499..................... 1 28,637 0.01
------ --------------- -------
Total............................ 3,362 $ 540,000,117 100.00%
====== =============== =======
ORIGINAL TERM OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
120 months................................ 2 $ 93,581 0.02%
180 months................................ 753 40,941,746 7.58
240 months................................ 42 3,455,230 0.64
300 months................................ 1 81,971 0.02
360 months................................ 2,564 495,427,588 91.75
------ --------------- --------
Total............................ 3,362 $ 540,000,117 100.00%
====== =============== ========
S-24
REMAINING TERM TO STATED MATURITY OF
THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
REMAINING TERM TO STATED MATURITY LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
61 - 120 months............................ 2 $ 93,581 0.02%
121 - 180 months............................ 753 40,941,746 7.58
181 - 240 months............................ 42 3,455,230 0.64
241 - 300 months............................ 1 81,971 0.02
301 - 360 months............................ 2,564 495,427,588 91.75
------ --------------- ------
Total.............................. 3,362 $ 540,000,117 100.00%
====== =============== ======
PROPERTY TYPES OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Single Family Residence..................... 2,626 $ 418,766,152 77.55%
PUD......................................... 311 51,883,049 9.61
Condominium................................. 291 42,481,265 7.87
2-4 Family.................................. 132 26,684,250 4.94
Townhouse................................... 2 185,400 0.03
-------- --------------- -------
Total.............................. 3,362 $ 540,000,117 100.00%
======== =============== =======
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL COMBINED LOAN-TO-VALUE MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
RATIO (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Less than or equal to 50.00............... 64 $ 7,409,979 1.37%
50.01 - 55.00....................... 24 4,279,635 0.79
55.01 - 60.00....................... 39 7,856,084 1.45
60.01 - 65.00....................... 77 14,622,045 2.71
65.01 - 70.00....................... 105 20,696,418 3.83
70.01 - 75.00....................... 151 32,330,547 5.99
75.01 - 80.00....................... 1,171 252,223,594 46.71
80.01 - 85.00....................... 242 45,735,853 8.47
85.01 - 90.00....................... 364 65,794,436 12.18
90.01 - 95.00....................... 206 29,091,350 5.39
95.01 - 100.00....................... 919 59,960,176 11.10
------- -------------- -------
Total............................ 3,362 $ 540,000,117 100.00%
======= ============== =======
S-25
DOCUMENTATION TYPE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Stated Income Documentation................. 1,487 $ 251,705,339 46.61%
Full Documentation.......................... 1,660 248,891,980 46.09
Limited/Lite Documentation.................. 173 32,462,731 6.01
Alternative Documentation................... 32 5,299,596 0.98
No Income Documentation..................... 10 1,640,470 0.30
------- --------------- ---------
Total.............................. 3,362 $ 540,000,117 100.00%
======= =============== =========
FICO SCORE FOR THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
FICO SCORE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Not Available............................... 4 $ 385,433 0.07%
500 - 524................................... 58 10,467,616 1.94
525 - 549................................... 98 17,103,528 3.17
550 - 574................................... 197 34,836,115 6.45
575 - 599................................... 216 35,652,183 6.60
600 - 624................................... 496 72,592,555 13.44
625 - 649................................... 574 92,315,581 17.10
650 - 674................................... 599 98,058,086 18.16
675 - 699................................... 463 73,127,297 13.54
700 - 724................................... 299 47,832,770 8.86
725 - 749................................... 173 27,518,085 5.10
750 - 774................................... 137 23,336,287 4.32
775 - 799................................... 44 6,302,525 1.17
Greater than or equal to 800................ 4 472,055 0.09
------- --------------- -------
Total.............................. 3,362 $ 540,000,117 100.00%
======= =============== =======
LOAN PURPOSE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Purchase.................................... 2,047 $ 298,197,418 55.22%
Refinance - Cashout......................... 1,000 186,833,497 34.60
Refinance - Rate Term....................... 315 54,969,202 10.18
------- --------------- -------
Total.............................. 3,362 $ 540,000,117 100.00%
======= =============== =======
S-26
OCCUPANCY STATUS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Primary..................................... 3,123 $ 507,178,642 93.92%
Investment.................................. 230 31,577,954 5.85
Second Home................................. 9 1,243,521 0.23
------ --------------- --------
Total.............................. 3,362 $ 540,000,117 100.00%
====== =============== ========
The occupancy status of a Mortgaged Property is as represented by the mortgagor
in its loan application.
NEXT ADJUSTMENT DATES FOR THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
NEXT ADJUSTMENT DATE ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
October 2005................................ 1 $ 64,304 0.02%
November 2005............................... 1 62,455 0.01
December 2005............................... 43 7,659,515 1.82
January 2006................................ 11 1,610,195 0.38
February 2006............................... 266 43,134,760 10.25
March 2006.................................. 175 43,563,205 10.35
April 2006.................................. 181 44,611,830 10.60
May 2006.................................... 364 75,521,633 17.95
June 2006................................... 88 16,235,842 3.86
July 2006................................... 423 96,981,179 23.04
August 2006................................. 129 29,001,279 6.89
September 2006.............................. 1 81,500 0.02
December 2006............................... 2 204,482 0.05
February 2007............................... 24 3,840,369 0.91
March 2007.................................. 32 6,836,300 1.62
April 2007.................................. 12 2,799,244 0.67
May 2007.................................... 12 2,617,766 0.62
June 2007................................... 16 3,220,762 0.77
July 2007................................... 55 10,504,029 2.50
August 2007................................. 25 4,084,107 0.97
December 2008............................... 1 274,126 0.07
February 2009............................... 8 1,075,496 0.26
March 2009.................................. 4 1,338,159 0.32
April 2009.................................. 2 670,719 0.16
May 2009.................................... 2 304,748 0.07
June 2009................................... 3 825,000 0.20
July 2009................................... 100 18,778,119 4.46
August 2009................................. 27 4,948,456 1.18
------ --------------- -------
Total............................... 2,008 $ 420,849,578 100.00%
====== =============== =======
S-27
GROSS MARGINS OF THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
3.000 - 3.499............................... 1 $ 155,766 0.04%
3.500 - 3.999............................... 15 3,195,088 0.76
4.000 - 4.499............................... 42 8,853,412 2.10
4.500 - 4.999............................... 120 26,304,220 6.25
5.000 - 5.499............................... 319 72,302,894 17.18
5.500 - 5.999............................... 440 100,726,782 23.93
6.000 - 6.499............................... 417 92,259,390 21.92
6.500 - 6.999............................... 347 70,080,737 16.65
7.000 - 7.499............................... 127 21,498,003 5.11
7.500 - 7.999............................... 77 12,688,881 3.02
8.000 - 8.499............................... 58 7,607,915 1.81
8.500 - 8.999............................... 30 3,111,747 0.74
9.000 - 9.499............................... 13 1,758,646 0.42
9.500 - 9.999............................... 2 306,097 0.07
------ -------------- -------
Total.............................. 2,008 $ 420,849,578 100.00%
====== ============== =======
MAXIMUM MORTGAGE RATES OF THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MAXIMUM MORTGAGE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RATE (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
9.500 - 9.999........................... 1 $ 143,519 0.03%
10.000 - 10.499........................... 3 384,035 0.09
10.500 - 10.999........................... 20 4,556,513 1.08
11.000 - 11.499........................... 57 12,855,609 3.05
11.500 - 11.999........................... 358 83,157,454 19.76
12.000 - 12.499........................... 343 76,659,521 18.22
12.500 - 12.999........................... 491 111,004,899 26.38
13.000 - 13.499........................... 204 37,411,276 8.89
13.500 - 13.999........................... 231 44,259,843 10.52
14.000 - 14.499........................... 109 18,576,303 4.41
14.500 - 14.999........................... 114 19,705,758 4.68
15.000 - 15.499........................... 37 6,293,351 1.50
15.500 - 15.999........................... 25 3,456,238 0.82
16.000 - 16.499........................... 10 1,462,232 0.35
16.500 - 16.999........................... 2 292,546 0.07
17.000 - 17.499........................... 1 344,000 0.08
17.500 - 17.999........................... 1 161,310 0.04
18.000 - 18.499........................... 1 125,171 0.03
------ -------------- -------
Total.............................. 2,008 $ 420,849,578 100.00%
====== ============== =======
S-28
MINIMUM MORTGAGE RATES OF THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MINIMUM MORTGAGE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RATE (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
4.500 - 4.999....................... 28 $ 6,445,859 1.53%
5.000 - 5.499....................... 74 16,691,957 3.97
5.500 - 5.999....................... 376 89,983,686 21.38
6.000 - 6.499....................... 361 81,718,992 19.42
6.500 - 6.999....................... 554 120,291,700 28.58
7.000 - 7.499....................... 215 39,123,732 9.30
7.500 - 7.999....................... 211 39,008,069 9.27
8.000 - 8.499....................... 88 12,910,384 3.07
8.500 - 8.999....................... 66 9,691,270 2.30
9.000 - 9.499....................... 19 3,069,251 0.73
9.500 - 9.999....................... 11 1,313,028 0.31
10.000 - 10.499....................... 3 315,170 0.07
10.500 - 10.999....................... 1 161,310 0.04
11.000 - 11.499....................... 1 125,171 0.03
------ -------------- -------
Total.............................. 2,008 $ 420,849,578 100.00%
====== ============== =======
INITIAL PERIODIC RATE CAPS OF THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
INITIAL PERIODIC RATE CAP (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
1.500....................................... 221 $ 47,086,399 11.19%
2.000....................................... 194 40,065,979 9.52
3.000....................................... 1,593 333,697,199 79.29
------ -------------- --------
Total.............................. 2,008 $ 420,849,578 100.00%
====== ============== ========
S-29
SUBSEQUENT PERIODIC RATE CAPS OF THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
SUBSEQUENT PERIODIC RATE CAP (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
1.000....................................... 1,602 $ 335,329,580 79.68%
1.500....................................... 406 85,519,998 20.32
------ --------------- --------
Total.............................. 2,008 $ 420,849,578 100.00%
====== =============== ========
LIFETIME RATE CAPS OF THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LIFETIME RATE CAP (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
4.000 - 4.999.......................... 4 $ 495,603 0.12%
5.000 - 5.999.......................... 91 17,213,151 4.09
6.000 - 6.999.......................... 1,505 316,949,391 75.31
7.000 - 7.999.......................... 407 85,847,432 20.40
11.000 - 11.999.......................... 1 344,000 0.08
------ --------------- -------
Total.............................. 2,008 $ 420,849,578 100.00%
====== =============== =======
PREPAYMENT PENALTY MONTHS OF THE MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PREPAYMENT PENALTY MONTHS MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
AT ORIGINATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
0........................................... 612 $ 64,361,702 11.92%
6........................................... 14 1,080,251 0.20
12.......................................... 144 34,558,309 6.40
24.......................................... 1,826 308,983,086 57.22
30.......................................... 2 663,845 0.12
36.......................................... 688 116,372,911 21.55
48.......................................... 1 63,200 0.01
60.......................................... 75 13,916,812 2.58
------- --------------- -------
Total.............................. 3,362 $ 540,000,117 100.00%
======= =============== =======
S-30
ORIGINATORS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINATORS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
OwnIT....................................... 1,585 $ 247,814,966 45.89%
Encore...................................... 624 126,393,685 23.41
Other....................................... 1,153 165,791,465 30.70
------- ------------- -------
Total.............................. 3,362 $ 540,000,117 100.00%
======= ============= =======
S-31
GROUP I MORTGAGE LOAN CHARACTERISTICS
Approximately 19.97% of the Group I Mortgage Loans are fixed-rate
mortgage loans and approximately 80.03% of the Group I Mortgage Loans are ARM
Loans (the "Group I ARM Loans"), in each case, by aggregate principal balance of
the Group I Mortgage Loans as of the Cut-off Date.
Approximately 92.45% of the Group I Mortgage Loans are First Lien
Mortgage Loans and approximately 7.55% of the Group I Mortgage Loans are Second
Lien Mortgage Loans, in each case, by aggregate principal balance of the Group I
Mortgage Loans as of the Cut-off Date.
Approximately 5.66% of the Group I Mortgage Loans are Balloon Loans and
approximately 30.24% of the Group I Mortgage Loans are Interest Only Loans, in
each case, by aggregate principal balance of the Group I Mortgage Loans as of
the Cut-off Date.
The average principal balance of the Group I Mortgage Loans at
origination was approximately $142,940. No Group I Mortgage Loan had a principal
balance at origination greater than approximately $500,000 or less than
approximately $10,000. The average principal balance of the Group I Mortgage
Loans as of the Cut-off Date was approximately $142,425. No Group I Mortgage
Loan had a principal balance as of the Cut-off Date greater than approximately
$498,666 or less than approximately $5,747.
The Group I Mortgage Loans had Mortgage Rates as of the Cut-off Date
ranging from approximately 4.590% per annum to approximately 13.000% per annum,
and the weighted average Mortgage Rate was approximately 6.935% per annum. As of
the Cut-off Date, the Group I ARM Loans had Gross Margins ranging from
approximately 3.375% per annum to approximately 9.750% per annum, Minimum
Mortgage Rates ranging from approximately 4.590% per annum to approximately
11.340% per annum and Maximum Mortgage Rates ranging from approximately 9.750%
per annum to approximately 18.340% per annum. As of the Cut-off Date, the
weighted average Gross Margin was approximately 6.118%, the weighted average
Minimum Mortgage Rate was approximately 6.688% per annum and the weighted
average Maximum Mortgage Rate was approximately 12.860% per annum. The latest
first Adjustment Date following the Cut-off Date on any Group I ARM Loan occurs
on August 1, 2009 and the weighted average next Adjustment Date for all of the
Group I ARM Loans following the Cut-off Date is July 22, 2006.
The weighted average combined loan-to-value ratio of the Group I
Mortgage Loans at origination was approximately 81.80%. At origination, no Group
I Mortgage Loan had a combined loan-to-value ratio greater than approximately
100.00% or less than approximately 9.98%.
The weighted average remaining term to stated maturity of the Group I
Mortgage Loans was approximately 344 months as of the Cut-off Date. None of the
Group I Mortgage Loans will have a first due date prior to February 1, 2003 or
after October 1, 2004, or will have a remaining term to stated maturity of less
than 112 months or greater than 360 months as of the Cut-off Date. The latest
maturity date of any Group I Mortgage Loan is September 1, 2034.
As of the Cut-off Date, the weighted average FICO Score for the Group I
Mortgage Loans that were scored is approximately 645. No Group I Mortgage Loan
which was scored had a FICO Score as of the Cut-off Date greater than 807 or
less than 500.
The Group I Mortgage Loans are expected to have the following
additional characteristics as of the Cut-off Date (the sum in any column may not
equal the total indicated due to rounding):
S-32
COLLATERAL TYPE OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
COLLATERAL TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Fixed Rate.............................. 899 $ 72,467,886 19.97%
ARM..................................... 1,649 290,431,651 80.03
------ -------------- -------
Total.......................... 2,548 $ 362,899,536 100.00%
====== ============== =======
LIEN PRIORITY OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LIEN PRIORITY LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
First Lien ............................. 1,924 $ 335,497,705 92.45%
Second Lien............................. 624 27,401,831 7.55
------ -------------- -------
Total.......................... 2,548 $ 362,899,536 100.00%
====== ============== =======
PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE MORTGAGE OUTSTANDING AT OUTSTANDING AT
AT ORIGINATION ($) LOANS ORIGINATION ORIGINATION
--------------------------------------- ---------------- ------------------- -------------------
0.01 - 50,000.00............. 458 $ 15,490,376 4.25%
50,000.01 - 100,000.00............. 472 34,484,952 9.47
100,000.01 - 150,000.00............. 523 65,997,886 18.12
150,000.01 - 200,000.00............. 460 80,360,907 22.06
200,000.01 - 250,000.00............. 269 60,696,514 16.67
250,000.01 - 300,000.00............. 241 66,477,464 18.25
300,000.01 - 350,000.00............. 114 36,135,955 9.92
350,000.01 - 400,000.00............. 5 1,897,900 0.52
400,000.01 - 450,000.00............. 4 1,689,500 0.46
450,000.01 - 500,000.00............. 2 979,200 0.27
------ -------------- -------
Total............................. 2,548 $ 364,210,654 100.00%
====== ============== =======
S-33
PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS
AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE AS OF THE MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
CUT-OFF DATE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
0.01 - 50,000.00............. 461 $ 15,575,550 4.29%
50,000.01 - 100,000.00............. 473 34,570,815 9.53
100,000.01 - 150,000.00............. 521 65,629,718 18.08
150,000.01 - 200,000.00............. 459 79,931,759 22.03
200,000.01 - 250,000.00............. 272 61,304,769 16.89
250,000.01 - 300,000.00............. 239 65,907,002 18.16
300,000.01 - 350,000.00............. 112 35,432,635 9.76
350,000.01 - 400,000.00............. 5 1,891,073 0.52
400,000.01 - 450,000.00............. 4 1,681,497 0.46
450,000.01 - 500,000.00............. 2 974,720 0.27
------- -------------- -------
Total........................... 2,548 $ 362,899,536 100.00%
======= ============== =======
S-34
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES OF
THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
California.................................. 1,114 $ 196,101,364 54.04%
Washington.................................. 190 22,725,855 6.26
Colorado.................................... 154 18,801,933 5.18
Illinois.................................... 77 13,100,632 3.61
Oregon...................................... 125 12,596,251 3.47
Florida..................................... 92 12,243,347 3.37
Arizona..................................... 116 11,944,799 3.29
Nevada...................................... 56 8,576,720 2.36
Texas....................................... 116 7,486,842 2.06
Georgia..................................... 60 6,574,006 1.81
Michigan.................................... 49 6,271,458 1.73
Ohio........................................ 60 5,607,300 1.55
New Jersey.................................. 23 3,978,815 1.10
New York.................................... 17 3,937,864 1.09
North Carolina.............................. 39 3,885,053 1.07
Kentucky.................................... 31 3,209,513 0.88
Pennsylvania................................ 23 2,576,603 0.71
Minnesota................................... 15 2,431,862 0.67
Virginia.................................... 20 2,407,369 0.66
Maryland.................................... 16 2,403,904 0.66
Tennessee................................... 25 2,359,533 0.65
Indiana..................................... 25 1,860,444 0.51
Missouri.................................... 18 1,711,817 0.47
Connecticut................................. 10 1,458,948 0.40
Utah........................................ 15 1,389,151 0.38
South Carolina.............................. 10 1,086,396 0.30
New Mexico.................................. 6 829,569 0.23
Massachusetts............................... 3 730,525 0.20
Kansas...................................... 4 606,844 0.17
Wisconsin................................... 4 497,100 0.14
Alabama..................................... 7 474,728 0.13
Alaska...................................... 2 463,842 0.13
Mississippi................................. 7 420,292 0.12
Hawaii...................................... 1 416,852 0.11
Idaho....................................... 3 369,719 0.10
Oklahoma.................................... 5 324,846 0.09
Louisiana................................... 2 300,343 0.08
West Virginia............................... 3 231,138 0.06
Iowa........................................ 2 203,277 0.06
Rhode Island................................ 1 130,929 0.04
Montana..................................... 1 103,111 0.03
Delaware.................................... 1 68,640 0.02
------ -------------- --------
Total........................... 2,548 $ 362,899,536 100.00%
====== ============== ========
S-35
MORTGAGE RATES OF THE GROUP I MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
4.500 - 4.999.................. 23 $ 4,523,453 1.25%
5.000 - 5.499.................. 63 12,202,124 3.36
5.500 - 5.999.................. 327 63,893,335 17.61
6.000 - 6.499.................. 321 59,529,528 16.40
6.500 - 6.999.................. 533 97,946,516 26.99
7.000 - 7.499.................. 242 38,333,492 10.56
7.500 - 7.999.................. 221 33,036,180 9.10
8.000 - 8.499.................. 128 13,576,406 3.74
8.500 - 8.999.................. 173 14,404,952 3.97
9.000 - 9.499.................. 75 5,084,941 1.40
9.500 - 9.999.................. 145 7,855,447 2.16
10.000 - 10.499.................. 44 2,177,579 0.60
10.500 - 10.999.................. 103 5,012,957 1.38
11.000 - 11.499.................. 93 3,532,504 0.97
11.500 - 11.999.................. 53 1,693,545 0.47
12.000 - 12.499.................. 3 67,943 0.02
13.000 - 13.499.................. 1 28,637 0.01
----- --------------- --------
Total............................... 2,548 $ 362,899,536 100.00%
===== =============== ========
ORIGINAL TERM OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
120 months............................... 2 $ 93,581 0.03%
180 months............................... 482 21,839,886 6.02
240 months............................... 30 2,827,076 0.78
300 months............................... 1 81,971 0.02
360 months............................... 2,033 338,057,024 93.15
----- --------------- -------
Total........................... 2,548 $ 362,899,536 100.00%
===== =============== =======
S-36
REMAINING TERM TO STATED MATURITY OF
THE GROUP I MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
REMAINING TERM TO STATED MATURITY LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
61 - 120 months............................ 2 $ 93,581 0.03%
121 - 180 months............................ 482 21,839,886 6.02
181 - 240 months............................ 30 2,827,076 0.78
241 - 300 months............................ 1 81,971 0.02
301 - 360 months............................ 2,033 338,057,024 93.15
------ -------------- -------
Total.............................. 2,548 $ 362,899,536 100.00%
====== ============== =======
PROPERTY TYPES OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Single Family Residence..................... 1,972 $ 276,614,096 76.22%
PUD......................................... 231 32,125,649 8.85
Condominium................................. 231 32,036,662 8.83
2-4 Family.................................. 112 21,937,729 6.05
Townhouse................................... 2 185,400 0.05
------ -------------- -------
Total.............................. 2,548 $ 362,899,536 100.00%
====== ============== =======
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL COMBINED LOAN-TO-VALUE MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
RATIO (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Less than or equal to 50.00............. 54 $ 4,785,637 1.32%
50.01 - 55.00...................... 19 3,007,577 0.83
55.01 - 60.00...................... 31 5,505,481 1.52
60.01 - 65.00...................... 62 11,170,806 3.08
65.01 - 70.00...................... 83 13,831,301 3.81
70.01 - 75.00...................... 118 20,997,837 5.79
75.01 - 80.00...................... 938 173,197,120 47.73
80.01 - 85.00...................... 200 31,926,651 8.80
85.01 - 90.00...................... 278 41,656,497 11.48
90.01 - 95.00...................... 155 20,683,281 5.70
95.01 - 100.00...................... 610 36,137,349 9.96
------ --------------- -------
Total.............................. 2,548 $ 362,899,536 100.00%
====== =============== =======
S-37
DOCUMENTATION TYPE OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Full Income Documentation................... 1,301 $ 172,261,778 47.47%
Stated Income Documentation................. 1,081 164,228,914 45.25
Limited/Lite Documentation.................. 136 22,273,203 6.14
Alternative Documentation................... 22 3,004,275 0.83
No Income Documentation..................... 8 1,131,367 0.31
------ --------------- -------
Total.............................. 2,548 $ 362,899,536 100.00%
====== =============== =======
FICO SCORE FOR THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
FICO SCORE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Not Available............................... 4 $ 385,433 0.11%
500 - 524................................... 52 8,203,770 2.26
525 - 549................................... 85 13,105,355 3.61
550 - 574................................... 174 28,655,735 7.90
575 - 599................................... 181 26,114,151 7.20
600 - 624................................... 402 53,049,848 14.62
625 - 649................................... 434 61,442,630 16.93
650 - 674................................... 421 59,672,225 16.44
675 - 699................................... 332 46,988,115 12.95
700 - 724................................... 212 30,577,613 8.43
725 - 749................................... 125 17,171,765 4.73
750 - 774................................... 95 14,134,941 3.90
775 - 799................................... 29 3,197,267 0.88
Greater than or equal to 800................ 2 200,689 0.06
------ -------------- -------
Total.............................. 2,548 $ 362,899,536 100.00%
====== ============== =======
LOAN PURPOSE OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Purchase.................................... 1,499 $ 196,928,721 54.27%
Refinance - Cashout......................... 812 130,708,305 36.02
Refinance - Rate Term....................... 237 35,262,510 9.72
------ -------------- ------
Total.............................. 2,548 $ 362,899,536 100.00%
====== ============== ======
S-38
OCCUPANCY STATUS OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Primary..................................... 2,354 $ 338,441,978 93.26%
Investment.................................. 188 23,745,758 6.54
Second Home................................. 6 711,801 0.20
------ --------------- --------
Total............................. 2,548 $ 362,899,536 100.00%
====== =============== ========
The occupancy status of a Mortgaged Property is as represented by the mortgagor
in its loan application.
NEXT ADJUSTMENT DATES FOR THE GROUP I ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
NEXT ADJUSTMENT DATE ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
October 2005................................ 1 $ 64,304 0.02%
December 2005............................... 40 6,389,123 2.20
January 2006................................ 11 1,610,195 0.55
February 2006............................... 247 35,384,722 12.18
March 2006.................................. 141 30,108,463 10.37
April 2006.................................. 145 29,429,895 10.13
May 2006.................................... 309 54,570,137 18.79
June 2006................................... 79 12,865,103 4.43
July 2006................................... 341 62,490,702 21.52
August 2006................................. 104 18,556,271 6.39
September 2006.............................. 1 81,500 0.03
December 2006............................... 2 204,482 0.07
February 2007............................... 22 2,999,267 1.03
March 2007.................................. 27 4,629,872 1.59
April 2007.................................. 9 1,642,402 0.57
May 2007.................................... 9 1,344,629 0.46
June 2007................................... 14 2,384,966 0.82
July 2007................................... 49 8,921,273 3.07
August 2007................................. 25 4,084,107 1.41
December 2008............................... 1 274,126 0.09
February 2009............................... 7 839,577 0.29
March 2009.................................. 2 475,434 0.16
April 2009.................................. 1 270,719 0.09
May 2009.................................... 1 95,757 0.03
June 2009................................... 2 481,000 0.17
July 2009................................... 41 7,086,254 2.44
August 2009................................. 18 3,147,371 1.08
------- ------------- --------
Total.............................. 1,649 $ 290,431,651 100.00%
======= ============= ========
S-39
GROSS MARGINS OF THE GROUP I ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
3.000 - 3.499............................... 1 $ 155,766 0.05%
3.500 - 3.999............................... 14 2,727,088 0.94
4.000 - 4.499............................... 36 6,490,438 2.23
4.500 - 4.999............................... 99 16,781,360 5.78
5.000 - 5.499............................... 239 44,644,994 15.37
5.500 - 5.999............................... 334 62,467,591 21.51
6.000 - 6.499............................... 341 65,343,801 22.50
6.500 - 6.999............................... 302 52,987,185 18.24
7.000 - 7.499............................... 113 16,826,800 5.79
7.500 - 7.999............................... 70 10,152,010 3.50
8.000 - 8.499............................... 56 7,099,769 2.44
8.500 - 8.999............................... 30 3,111,747 1.07
9.000 - 9.499............................... 12 1,337,004 0.46
9.500 - 9.999............................... 2 306,097 0.11
------- ------------- -------
Total.............................. 1,649 $ 290,431,651 100.00%
======= ============= =======
MAXIMUM MORTGAGE RATES OF THE GROUP I ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MAXIMUM MORTGAGE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RATE (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
9.500 - 9.999........................... 1 $ 143,519 0.05%
10.000 - 10.499........................... 3 384,035 0.13
10.500 - 10.999........................... 16 2,995,068 1.03
11.000 - 11.499........................... 44 8,302,364 2.86
11.500 - 11.999........................... 263 50,218,162 17.29
12.000 - 12.499........................... 268 50,633,992 17.43
12.500- 12.999........................... 395 75,143,619 25.87
13.000 - 13.499........................... 182 28,859,871 9.94
13.500 - 13.999........................... 201 33,241,769 11.45
14.000 - 14.499........................... 103 15,770,689 5.43
14.500 - 14.999........................... 104 15,775,400 5.43
15.000 - 15.499........................... 31 3,940,314 1.36
15.500 - 15.999........................... 24 2,981,590 1.03
16.000 - 16.499........................... 10 1,462,232 0.50
16.500 - 16.999........................... 2 292,546 0.10
17.500 - 17.999........................... 1 161,310 0.06
18.000 - 18.499........................... 1 125,171 0.04
------ -------------- --------
Total.............................. 1,649 $ 290,431,651 100.00%
====== ============== ========
S-40
MINIMUM MORTGAGE RATES OF THE GROUP I ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MINIMUM MORTGAGE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RATE (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
4.500 - 4.999....................... 23 $ 4,523,453 1.56%
5.000 - 5.499....................... 58 11,061,302 3.81
5.500 - 5.999....................... 271 52,691,149 18.14
6.000 - 6.499....................... 279 52,595,934 18.11
6.500 - 6.999....................... 461 85,917,440 29.58
7.000 - 7.499....................... 197 32,120,457 11.06
7.500 - 7.999....................... 183 28,722,460 9.89
8.000 - 8.499....................... 82 10,371,994 3.57
8.500 - 8.999....................... 62 8,290,175 2.85
9.000 - 9.499....................... 17 2,222,608 0.77
9.500 - 9.999....................... 11 1,313,028 0.45
10.000 - 10.499....................... 3 315,170 0.11
10.500 - 10.999....................... 1 161,310 0.06
11.000 - 11.499....................... 1 125,171 0.04
------ ------------- --------
Total........................... 1,649 $ 290,431,651 100.00%
====== ============= ========
INITIAL PERIODIC RATE CAPS OF THE GROUP I ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
INITIAL PERIODIC RATE CAP (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
1.500..................................... 191 $ 34,037,320 11.72%
2.000..................................... 168 29,610,236 10.20
3.000..................................... 1,290 226,784,095 78.09
------ --------------- --------
Total............................ 1,649 $ 290,431,651 100.00%
====== =============== ========
SUBSEQUENT PERIODIC RATE CAPS OF THE GROUP I ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
SUBSEQUENT PERIODIC RATE CAP (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
1.000..................................... 1,298 $ 227,951,106 78.49%
1.500..................................... 351 62,480,545 21.51
----- -------------- -------
Total............................ 1,649 $ 290,431,651 100.00%
===== ============== =======
S-41
LIFETIME RATE CAPS OF THE GROUP I ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LIFETIME RATE CAP (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
4.000 - 4.999......................... 4 $ 495,603 0.17%
5.000 - 5.999......................... 83 13,798,971 4.75
6.000 - 6.999......................... 1,210 213,329,097 73.45
7.000 - 7.999......................... 352 62,807,979 21.63
------ -------------- ------
Total............................ 1,649 $ 290,431,651 100.00%
====== ============== ======
PREPAYMENT PENALTY MONTHS OF THE GROUP I MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PREPAYMENT PENALTY MONTHS MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
AT ORIGINATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
0......................................... 508 $ 50,004,295 13.78%
6......................................... 14 1,080,251 0.30
12........................................ 86 15,869,601 4.37
24........................................ 1,397 212,353,307 58.52
30........................................ 1 183,696 0.05
36........................................ 542 83,408,386 22.98
------ -------------- ------
Total............................ 2,548 $ 362,899,536 100.00%
====== ============== ======
ORIGINATORS OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINATORS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
OwnIT..................................... 1,116 $ 155,957,073 42.98%
Encore.................................... 509 89,478,176 24.66
Other..................................... 923 117,464,288 32.37
------ --------------- ------
Total............................ 2,548 $ 362,899,536 100.00%
====== =============== ======
S-42
GROUP II MORTGAGE LOAN CHARACTERISTICS
Approximately 26.36% of the Group II Mortgage Loans are fixed-rate
mortgage loans and approximately 73.64% of the Group II Mortgage Loans are ARM
Loans (the "Group II ARM Loans"), in each case, by aggregate principal balance
of the Group II Mortgage Loans as of the Cut-off Date.
Approximately 86.69% of the Group II Mortgage Loans are First Lien
Mortgage Loans and approximately 13.31% of the Group II Mortgage Loans are
Second Lien Mortgage Loans, in each case, by aggregate principal balance of the
Group II Mortgage Loans as of the Cut-off Date.
Approximately 10.18% of the Group II Mortgage Loans are Balloon Loans
and approximately 39.79% of the Group II Mortgage Loans are Interest Only Loans,
in each case, by aggregate principal balance of the Group II Mortgage Loans as
of the Cut-off Date.
The average principal balance of the Group II Mortgage Loans at
origination was approximately $218,154. No Group II Mortgage Loan had a
principal balance at origination greater than approximately $1,000,000 or less
than approximately $10,000. The average principal balance of the Group II
Mortgage Loans as of the Cut-off Date was approximately $217,568. No Group II
Mortgage Loan had a principal balance as of the Cut-off Date greater than
approximately $1,000,000 or less than approximately $9,913.
The Group II Mortgage Loans had Mortgage Rates as of the Cut-off Date
ranging from approximately 4.690% per annum to approximately 12.125% per annum,
and the weighted average Mortgage Rate was approximately 6.878% per annum. As of
the Cut-off Date, the Group II ARM Loans had Gross Margins ranging from
approximately 3.875% per annum to approximately 9.250% per annum, Minimum
Mortgage Rates ranging from approximately 4.690% per annum to approximately
9.250% per annum and Maximum Mortgage Rates ranging from approximately 10.500%
per annum to approximately 17.250% per annum. As of the Cut-off Date, the
weighted average Gross Margin was approximately 5.885%, the weighted average
Minimum Mortgage Rate was approximately 6.419% per annum and the weighted
average Maximum Mortgage Rate was approximately 12.585% per annum. The latest
first Adjustment Date following the Cut-off Date on any Group II ARM Loan occurs
on August 1, 2009 and the weighted average next Adjustment Date for all of the
Group II ARM Loans following the Cut-off Date is October 14, 2006.
The weighted average combined loan-to-value ratio of the Group II
Mortgage Loans at origination was approximately 82.79%. At origination, no Group
II Mortgage Loan had a combined loan-to-value ratio greater than approximately
100.00% or less than approximately 20.24%.
The weighted average remaining term to stated maturity of the Group II
Mortgage Loans was approximately 337 months as of the Cut-off Date. None of the
Group II Mortgage Loans will have a first due date prior to November 1, 2001 or
after October 1, 2004, or will have a remaining term to stated maturity of less
than 145 months or greater than 359 months as of the Cut-off Date. The latest
maturity date of any Group II Mortgage Loan is August 1, 2034.
As of the Cut-off Date, the weighted average FICO Score for the Group
II Mortgage Loans that were scored is approximately 660. No Group II Mortgage
Loan had a FICO Score as of the Cut-off Date greater than 807 or less than 503.
The Group II Mortgage Loans are expected to have the following
additional characteristics as of the Cut-off Date (the sum in any column may not
equal the total indicated due to rounding):
S-43
COLLATERAL TYPE OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
COLLATERAL TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Fixed Rate.............................. 455 $ 46,682,653 26.36%
ARM..................................... 359 130,417,927 73.64
----- --------------- ------
Total.......................... 814 $ 177,100,580 100.00%
===== =============== ======
LIEN PRIORITY OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LIEN PRIORITY LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
First Lien ............................. 459 $ 153,527,201 86.69%
Second Lien............................. 355 23,573,379 13.31
----- --------------- --------
Total.......................... 814 $ 177,100,580 100.00%
===== =============== ========
PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE MORTGAGE OUTSTANDING AT OUTSTANDING AT
AT ORIGINATION ($) LOANS ORIGINATION ORIGINATION
--------------------------------------- ---------------- ------------------- -------------------
0.01 - 50,000.00............ 116 $ 3,772,250 2.12%
50,000.01 - 100,000.00............ 230 17,448,339 9.83
100,000.01 - 150,000.00............ 69 8,486,487 4.78
150,000.01 - 200,000.00............ 42 7,297,468 4.11
200,000.01 - 250,000.00............ 33 7,263,170 4.09
250,000.01 - 300,000.00............ 12 3,328,750 1.87
300,000.01 - 350,000.00............ 47 15,810,751 8.90
350,000.01 - 400,000.00............ 118 44,440,856 25.03
400,000.01 - 450,000.00............ 61 25,866,179 14.57
450,000.01 - 500,000.00............ 62 29,482,440 16.60
500,000.01 - 550,000.00............ 11 5,842,274 3.29
550,000.01 - 600,000.00............ 6 3,425,250 1.93
600,000.01 - 650,000.00............ 2 1,247,500 0.70
650,000.01 - 700,000.00............ 1 652,000 0.37
700,000.01 - 750,000.00............ 2 1,445,000 0.81
750,000.01 - 800,000.00............ 1 768,750 0.43
950,000.01 - 1,000,000.00............ 1 1,000,000 0.56
----- -------------- -------
Total......................... 814 $ 177,577,464 100.00%
===== ============== =======
S-44
PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS
AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE AS OF THE MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
CUT-OFF DATE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
0.01 - 50,000.00............ 117 $ 3,808,855 2.15%
50,000.01 - 100,000.00............ 229 17,337,558 9.79
100,000.01 - 150,000.00............ 69 8,464,717 4.78
150,000.01 - 200,000.00............ 42 7,277,701 4.11
200,000.01 - 250,000.00............ 33 7,244,612 4.09
250,000.01 - 300,000.00............ 12 3,319,608 1.87
300,000.01 - 350,000.00............ 49 16,475,952 9.30
350,000.01 - 400,000.00............ 117 44,014,248 24.85
400,000.01 - 450,000.00............ 62 26,305,561 14.85
450,000.01 - 500,000.00............ 60 28,504,099 16.09
500,000.01 - 550,000.00............ 11 5,823,457 3.29
550,000.01 - 600,000.00............ 6 3,422,203 1.93
600,000.01 - 650,000.00............ 2 1,242,356 0.70
650,000.01 - 700,000.00............ 1 650,512 0.37
700,000.01 - 750,000.00............ 2 1,440,390 0.81
750,000.01 - 800,000.00............ 1 768,750 0.43
950,000.01 - 1,000,000.00............ 1 1,000,000 0.56
----- -------------- --------
Total......................... 814 $ 177,100,580 100.00%
===== ============== ========
S-45
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES OF THE
GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOCATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
California.................................. 568 $ 137,862,565 77.84%
Washington.................................. 48 5,891,957 3.33
Colorado.................................... 41 4,755,710 2.69
Nevada...................................... 13 4,193,443 2.37
Oregon...................................... 32 3,710,532 2.10
Florida..................................... 12 3,531,786 1.99
Arizona..................................... 17 2,754,010 1.56
New York.................................... 6 2,222,454 1.25
Illinois.................................... 5 2,191,628 1.24
Texas....................................... 20 1,604,684 0.91
Massachusetts............................... 4 1,395,040 0.79
Maryland.................................... 5 1,143,892 0.65
Georgia..................................... 5 844,901 0.48
Ohio........................................ 3 617,820 0.35
Hawaii...................................... 2 554,654 0.31
Michigan.................................... 2 535,804 0.30
Wisconsin................................... 2 519,263 0.29
Nebraska.................................... 1 465,370 0.26
New Mexico.................................. 1 400,778 0.23
North Carolina.............................. 2 399,156 0.23
New Jersey.................................. 1 375,627 0.21
Kentucky.................................... 4 303,202 0.17
Tennessee................................... 7 187,890 0.11
Montana..................................... 2 136,040 0.08
Minnesota................................... 3 117,871 0.07
Mississippi................................. 1 84,795 0.05
Indiana..................................... 2 78,995 0.04
Pennsylvania................................ 1 75,427 0.04
Utah........................................ 2 65,986 0.04
Delaware.................................... 1 53,545 0.03
Oklahoma.................................... 1 25,754 0.01
----- ------------- --------
Total........................... 814 $ 177,100,580 100.00%
===== ============= ========
S-46
MORTGAGE RATES OF THE GROUP II MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
4.500 - 4.999................ 5 $ 1,922,406 1.09%
5.000 - 5.499................ 25 8,324,855 4.70
5.500 - 5.999................ 126 43,503,477 24.56
6.000 - 6.499................ 101 34,320,315 19.38
6.500 - 6.999................ 117 39,157,539 22.11
7.000 - 7.499................ 23 7,434,765 4.20
7.500 - 7.999................ 49 12,978,342 7.33
8.000 - 8.499................ 23 3,840,949 2.17
8.500 - 8.999................ 68 6,685,987 3.78
9.000 - 9.499................ 45 4,092,441 2.31
9.500 - 9.999................ 88 6,333,562 3.58
10.000 - 10.499................ 29 1,925,000 1.09
10.500 - 10.999................ 57 3,589,353 2.03
11.000 - 11.499................ 38 1,949,390 1.10
11.500 - 11.999................ 18 926,012 0.52
12.000 - 12.499................ 2 116,187 0.07
----- ------------- -------
Total............................... 814 $ 177,100,580 100.00%
===== ============= =======
ORIGINAL TERM OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
180 months............................... 271 $ 19,101,861 10.79%
240 months............................... 12 628,155 0.35
360 months............................... 531 157,370,565 88.86
---- ------------- -------
Total........................... 814 $ 177,100,580 100.00%
==== ============= =======
S-47
REMAINING TERM TO STATED MATURITY OF
THE GROUP II MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
REMAINING TERM TO STATED MATURITY LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
121 - 180 months............................ 271 $ 19,101,861 10.79%
181 - 240 months............................ 12 628,155 0.35
301 - 360 months............................ 531 157,370,565 88.86
---- ------------- -------
Total.............................. 814 $ 177,100,580 100.00%
==== ============= =======
PROPERTY TYPES OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Single Family Residence..................... 654 $ 142,152,057 80.27%
PUD......................................... 80 19,757,400 11.16
Condominium................................. 60 10,444,602 5.90
2 - 4 Family................................ 20 4,746,521 2.68
---- ------------- -------
Total.............................. 814 $ 177,100,580 100.00%
==== ============= =======
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL COMBINED LOAN-TO-VALUE MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
RATIO (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Less than or equal to 50.00.............. 10 $ 2,624,342 1.48%
50.01 - 55.00..................... 5 1,272,058 0.72
55.01 - 60.00..................... 8 2,350,603 1.33
60.01 - 65.00..................... 15 3,451,239 1.95
65.01 - 70.00..................... 22 6,865,117 3.88
70.01 - 75.00..................... 33 11,332,711 6.40
75.01 - 80.00..................... 233 79,026,474 44.62
80.01 - 85.00..................... 42 13,809,202 7.80
85.01 - 90.00..................... 86 24,137,939 13.63
90.01 - 95.00..................... 51 8,408,068 4.75
95.01 - 100.00..................... 309 23,822,827 13.45
---- ------------- -------
Total............................ 814 $ 177,100,580 100.00%
==== ============= =======
S-48
DOCUMENTATION TYPE OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Stated Income Documentation................. 406 $ 87,476,425 49.39%
Full Documentation.......................... 359 76,630,202 43.27
Limited/Lite Documentation.................. 37 10,189,529 5.75
Alternative Documentation................... 10 2,295,322 1.30
No Income Documentation..................... 2 509,102 0.29
----- -------------- -------
Total.............................. 814 $ 177,100,580 100.00%
===== ============== =======
FICO SCORE FOR THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
FICO SCORE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
500 - 524................................... 6 $ 2,263,846 1.28%
525 - 549................................... 13 3,998,173 2.26
550 - 574................................... 23 6,180,380 3.49
575 - 599................................... 35 9,538,032 5.39
600 - 624................................... 94 19,542,707 11.03
625 - 649................................... 140 30,872,952 17.43
650 - 674................................... 178 38,385,861 21.67
675 - 699................................... 131 26,139,182 14.76
700 - 724................................... 87 17,255,157 9.74
725 - 749................................... 48 10,346,320 5.84
750 - 774................................... 42 9,201,347 5.20
775 - 799................................... 15 3,105,257 1.75
Greater than or equal to 800................ 2 271,366 0.15
----- -------------- -------
Total.............................. 814 $ 177,100,580 100.00%
===== ============== =======
LOAN PURPOSE OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Purchase.................................... 548 $ 101,268,697 57.18%
Refinance - Cashout......................... 188 56,125,191 31.69
Refinance - Rate Term....................... 78 19,706,692 11.13
----- -------------- --------
Total.............................. 814 $ 177,100,580 100.00%
===== ============== ========
S-49
OCCUPANCY STATUS OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY STATUS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
Primary..................................... 769 $ 168,736,664 95.28%
Investment.................................. 42 7,832,196 4.42
Second Home................................. 3 531,720 0.30
----- -------------- --------
Total.................................... 814 $ 177,100,580 100.00%
===== ============== ========
The occupancy status of a Mortgaged Property is as represented by the mortgagor
in its loan application.
NEXT ADJUSTMENT DATES FOR THE GROUP II ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
NEXT ADJUSTMENT DATE ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
November 2005............................... 1 $ 62,455 0.05%
December 2005............................... 3 1,270,392 0.97
February 2006............................... 19 7,750,038 5.94
March 2006.................................. 34 13,454,742 10.32
April 2006.................................. 36 15,181,935 11.64
May 2006.................................... 55 20,951,496 16.06
June 2006................................... 9 3,370,739 2.58
July 2006................................... 82 34,490,477 26.45
August 2006................................. 25 10,445,008 8.01
February 2007............................... 2 841,102 0.64
March 2007.................................. 5 2,206,427 1.69
April 2007.................................. 3 1,156,841 0.89
May 2007.................................... 3 1,273,137 0.98
June 2007................................... 2 835,795 0.64
July 2007................................... 6 1,582,756 1.21
February 2009............................... 1 235,919 0.18
March 2009.................................. 2 862,725 0.66
April 2009.................................. 1 400,000 0.31
May 2009.................................... 1 208,991 0.16
June 2009................................... 1 344,000 0.26
July 2009................................... 59 11,691,865 8.96
August 2009................................. 9 1,801,085 1.38
----- ------------- -------
Total.............................. 359 $ 130,417,927 100.00%
===== ============= =======
S-50
GROSS MARGINS OF THE GROUP II ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGIN (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
3.500 - 3.999............................... 1 $ 468,000 0.36%
4.000 - 4.499............................... 6 2,362,974 1.81
4.500 - 4.999............................... 21 9,522,859 7.30
5.000 - 5.499............................... 80 27,657,900 21.21
5.500 - 5.999............................... 106 38,259,191 29.34
6.000 - 6.499............................... 76 26,915,589 20.64
6.500 - 6.999............................... 45 17,093,551 13.11
7.000 - 7.499............................... 14 4,671,203 3.58
7.500 - 7.999............................... 7 2,536,871 1.95
8.000 - 8.499............................... 2 508,146 0.39
9.000 - 9.499............................... 1 421,643 0.32
---- -------------- -------
Total.............................. 359 $ 130,417,927 100.00%
==== ============== =======
MAXIMUM MORTGAGE RATES OF THE GROUP II ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MAXIMUM MORTGAGE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RATE (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
10.500 - 10.999..................... 4 $ 1,561,444 1.20%
11.000 - 11.499..................... 13 4,553,245 3.49
11.500 - 11.999..................... 95 32,939,293 25.26
12.000 - 12.499..................... 75 26,025,530 19.96
12.500 - 12.999..................... 96 35,861,280 27.50
13.000 - 13.499..................... 22 8,551,405 6.56
13.500 - 13.999..................... 30 11,018,074 8.45
14.000 - 14.499..................... 6 2,805,614 2.15
14.500 - 14.999..................... 10 3,930,358 3.01
15.000 - 15.499..................... 6 2,353,036 1.80
15.500 - 15.999..................... 1 474,648 0.36
17.000 - 17.499..................... 1 344,000 0.26
---- -------------- -------
Total.............................. 359 $ 130,417,927 100.00%
==== ============== =======
S-51
MINIMUM MORTGAGE RATES OF THE GROUP II ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
MINIMUM MORTGAGE NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
RATE (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
4.500 - 4.999..................... 5 $ 1,922,406 1.47%
5.000 - 5.499..................... 16 5,630,655 4.32
5.500 - 5.999..................... 105 37,292,537 28.59
6.000 - 6.499..................... 82 29,123,058 22.33
6.500 - 6.999..................... 93 34,374,260 26.36
7.000 - 7.499..................... 18 7,003,274 5.37
7.500 - 7.999..................... 28 10,285,609 7.89
8.000 - 8.499..................... 6 2,538,390 1.95
8.500 - 8.999..................... 4 1,401,096 1.07
9.000 - 9.499..................... 2 846,643 0.65
---- -------------- -------
Total.............................. 359 $ 130,417,927 100.00%
==== ============== =======
INITIAL PERIODIC RATE CAPS OF THE GROUP II ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
INITIAL PERIODIC RATE CAP (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
1.500....................................... 30 $ 13,049,080 10.01%
2.000....................................... 26 10,455,743 8.02
3.000....................................... 303 106,913,105 81.98
---- ------------- -------
Total.............................. 359 $ 130,417,927 100.00%
==== ============= =======
SUBSEQUENT PERIODIC RATE CAPS OF THE GROUP II ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
SUBSEQUENT PERIODIC RATE CAP (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
1.000....................................... 304 $ 107,378,474 82.33%
1.500....................................... 55 23,039,453 17.67
---- ------------- -------
Total.............................. 359 $ 130,417,927 100.00%
==== ============= =======
S-52
LIFETIME RATE CAPS OF THE GROUP II ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
LIFETIME RATE CAP (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
5.000 - 5.999........................ 8 $ 3,414,180 2.62%
6.000 - 6.999........................ 295 103,620,295 79.45
7.000 - 7.999........................ 55 23,039,453 17.67
11.000 - 11.999........................ 1 344,000 0.26
----- ------------- ------
Total............................ 359 $ 130,417,927 100.00%
===== ============= ======
PREPAYMENT PENALTY MONTHS OF THE GROUP II MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PREPAYMENT PENALTY MONTHS MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
AT ORIGINATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
0......................................... 104 $ 14,357,408 8.11%
12........................................ 58 18,688,707 10.55
24........................................ 429 96,629,779 54.56
30........................................ 1 480,149 0.27
36........................................ 146 32,964,525 18.61
48........................................ 1 63,200 0.04
60........................................ 75 13,916,812 7.86
---- ------------- ------
Total............................ 814 $ 177,100,580 100.00%
==== ============= ======
ORIGINATORS OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINATORS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
--------------------------------------- ---------------- ------------------- -------------------
OwnIT..................................... 469 $ 91,857,893 51.87%
Encore.................................... 115 36,915,509 20.84
Other..................................... 230 48,327,178 27.29
---- -------------- ------
Total............................ 814 $ 177,100,580 100.00%
==== ============== ======
S-53
THE INDEX
As of any Adjustment Date, the index applicable to the determination of
the Mortgage Rate on each ARM Loan will generally be the average of the
interbank offered rates for six-month United States dollar deposits in the
London market as published in THE WALL STREET JOURNAL and as most recently
available either (i) as of the first business day 45 days prior to that
Adjustment Date or (ii) as of the first business day of the month preceding the
month of the Adjustment Date, as specified in the related mortgage note
("Six-Month LIBOR" or the "Index"). In the event that the Index becomes
unavailable or otherwise unpublished, the servicer will select a comparable
alternative index over which it has no direct control and which is readily
verifiable.
UNDERWRITING STANDARDS
OWNIT MORTGAGE SOLUTIONS, INC. F/K/A OAKMONT MORTGAGE COMPANY INC. The
information set forth in this section with regard to the underwriting standards
of Ownit Mortgage Solutions, Inc. f/k/a Oakmont Mortgage Company Inc. ("Ownit")
has been provided to the Depositor or compiled from information provided to the
Depositor by Ownit. None of the Depositor, the Trustee, the Securities
Administrator, the Master Servicer, the Servicers, the Mortgage Loan Seller, the
Underwriter, the Credit Risk Manager, the Certificate Insurer, Encore Credit
Corp. or any of their respective affiliates has made any independent
investigation of this information or has made or will make any representation as
to the accuracy or completeness of this information.
Approximately 45.89% of the Mortgage Loans (the "Ownit Mortgage
Loans"), which will be acquired on the Closing Date by the Depositor from the
Mortgage Loan Seller, were acquired by the Mortgage Loan Seller from Ownit prior
to the Closing Date. All of the Ownit Mortgage Loans were funded or acquired by
Ownit in accordance with the underwriting criteria described in this section.
All underwriting functions are performed on-site in the originating
branches. Branches are located in Woodland Hills, CA, San Diego, CA, Irvine, CA,
Sacramento, CA, Walnut Creek, CA, Portland, Oregon, Kirkland, Washington,
Denver, Colorado, Phoenix, Arizona, Cincinnati, Ohio and Atlanta, Georgia. Ownit
does not delegate underwriting authority to any 3rd party originators. Ownit
does not originate "Section 32" or state "high cost" loans.
All of the Ownit Mortgage Loans were originated generally in accordance
with the underwriting guidelines (the "Ownit Underwriting Guidelines")
established by Ownit with one of the following income documentation types: "Full
Documentation," "Full Documentation/12 Month Bank Statements," "Reduced
Documentation/6 Mos. Bank Statements," and "No Income Documentation".
The Ownit Underwriting Guidelines are primarily intended to evaluate:
(1) the applicant's credit standing and repayment ability and (2) the value and
adequacy of the mortgaged property as collateral. On a case by case basis, Ownit
may determine that, based on compensating factors, a loan applicant, not
strictly qualifying under one of the Risk Categories described below warrants an
exception to the requirements set forth in the Ownit Underwriting Guidelines.
Compensating factors may include, but are not limited to, loan to value ratio,
debt to income ratio, good credit history, stable employment history, length at
current employment and time in residence at the applicant's current address.
Exceptions may be made to loans, but more emphasis is given to purchase money
loans. The 80/20 Combo is either a Full, LIV or NIV; Depending on the doc type,
there is a minimum credit score that is required. As the Doc type moves from
Full to NIV, higher credit scores are required. The minimum score for Full Doc
80/20's is 580, LIV is 640 and NIV is 660. If a borrower has declared
bankruptcy, the Ownit Underwriting Guidelines require the filing to have been
dismissed or discharged prior to closing the loan; foreclosures must be
"seasoned" for 12 months. The borrower's mortgage cannot be greater than 30 days
delinquent at time of funding, and the debt-to-income ratio
S-54
cannot exceed 55%. Ownit will disregard all charge offs and collections and
judgments if greater than 12 months old. All derogatory credit events less than
12 months old can remain open, unless the aggregate amount is greater than
$4,000. Owner-occupied, single-family residences, 1-2 units, condominiums, and
town homes are the only property types financed by Ownit. The maximum loan
amount is $700,000 and the seller may contribute up to 6% of the loan amount in
seller concessions. Ownit will finance First Time Homebuyers (FTHB).
CREDIT GRADES
Ownit does not have credit grades. Ownit relies on the credit score
that is generated from the dual or tri-merged credit report. The credit score is
an indication on how the borrower is going to repay a loan originated by Ownit.
From the credit score, Ownit determines how much Ownit will lend, at what LTV
for each doc type. As the score goes up, both the loan amount and LTV increase.
As the doc type moves from full to NIV, the loan amounts and LTV's are reduced.
The following represents a summary of the key provisions of the Ownit
Underwriting Guidelines:
Income/Asset Verification
Ownit has three levels of income documentation:
Full Documentation/12 months bank statements
Acceptable income documentation for salaried borrowers is one current
pay stub with year-to-date income and up to two years W-2's. Self-employed
borrowers must be employed in the same business or have received 1099 income in
the same job for the past 12 months. At lower scores more income documentation
is required. Borrowers may also provide 12 months bank statements to prove their
income. The income is calculated differently for W-2 and Self-Employed
borrowers.
Reduced Documentation/6 Months Banks Statements
The last 6 months bank statements is used to verify income. Borrowers
must provide proof that the business cash flow can support the borrower's
income. Income must be reasonable for the line of work and a verbal verification
of employment is required. Bank statements must be in the name of the borrower
only.
No Income Documentation
Income is stated on the application and not verified. A verbal
Verification of Employment is required. Self-employed borrowers must provide
proof of self-employment and supply a business license or contract to verify
that the business has been in existence for the last 2 years. The income stated
must be reasonable for the line of work listed on the application.
Asset verification is required, a Verification of Deposit (VOD) with a
2 month average balance or two months recent and consecutive bank statements
must be supplied. The source of funds must be explained when an account has been
just opened or there is a large increase in the existing account. However, it is
not indicated in their guidelines that assets are required to be verified under
any of their programs. For purchase money loans, only need to verify source of
funds are stated on application and cashier's check matches stated source of
funds.
Credit History/Score
Ownit obtains a two bureau or a tri-merged credit report no more than
60 days old. The report must provide at least a 12-month credit history. The
qualifying score is the lower of two or the middle
S-55
of three scores for the primary borrower. If the borrowers have equal income,
the lowest score from the middle of three or lower of two for all borrowers is
used. Credit scores vary by documentation type, occupancy type and loan amount.
In general, the minimum credit score is 540. All foreclosures and bankruptcies
must be fully discharged release and satisfied.
Mortgage History
Ownit uses the credit score to show the borrowers ability to repay. The
mortgage must be rated in the credit report and be no more than 30 days
delinquent at close. This is verified by a demand which demonstrates where the
borrower is in regards to their current payment.
Qualifying Ratios
Maximum debt-to-income ratio varies from 50% to 55% depending on the
program and other factors including, but not limited to, documentation type,
amount of disposable income, loan amount. Ownit has a minimum disposable income
requirement of $1,000 per family which is determined using gross income less all
debts.
Appraisals
One full appraisal including supporting documentation is required on
all properties securing mortgage loans with initial principal balances less than
or equal to $600,000. For mortgage loans with initial principal balances in
excess of $600,000, two full appraisals with supporting documentation are
required. All properties are subject to a Property Information and Automated
Valuation Model (AVM). A field review may be required if the AVM does not
support the appraised value. A recertification of value is required on
appraisals over 120 days old.
Matrices
Ownit has one matrix which is outlined above.
ENCORE CREDIT CORP. The information set forth in this section with
regard to the underwriting standards of Encore Credit Corp. ("Encore") has been
provided to the Depositor or compiled from information provided to the Depositor
by Encore. None of the Depositor, the Trustee, the Master Servicer, the Mortgage
Loan Seller, the Underwriter, the Credit Risk Manager, the Certificate Insurer,
Ownit Mortgage Solutions, Inc. f/k/a Oakmont Mortgage Company Inc. or any of
their respective affiliates has made any independent investigation of this
information or has made or will make any representation as to the accuracy or
completeness of this information.
The information included in this section is an overview of the
underwriting standards and practices of Encore Credit Corp. Encore originates
loans through approved brokers or correspondents and all loans are individually
underwritten and approved in accordance with these guidelines. Encore approves
loans that represent a reasonable and prudent risk, where the borrowers have
shown the ability and willingness to repay their debts, and where there is
acceptable collateral to secure the obligations.
Encore's loans are all underwritten by its on-site underwriting
personnel. Encore does not delegate underwriting authority to any broker or
third party. Encore has established internal standards in designating the
authority to underwrite or approve a loan. Only certain senior personnel, who
have been granted a designated level of authority, can make program exceptions.
S-56
Encore complies with all applicable federal and state rules and
regulations, including, without limitation, the Equal Credit Opportunity Act
(ECOA) and the Fair Housing Act (FHA). As such, Encore is committed to offering
loans to all qualified applicants and mandates non-discriminatory practices.
Encore is committed to the fair and equitable treatment of all
customers. Encore reviews all applications to determine if the applicants can
qualify for any of its loan programs. Encore has adopted a group of "Fair
Lending Practices" that are contained within its Underwriting Guidelines and are
reinforced through employee training and distribution of these materials to all
of its broker/customers.
Encore's Underwriting Guidelines describe the general policies and
procedures pursuant to which Encore evaluates loans submitted for approval. In
developing these guidelines, Encore has attempted to offer a broad range of loan
programs to assist applicants with varied backgrounds and qualifications. Encore
has established these guidelines and the automated systems that support them to
originate loans that represent prudent risks based on sound underwriting
practices. Encore evaluates the ability and willingness of the borrower to repay
its obligation, the established value of the property used to secure the
obligation and any compensating factors to quality borrowers for the best
program possible.
Encore has committed to use these guidelines in a common sense manner
to not only qualify borrowers but to also ensure that each loan will meet the
borrower's needs. In addition, the flexibility of Encore's Underwriting
Guidelines allows it to make exceptions for applicants with compensating
factors. Decision makers document exceptions as they are granted and describe
the compensating factors used to offset the exceptions.
Encore offers a variety of both adjustable-rate and fixed-rate loan
products. Encore's principal loan products are adjustable-rate loans and fixed
rate loans with a fixed principal amount and term to maturity that are secured
by a first or second mortgage on the borrower's residence. Encore's loan
products are available for purchase, rate/term refinance and cash out
refinances.
FULLY AMORTIZED FIRST MORTGAGE LOAN PRODUCTS:
o Fixed Rate Mortgage Loans
o 6-month Adjustable Rate Mortgage Loans (ARM)
o 1-year Fixed/29-year Adjustable Rate Mortgage Loans (ARM)
o 2-year Fixed/28-year Adjustable Rate Mortgage Loans (ARM)
o 3-year Fixed/27-year Adjustable Rate Mortgage Loans (ARM)
o Interest only Option (2, 3 or 5 year interest only period) Adjustable
or Fixed Rate Mortgage Loans
VARIABLE RATE PARAMETERS
o After the initial fixed period (1, 2 or 3 years) both the rate and
payment will adjust every 6 months thereafter.
o Encore establishes and discloses a maximum rate per change and for the
life of each loan.
o The floor rate for each loan is the initial note rate.
S-57
o The index is the Wall Street Journal's published LIBOR Index.
o Encore qualifies borrowers at the initial note rate on the 2/28 and
3/27 ARM. Encore qualifies at the higher of the fully indexed or
initial note rate on the 6 Month and 1/29 ARM.
o Encore interest only option only available to three highest credit
grade classifications (AA, A+ and B). Encore qualifies borrowers at the
initial payment (interest only)
PAYMENT SCHEDULES
The repayment terms on loans are clearly identified on the note and
certain disclosures signed by the borrower. All payments are due the first of
each month.
PROGRAM TYPES
Encore describes each of its loan programs that it offers in detail on
separate program matrices. Examples of programs are:
CREDIT SCORE ADVANTAGE
This program offers loans to individuals with a wide range of credit
backgrounds and has the most flexible underwriting criteria. This program
determines the borrower credit grade (AA to C-) by considering the borrower's
credit score, mortgage or rental history for the past 12 months and the
borrower's bankruptcy and foreclosure history. The credit grade is the primary
factor used to determine the applicable LTV ratios and allowable loan amounts.
SPECIALTY ADVANTAGE PROGRAMS
Encore's "Specialty Advantage" programs are designed to fit specific
borrower niches and may have special requirements or limitations not found in
Encore's other program matrices. These programs offer either first or second
mortgages to borrowers in either of our two highest credit classifications, AA
and A+ with LTVs and CLTV's up to 100%. Because of the additional risk
associated with loans with higher LTVs, there are additional limitations that
are not placed on similar grades in other programs.
Each program matrix sets forth the eligibility standards to the
specific program. These standards include, but are not limited to:
o Borrower eligibility
o Occupancy standards
o Eligible property types
o Income type
o Ownership interests
o Underwriting standards which include:
o Credit quality
o Income documentation standards
o Reserve requirements
S-58
o Debt-to-income qualifying ratios
o Secondary financing
o Sales concessions
o Appraisal requirements
o Maximum loan amounts, LTV's and CLTV's
CREDIT SCORES
Encore obtains a credit score on each borrower. Credit scores are
obtained from credit reports provided by various credit reporting agencies. The
credit score is designed to assess a borrower's credit history. Encore's current
underwriting guidelines require a minimum credit score of 500, although a higher
credit score is often required to qualify for the maximum LTV under the program.
Encore also makes available a program with restricted guidelines, which allows a
minimum credit score of 475.
BORROWER'S CREDIT PACKAGE
The borrowers loan package must contain sufficient information to
enable Encore to reach an informed decision. Encore reviews all information
obtained by the broker, supplied by the borrower or received from another
source, to ensure the information is reasonable, consistent with the application
and genuine. In addition to the credit report, appraisal and income
documentation, the file must contain a preliminary title report or acceptable
form of property title and lien analysis provided by a local title agency.
TYPES OF INCOME DOCUMENTATION
Encore offers three types of income documentation.
o Full Documentation
o Limited Documentation
o Stated Income Documentation
Full Documentation for Salaried or Commissioned Wage Earner
o Encore requires one year stated documentation on loan amounts under
$600,000, which consists of a year to date pay stub and prior year W-2.
If the pay stub does not indicate the borrower's name, social security
number, employer's name and /or year-to-date earnings with deductions,
a Verification of Employment (VOE) is required.
o Encore will also accept immediate prior year's complete form 1040.
o On loan amounts of $600,000 and above, Encore requires two year's W-2
and a year-to-date pay stub, or VOE with incomplete pay stub.
o Encore will also accept two most current years complete form 1040.
Full Documentation for Self -Employed
o Signed, personal tax returns (form 1040 and all schedules) for the most
current two years
S-59
o Signed YTD Profit & Loss Statement (may not be required for family
owned business)
o If the business is a partnership or corporation, the corresponding tax
returns for the most current two years
Limited Documentation
o 12 months consecutive personal bank statements. This program is for
borrowers who have less than a two-year history of stable income or who
cannot otherwise meet the requirements for full documentation.
Stated Income Documentation
o Income stated on the borrower's signed application. Income stated must
be reasonable for the borrower's line of work or profession. All
self-employed borrowers must provide satisfactory evidence of existence
of the business and demonstrate a two-year history of employment in the
same profession.
o Stated income wage earners will be considered on a case-by-case basis.
PROPERTY EVALUATION/BORROWER EQUITY
Encore places special emphasis on both the type and value of the
property when underwriting a loan file. An assessment of the adequacy of the
real property as collateral for the loan is primarily based upon an appraisal of
the property and a calculation of the LTV of the loan applied for and the CLTV
to the appraised value of the property at the time of origination. Encore's
program matrices address certain property types differently. Any negative
factors raised by the appraiser or identified by a field reviewer are closely
analyzed to ensure that they do not represent a serious impairment to the
property's structure, condition or salability. Functional problems and
non-permitted additions are handled on a case-by-case basis.
CREDIT GRADE: AA (SPECIALTY)
Maximum LTV: 100%
Maximum Loan Amounts: $500,000
Maximum DTI: 50%
Mortgage History: 1x30 Day Late
Bankruptcy History: >3 years
Foreclosure History: >3 years
Consumer Credit History: Max 1x30 day late in past 12 months, 650 credit score
overrides
Major Derog History: -/<$2,000 in past 24 months
CREDIT GRADE: AA (CSA)
Maximum LTV: 95%
Maximum Loan Amounts: $1,000,000 (max LTV 75%)
S-60
Maximum DTI: 50%
Mortgage History: 0x30 Day Late
Bankruptcy History >3 years
Foreclosure History: >3 years
Consumer Credit History: Not considered
Major Derog History: -/<$2,000 in past 24 months
CREDIT GRADE: A+
Maximum LTV: 90%
Maximum Loan Amounts: $500,000
Maximum DTI: 50%
Mortgage History: 4x30 Day Late
Bankruptcy: 24 months
Foreclosure History: >3 years
Consumer Credit History: Not considered
Major Derog History: Max of $5,000 aggregate of charge off, collections or
judgments in past 12 months or 550 score to override
CREDIT GRADE: B
Maximum LTV: 85%
Maximum Loan Amounts: $500,000
Maximum DTI: 50%
Mortgage History: 1x60 Day Late, unlimited 30 day lates
Bankruptcy: 18 months
Foreclosure History: >2 years
Consumer Credit History: Not considered
Major Derog History: Not considered
CREDIT GRADE: C
Maximum LTV: 80%
S-61
Maximum Loan Amounts: $450,000
Maximum DTI: 55%
Mortgage History: 1x60 Day Late, unlimited 30 day lates
Bankruptcy: 12 months
Foreclosure History: >12 months
Consumer Credit History: Not considered
Major Derog History: Not considered
CREDIT GRADE: C-
Maximum LTV: 70%
Maximum Loan Amounts: $400,000 (65% LTV)
Maximum DTI: 55%
Mortgage History: 1x120 Day Late, unlimited 90 day lates
Bankruptcy: 12 months
Foreclosure History: >6 months, no current NOD
Consumer Credit History: Not considered
Major Derog History: Not considered
Note: Loan amounts, LTVs and DTI's shown are maximums, which require full
documentation and certain minimum credit scores, depending on LTV. Loan amounts
>$600,000 permit no mortgage lates.
ADDITIONAL INFORMATION CONCERNING THE MORTGAGE LOANS
The description in this prospectus supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted as of
the close of business on the Cut-off Date, as adjusted for the scheduled
principal payments due on or before such date. Prior to the issuance of the
certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise if the Depositor deems the removal
necessary or desirable, and may be prepaid at any time. A limited number of
other mortgage loans may be included in the Mortgage Pool prior to the issuance
of the certificates unless including these mortgage loans would materially alter
the characteristics of the Mortgage Pool as described in this prospectus
supplement. The Depositor believes that the information set forth in this
prospectus supplement will be representative of the characteristics of the
Mortgage Pool as it will be constituted at the time the certificates are issued,
although the range of Mortgage Rates and maturities and other characteristics of
the Mortgage Loans may vary.
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YIELD ON THE CERTIFICATES
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
preceding monthly payment up to the date of the prepayment, instead of for a
full month. When a partial principal prepayment is made on a Mortgage Loan, the
mortgagor is not charged interest on the amount of the prepayment for the month
in which the prepayment is made. In addition, the application of the
Servicemembers Civil Relief Act (the "Relief Act") and similar state or local
laws to any Mortgage Loan could adversely affect, for an indeterminate period of
time, the ability of the Servicer to collect full amounts of interest on such
Mortgage Loans. The Servicer is obligated to pay from its own funds only those
interest shortfalls attributable to principal prepayments by the mortgagors on
the Mortgage Loans received from the 16th day of the month prior to the month of
the related Distribution Date to the last day of such prior month; provided,
however that the obligation of the Servicer to remit the amount of any shortfall
in interest resulting from a principal prepayment on a Mortgage Loan shall be
limited to the aggregate Servicing Fee (as defined herein) payable to the
Servicer for the related Due Period. The Servicer will not remit any shortfalls
in interest attributable to the application of the Relief Act. Any interest
shortfalls attributable to voluntary principal prepayments required to be funded
but not funded by the Servicer are required to be paid by the Master Servicer,
but only to the extent that such amount does not exceed the Master Servicing Fee
for the Mortgage Loans for the applicable Distribution Date. Accordingly, the
effect of (i) any principal prepayments on the Mortgage Loans, to the extent
that any resulting interest shortfalls for the period from the 16th day to the
last day of the month prior to the month of the related Distribution Date (each,
a "Prepayment Interest Shortfall") exceed any payments by the Master Servicer or
the Servicer ("Compensating Interest") or (ii) any shortfalls resulting from the
application of the Relief Act or similar state or local laws, will be to reduce
the aggregate amount of interest collected that is available for distribution to
certificateholders. Any such shortfalls will be allocated among the certificates
as provided under "Description of the Certificates-Interest Distributions on the
Offered Certificates and the Class B Certificates" and "-Overcollateralization
Provisions" in this prospectus supplement. See "Certain Legal Aspects of the
Mortgage Loans-Servicemembers Civil Relief Act" in the prospectus.
GENERAL PREPAYMENT CONSIDERATIONS
The rate of principal payments on the Offered Certificates, the
aggregate amount of distributions on such certificates and the yield to maturity
of such certificates will be related to the rate and timing of payments of
principal on the Mortgage Loans. The rate of principal payments on the Mortgage
Loans will in turn be affected by the amortization schedules of the Mortgage
Loans as they change from time to time to accommodate changes in the Mortgage
Rates and by the rate of principal prepayments thereon (including for this
purpose, payments resulting from refinancings, liquidations of the Mortgage
Loans due to defaults, casualties, condemnations and repurchases, whether
optional or required, by the Depositor or the Mortgage Loan Seller). The
Mortgage Loans may be prepaid by the mortgagors at any time; however, as
described under "The Mortgage Pool" in this prospectus supplement, with respect
to approximately 88.08% of the Mortgage Loans, by aggregate principal balance of
the Mortgage Loans as of the Cut-off Date, a prepayment may subject the related
mortgagor to a Prepayment Charge.
Prepayments, liquidations and repurchases of the Mortgage Loans will
result in distributions in respect of principal to the holders of the class or
classes of Offered Certificates then entitled to receive distributions that
otherwise would be distributed over the remaining terms of the Mortgage Loans.
Since the rates of payment of principal on the Mortgage Loans will depend on
future events and a variety of factors, no assurance can be given as to that
rate or the rate of principal prepayments. The extent to which the yield to
maturity of any class of Offered Certificates may vary from the anticipated
S-63
yield will depend upon the degree to which the Offered Certificates are
purchased at a discount or premium and the degree to which the timing of
payments thereon is sensitive to prepayments on the Mortgage Loans. Further, an
investor should consider, in the case of any Offered Certificate purchased at a
discount, the risk that a slower than anticipated rate of principal payments on
the Mortgage Loans could result in an actual yield to the investor that is lower
than the anticipated yield. In the case of any Offered Certificate purchased at
a premium, there is a risk that a faster than anticipated rate of principal
payments could result in an actual yield to the investor that is lower than the
anticipated yield. In general, the earlier prepayments of principal are made on
the Mortgage Loans, the greater the effect on the yield to maturity of the
Offered Certificates. As a result, the effect on an investors' yield of
principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Offered Certificates would not be fully offset by a subsequent like
reduction (or increase) in the rate of principal payments.
It is highly unlikely that the Mortgage Loans will prepay at any
constant rate until maturity or that all of the Mortgage Loans will prepay at
the same rate. Moreover, the timing of prepayments on the Mortgage Loans may
significantly affect the yield to maturity on the Offered Certificates, even if
the average rate of principal payments experienced over time is consistent with
an investor's expectation.
The rate of payments (including prepayments), on pools of mortgage
loans is influenced by a variety of economic, geographic, social and other
factors. If prevailing mortgage rates fall significantly below the Mortgage
Rates on the Mortgage Loans, the rate of prepayment and refinancing would be
expected to increase. Conversely, if prevailing mortgage rates rise
significantly above the Mortgage Rates on the Mortgage Loans, the rate of
prepayment on the Mortgage Loans would be expected to decrease. Other factors
affecting prepayment of mortgage loans include changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. The prepayment experience of the Delayed
First Adjustment Mortgage Loans may differ from that of the other Mortgage
Loans. The Delayed First Adjustment Mortgage Loans may be subject to greater
rates of prepayments as they approach their initial Adjustment Dates even if
market interest rates are only slightly higher or lower than the Mortgage Rates
on the Delayed First Adjustment Mortgage Loans as mortgagors seek to avoid
changes in their monthly payments. In addition, the existence of the applicable
Periodic Rate Cap, Maximum Mortgage Rate and Minimum Mortgage Rate may affect
the likelihood of prepayments resulting from refinancings. There can be no
certainty as to the rate of prepayments on the Mortgage Loans during any period
or over the life of the certificates. See "Yield Considerations" in the
prospectus.
Because principal distributions are paid to certain classes of Offered
Certificates before other classes, holders of classes of Offered Certificates
having a later priority of payment bear a greater risk of losses than holders of
classes having earlier priorities for distribution of principal. This is because
the certificates having a later priority of payment will represent an increasing
percentage interest in the trust fund during the period prior to the
commencement of distributions of principal on these certificates. As described
under "Description of the Certificates--Principal Distributions on the Offered
Certificates and the Class B Certificates" in this prospectus supplement, prior
to the Stepdown Date, all principal payments on the Mortgage Loans will be
allocated to the Class A Certificates. Thereafter, as further described in this
prospectus supplement, during certain periods, subject to certain delinquency
triggers described in this prospectus supplement, all principal payments on the
Mortgage Loans will be allocated among the Class A Certificates and all classes
of the Mezzanine Certificates in the priorities described under "Description of
the Certificates--Principal Distributions on the Offered Certificates and the
Class B Certificates" in this prospectus supplement.
In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. In addition, default rates may be higher
for mortgage loans used to refinance an existing mortgage loan. In the event of
a mortgagor's default on a Mortgage Loan, there can be no assurance
S-64
that recourse will be available beyond the specific Mortgaged Property pledged
as security for repayment. See "The Mortgage Pool--Underwriting Standards" in
this prospectus supplement.
SPECIAL YIELD CONSIDERATIONS
The Mortgage Rates on approximately 22.06% of the Mortgage Loans, by
aggregate principal balance as of the Cut-off Date, are fixed and will not vary
with any index. The Mortgage Rates on approximately 77.94% of the Mortgage
Loans, by aggregate principal balance as of the Cut-off Date, adjust
semi-annually based upon Six-Month LIBOR subject to periodic and lifetime
limitations and after an initial period of two, three or five years with respect
to Delayed First Adjustment Mortgage Loans. The Pass-Through Rate on the Offered
Certificates adjusts monthly based upon One-Month LIBOR, subject to the
applicable Net WAC Pass-Through Rate, with the result that increases in the
Pass-Through Rates on such certificates may be limited for extended periods in a
rising interest rate environment. Investors should note that all of the ARM
Loans are Delayed First Adjustment Mortgage Loans. The interest due on the
Mortgage Loans during any Due Period, net of the expenses of the trust may not
equal the amount of interest that would accrue at One-Month LIBOR plus the
applicable spread on the Offered Certificates during the related Interest
Accrual Period; however, any shortfall of this kind will be payable to the
holders of such certificates, but only to the extent and in the priority
described under "Description of the Certificates--Overcollateralization
Provisions" in this prospectus supplement. In addition, Six-Month LIBOR and
One-Month LIBOR may respond differently to economic and market factors. Thus, it
is possible, for example, that if both One-Month LIBOR and Six-Month LIBOR rise
during the same period, One-Month LIBOR may rise more rapidly than Six-Month
LIBOR, potentially resulting in the application of the applicable Net WAC
Pass-Through Rate on the Offered Certificates, which would adversely affect the
yield to maturity on such certificates.
If the pass-through rates on the Offered Certificates are limited by
the applicable Net WAC Pass-Through Rate for any Distribution Date, the
resulting interest shortfalls, which are referred to herein as "Net WAC Rate
Carryover Amounts", may be recovered by the holders of such certificates on such
Distribution Date or on future Distribution Dates, to the extent that on such
Distribution Date or future Distribution Dates there are any available funds
remaining after certain other distributions on the Offered Certificates and the
payment of certain fees and expenses of the trust. The ratings on the Offered
Certificates will not address the likelihood of any such recovery of such
interest shortfalls by holders of those certificates.
As described under "Description of the Certificates--Allocation of
Losses; Subordination," amounts otherwise distributable to holders of the
Mezzanine Certificates, the Class B Certificates and the Class CE Certificates
may be made available to protect the holders of the Class A Certificates against
interruptions in distributions due to certain mortgagor delinquencies, to the
extent not covered by P&I Advances. Such delinquencies may affect the yield to
investors in the Mezzanine Certificates and the Class B Certificates and, even
if subsequently cured, will affect the timing of the receipt of distributions by
the holders of the Mezzanine Certificates and the Class B Certificates. In
addition, the rate of delinquencies or losses will affect the rate of principal
payments on the Mezzanine Certificates. See "Description of the
Certificates--Principal Distributions on the Offered Certificates and the Class
B Certificates" in this prospectus supplement.
WEIGHTED AVERAGE LIVES
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
that security will be repaid to the investor. The weighted average life of the
Offered Certificates will be influenced by the rate at which principal on the
Mortgage Loans is paid, which may be in the form of scheduled payments or
prepayments (including repurchases and prepayments of principal by the mortgagor
as well as amounts received by virtue of condemnation, insurance or foreclosure
with respect to the Mortgage Loans), and the timing of these
S-65
payments. The "Assumed Final Distribution Date" for each class of the Offered
Certificates is October 25, 2034. The Assumed Final Distribution Date is the
Distribution Date in the month following the latest scheduled maturity date of
all of the Mortgage Loans. Since the rate of payment (including prepayments) of
principal on the Mortgage Loans can be expected to exceed the scheduled rate of
payments, and could exceed the scheduled rate by a substantial amount, the
disposition of the last remaining Mortgage Loan may be earlier, and could be
substantially earlier, than the Assumed Final Distribution Date.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment assumption used in this prospectus
supplement with respect to the adjustable rate Mortgage Loans assumes a
prepayment rate for the mortgage loans of 28% CPR. To assume 28% CPR or any
other CPR percentage is to assume that the stated percentage of the outstanding
principal balance of the pool is prepaid over the course of a year. The
prepayment assumption used in this prospectus supplement with respect to the
fixed rate Mortgage Loans assumes a prepayment rate of 100% PPC. To assume 100%
PPC is to assume (i) a per annum prepayment rate of 4% of the then outstanding
principal balance of the mortgage loans in the first month of the life of the
mortgage loans, (ii) an additional 1.72727% per annum in each month thereafter
through the eleventh month and (iii) a constant prepayment rate of 23% per annum
beginning in the twelfth month and in each month thereafter during the life of
the mortgage loans. No representation is made that the Mortgage Loans will
prepay in accordance with such prepayment models or any other rate. We refer to
each such prepayment model herein as a "Prepayment Assumption".
The tables entitled "Percent of Initial Certificate Principal Balance
Outstanding at the Specified Percentages of the Prepayment Assumption" indicate
the percentage of the initial Certificate Principal Balance of the Offered
Certificates that would be outstanding after each of the dates shown at various
percentages of CPR and PPC, and the corresponding weighted average lives of
these certificates. The tables are based on the following assumptions (the
"Modeling Assumptions"): (i) the Mortgage Pool consists of 123 mortgage loans
with the characteristics set forth below, (ii) distributions on the certificates
are received, in cash, on the 25th day of each month, commencing in October
2004; (iii) the Mortgage Loans prepay at the percentages of CPR and PPC
indicated; (iv) no defaults or delinquencies occur in the payment by mortgagors
of principal and interest on the Mortgage Loans and no shortfalls due to the
application of the Relief Act or similar state or local laws are incurred; (v)
none of the Depositor, the Master Servicer, the Servicer or any other person
purchases from the trust fund any Mortgage Loan under any obligation or option
under the Pooling and Servicing Agreement, except as indicated in footnote two
in the tables; (vi) scheduled monthly payments on the Mortgage Loans are
received on the first day of each month commencing in October 2004, and are
computed prior to giving effect to any prepayments received in the prior month;
(vii) prepayments representing payment in full of individual Mortgage Loans are
received on the last day of each month commencing in September 2004, and include
30 days' interest thereon; (viii) the scheduled monthly payment for each
Mortgage Loan is calculated based on the assumed mortgage loan characteristics
stated below; (ix) the certificates are purchased on September 20, 2004; (x)
Six-Month LIBOR remains constant at 2.06% per annum and the gross mortgage rate
on each ARM Loan is adjusted according to the assumed mortgage loan
characteristics; (xi) One-Month LIBOR remains constant at 1.7788% per annum;
(xii) the Class P Certificates have a Certificate Principal Balance equal to
zero; and (xiii) the Servicer fee is assumed to be 0.50% per annum, the Master
Servicer fee is assumed to be equal to 0.0175% per annum and the Credit Risk
Manager fee is assumed to be equal to 0.015% per annum.
S-66
ASSUMED GROUP I MORTGAGE LOAN CHARACTERISTICS
Remaining
Term Remaining Maximum Minimum Initial
Principal to Amortization Mortgage Gross Mortgage Mortgage Periodic
Balance Maturity Term Age Rate Index Margin Rate Rate Rate Cap
($) (Months) (Months) (Months) (%) Type (%) (%) (%) (%)
-------------- --------- ------------ -------- ------- ------- ------ -------- -------- --------
107,441.00 173 353 7 9.331 Fixed n/a n/a n/a n/a
183,753.62 189 189 3 7.778 Fixed n/a n/a n/a n/a
4,911,843.11 356 356 4 7.345 Fixed n/a n/a n/a n/a
57,476.67 236 236 4 7.440 Fixed n/a n/a n/a n/a
163,351.88 236 236 4 6.740 Fixed n/a n/a n/a n/a
55,238.84 174 354 6 9.990 Fixed n/a n/a n/a n/a
632,512.69 174 354 6 9.286 Fixed n/a n/a n/a n/a
2,229,138.31 224 224 4 6.437 Fixed n/a n/a n/a n/a
1,389,432.91 356 356 4 7.415 Fixed n/a n/a n/a n/a
148,203.53 356 356 4 5.900 Fixed n/a n/a n/a n/a
494,000.00 356 356 4 6.826 Fixed n/a n/a n/a n/a
1,496,257.64 356 356 4 6.779 Fixed n/a n/a n/a n/a
1,352,659.41 357 357 3 6.810 Fixed n/a n/a n/a n/a
31,844,744.62 356 356 4 6.543 Fixed n/a n/a n/a n/a
Six-Month
30,539,666.86 355 355 5 7.086 LIBOR 6.220 13.615 7.086 2.341
Six-Month
549,720.00 357 357 3 6.047 LIBOR 4.670 12.572 6.047 2.211
Six-Month
3,527,393.00 357 357 3 7.019 LIBOR 6.198 13.019 7.019 3.000
Six-Month
988,049.96 353 353 7 7.036 LIBOR 6.199 13.361 7.036 2.569
Six-Month
130,929.34 356 356 4 9.140 LIBOR 4.950 16.140 9.140 1.500
Six-Month
336,027.87 353 353 7 6.232 LIBOR 5.855 12.232 6.232 3.000
Six-Month
193,755.00 357 357 3 6.625 LIBOR 4.875 13.625 6.625 1.500
Six-Month
4,691,926.08 356 356 4 6.648 LIBOR 6.253 12.648 6.648 3.000
Six-Month
8,224,770.52 356 356 4 6.862 LIBOR 6.098 13.392 6.862 2.322
Six-Month
6,333,485.90 354 354 6 7.110 LIBOR 6.887 13.308 7.110 2.631
Six-Month
1,958,247.58 355 355 5 7.290 LIBOR 6.146 13.842 7.290 2.276
Six-Month
61,262.70 354 354 6 7.150 LIBOR 6.450 13.150 7.150 3.000
Original
Subsequent Adjustment Interest
Principal Periodic Months to Rate Only
Balance Rate Cap Next Rate Frequency Term
($) (%) Adjustment (Months) (Months)
-------------- ---------- ---------- ---------- --------
107,441.00 n/a n/a n/a 0
183,753.62 n/a n/a n/a 0
4,911,843.11 n/a n/a n/a 0
57,476.67 n/a n/a n/a 0
163,351.88 n/a n/a n/a 0
55,238.84 n/a n/a n/a 0
632,512.69 n/a n/a n/a 0
2,229,138.31 n/a n/a n/a 0
1,389,432.91 n/a n/a n/a 0
148,203.53 n/a n/a n/a 0
494,000.00 n/a n/a n/a 120
1,496,257.64 n/a n/a n/a 0
1,352,659.41 n/a n/a n/a 0
31,844,744.62 n/a n/a n/a 0
30,539,666.86 1.267 19 6 0
549,720.00 1.263 21 6 24
3,527,393.00 1.000 21 6 60
988,049.96 1.144 29 6 0
130,929.34 1.500 20 6 0
336,027.87 1.000 17 6 0
193,755.00 1.500 21 6 24
4,691,926.08 1.000 20 6 60
8,224,770.52 1.275 20 6 0
6,333,485.90 1.160 18 6 0
1,958,247.58 1.283 19 6 0
61,262.70 1.000 18 6 0
S-67
Remaining
Term Remaining Maximum Minimum Initial
Principal to Amortization Mortgage Gross Mortgage Mortgage Periodic
Balance Maturity Term Age Rate Index Margin Rate Rate Rate Cap
($) (Months) (Months) (Months) (%) Type (%) (%) (%) (%)
-------------- --------- ------------ -------- ------- ------- ------ -------- -------- --------
Six-Month
103,630.54 356 356 4 7.500 LIBOR 4.950 14.500 7.500 1.500
Six-Month
5,404,571.05 353 353 7 6.563 LIBOR 6.630 12.530 6.563 3.000
Six-Month
184,017.99 356 356 4 9.315 LIBOR 5.990 16.315 9.315 2.000
Six-Month
5,248,856.89 357 357 3 6.419 LIBOR 5.370 12.618 6.419 2.155
Six-Month
73,900,045.50 356 356 4 6.438 LIBOR 6.036 12.438 6.438 3.000
Six-Month
97,479,291.48 356 356 4 6.781 LIBOR 6.092 13.072 6.781 2.580
Six-Month
183,696.16 353 353 7 5.900 LIBOR 7.250 11.900 5.900 3.000
Six-Month
2,252,172.39 353 353 7 7.214 LIBOR 7.847 13.128 7.214 3.000
Six-Month
643,161.89 353 353 7 7.319 LIBOR 7.543 13.319 7.319 3.000
Six-Month
504,470.66 352 352 8 7.500 LIBOR 8.084 13.500 7.500 3.000
Six-Month
1,247,526.89 352 352 8 7.255 LIBOR 7.680 13.255 7.255 3.000
Six-Month
1,602,826.00 356 356 4 6.438 LIBOR 5.875 12.438 6.438 3.000
Six-Month
6,248,962.14 355 355 5 6.455 LIBOR 5.893 12.614 6.455 2.792
Six-Month
90,000.00 359 359 1 8.125 LIBOR 8.125 14.125 8.125 3.000
Six-Month
77,580.06 353 353 7 6.500 LIBOR 6.750 12.500 6.500 3.000
Six-Month
233,700.00 355 355 5 7.990 LIBOR 7.990 13.990 7.990 3.000
Six-Month
679,898.95 355 355 5 6.522 LIBOR 6.295 12.522 6.522 3.000
Six-Month
1,970,299.87 357 357 3 6.721 LIBOR 6.475 12.721 6.721 3.000
Six-Month
237,290.96 353 353 7 8.214 LIBOR 8.686 14.214 8.214 3.000
Six-Month
132,423.44 353 353 7 6.050 LIBOR 6.250 12.050 6.050 3.000
Six-Month
49,806.34 353 353 7 9.400 LIBOR 9.000 15.400 9.400 3.000
Six-Month
437,490.57 353 353 7 6.147 LIBOR 6.782 12.147 6.147 3.000
Six-Month
2,218,224.77 356 356 4 6.324 LIBOR 5.805 11.768 6.324 2.819
Six-Month
7,643,404.02 358 358 2 6.319 LIBOR 5.849 12.319 6.319 3.000
Original
Subsequent Adjustment Interest
Principal Periodic Months to Rate Only
Balance Rate Cap Next Rate Frequency Term
($) (%) Adjustment (Months) (Months)
-------------- ---------- ---------- ---------- --------
103,630.54 1.500 20 6 0
5,404,571.05 1.000 17 6 0
184,017.99 1.500 20 6 0
5,248,856.89 1.282 21 6 24
73,900,045.50 1.000 20 6 60
97,479,291.48 1.164 20 6 0
183,696.16 1.000 17 6 0
2,252,172.39 1.000 17 6 0
643,161.89 1.000 17 6 0
504,470.66 1.000 16 6 0
1,247,526.89 1.000 16 6 0
1,602,826.00 1.000 20 6 60
6,248,962.14 1.080 19 6 0
90,000.00 1.000 35 6 36
77,580.06 1.000 29 6 0
233,700.00 1.000 31 6 36
679,898.95 1.000 31 6 60
1,970,299.87 1.000 33 6 0
237,290.96 1.000 29 6 0
132,423.44 1.000 29 6 0
49,806.34 1.000 29 6 0
437,490.57 1.000 29 6 0
2,218,224.77 1.060 32 6 36
7,643,404.02 1.000 34 6 60
S-68
Remaining
Term Remaining Maximum Minimum Initial
Principal to Amortization Mortgage Gross Mortgage Mortgage Periodic
Balance Maturity Term Age Rate Index Margin Rate Rate Rate Cap
($) (Months) (Months) (Months) (%) Type (%) (%) (%) (%)
-------------- --------- ------------ -------- ------- ------- ------ -------- -------- --------
Six-Month
11,452,830.05 356 356 4 6.729 LIBOR 6.312 12.452 6.729 2.886
Six-Month
282,815.79 357 357 3 6.631 LIBOR 6.034 12.631 6.631 2.789
Six-Month
307,100.00 358 358 2 7.064 LIBOR 6.564 13.064 7.064 3.000
Six-Month
51,732.69 353 353 7 8.070 LIBOR 7.650 14.070 8.070 2.000
Six-Month
701,866.08 358 358 2 6.089 LIBOR 5.180 12.089 6.089 3.000
Six-Month
1,197,556.66 358 358 2 6.082 LIBOR 5.293 12.082 6.082 3.000
Six-Month
97,028.96 353 353 7 6.990 LIBOR 7.250 12.990 6.990 2.000
Six-Month
317,987.16 353 353 7 6.696 LIBOR 6.480 12.696 6.696 2.000
Six-Month
2,536,562.95 357 357 3 5.973 LIBOR 5.691 12.127 5.973 2.747
Six-Month
7,177,586.90 358 358 2 6.275 LIBOR 5.609 12.275 6.275 3.000
4,644,756.58 176 356 4 9.910 Fixed n/a n/a n/a n/a
699,583.12 173 173 7 8.805 Fixed n/a n/a n/a n/a
3,262,171.56 357 357 2 10.128 Fixed n/a n/a n/a n/a
1,593,881.01 175 355 5 10.242 Fixed n/a n/a n/a n/a
11,488,667.42 176 356 4 9.725 Fixed n/a n/a n/a n/a
2,000,423.38 175 355 5 10.603 Fixed n/a n/a n/a n/a
609,226.43 219 219 3 10.094 Fixed n/a n/a n/a n/a
295,090.79 193 193 6 10.854 Fixed n/a n/a n/a n/a
137,065.98 358 358 2 10.580 Fixed n/a n/a n/a n/a
2,535,993.85 358 358 2 9.695 Fixed n/a n/a n/a n/a
134,971.38 358 358 2 10.375 Fixed n/a n/a n/a n/a
Original
Subsequent Adjustment Interest
Principal Periodic Months to Rate Only
Balance Rate Cap Next Rate Frequency Term
($) (%) Adjustment (Months) (Months)
-------------- ---------- ---------- ---------- --------
11,452,830.05 1.045 32 6 0
282,815.79 1.000 57 6 0
307,100.00 1.000 58 6 60
51,732.69 1.000 53 6 0
701,866.08 1.000 58 6 0
1,197,556.66 1.000 58 6 60
97,028.96 1.000 53 6 0
317,987.16 1.000 53 6 0
2,536,562.95 1.000 57 6 0
7,177,586.90 1.000 58 6 60
4,644,756.58 n/a n/a n/a 0
699,583.12 n/a n/a n/a 0
3,262,171.56 n/a n/a n/a 0
1,593,881.01 n/a n/a n/a 0
11,488,667.42 n/a n/a n/a 0
2,000,423.38 n/a n/a n/a 0
609,226.43 n/a n/a n/a 0
295,090.79 n/a n/a n/a 0
137,065.98 n/a n/a n/a 0
2,535,993.85 n/a n/a n/a 0
134,971.38 n/a n/a n/a 0
S-69
ASSUMED GROUP II MORTGAGE LOAN CHARACTERISTICS
Remaining
Term Remaining Maximum Minimum Initial
Principal to Amortization Mortgage Gross Mortgage Mortgage Periodic
Balance Maturity Term Age Rate Index Margin Rate Rate Rate Cap
($) (Months) (Months) (Months) (%) Type (%) (%) (%) (%)
-------------- --------- ------------ -------- -------- ------- ------ -------- -------- --------
42,028.42 174 354 6 9.999 Fixed n/a n/a n/a n/a
794,467.47 356 356 4 7.162 Fixed n/a n/a n/a n/a
55,285.81 145 325 35 10.500 Fixed n/a n/a n/a n/a
1,020,691.82 183 183 4 6.654 Fixed n/a n/a n/a n/a
169,387.74 356 356 4 7.540 Fixed n/a n/a n/a n/a
84,794.81 356 356 4 9.190 Fixed n/a n/a n/a n/a
128,000.00 357 357 3 7.500 Fixed n/a n/a n/a n/a
861,523.10 356 356 4 5.844 Fixed n/a n/a n/a n/a
338,714.44 357 357 3 7.841 Fixed n/a n/a n/a n/a
19,189,283.88 356 356 4 6.425 Fixed n/a n/a n/a n/a
425,096.32 358 358 2 6.135 Fixed n/a n/a n/a n/a
Six-Month
7,364,793.89 355 355 5 7.107 LIBOR 6.302 13.636 7.107 2.328
Six-Month
2,114,034.00 358 358 2 7.417 LIBOR 5.872 13.417 7.417 3.000
Six-Month
1,240,750.00 356 356 4 6.208 LIBOR 6.018 11.827 6.208 3.000
Six-Month
8,128,128.07 357 357 3 6.388 LIBOR 5.797 12.388 6.388 3.000
Six-Month
6,639,462.53 356 356 4 6.680 LIBOR 6.028 13.203 6.680 2.305
Six-Month
393,146.33 353 353 7 7.990 LIBOR 8.150 13.990 7.990 3.000
Six-Month
2,006,501.00 357 357 3 6.208 LIBOR 5.459 12.212 6.208 2.383
Six-Month
41,398,305.60 357 357 3 6.337 LIBOR 5.866 12.337 6.337 3.000
Six-Month
35,829,943.39 356 356 4 6.421 LIBOR 5.902 12.780 6.421 2.538
Six-Month
476,709.64 353 353 7 6.740 LIBOR 6.250 12.740 6.740 3.000
Six-Month
1,027,998.99 356 356 4 5.570 LIBOR 5.290 11.570 5.570 3.000
Six-Month
357,508.57 355 355 5 6.250 LIBOR 5.490 12.250 6.250 3.000
Six-Month
397,000.00 354 354 6 6.250 LIBOR 6.250 12.250 6.250 3.000
Six-Month
372,354.06 355 355 5 5.500 LIBOR 5.500 11.500 5.500 3.000
Six-Month
468,000.00 357 357 3 5.375 LIBOR 3.875 12.375 5.375 1.500
Original
Subsequent Adjustment Interest
Principal Periodic Months to Rate Only
Balance Rate Cap Next Rate Frequency Term
($) (%) Adjustment (Months) (Months)
------------ ------------ ---------- ---------- --------
42,028.42 n/a n/a n/a 0
794,467.47 n/a n/a n/a 0
55,285.81 n/a n/a n/a 0
1,020,691.82 n/a n/a n/a 0
169,387.74 n/a n/a n/a 0
84,794.81 n/a n/a n/a 0
128,000.00 n/a n/a n/a 60
861,523.10 n/a n/a n/a 0
338,714.44 n/a n/a n/a 0
19,189,283.88 n/a n/a n/a 0
425,096.32 n/a n/a n/a 0
7,364,793.89 1.261 19 6 0
2,114,034.00 1.000 22 6 60
1,240,750.00 1.000 20 6 24
8,128,128.07 1.000 21 6 60
6,639,462.53 1.285 20 6 0
393,146.33 1.000 17 6 0
2,006,501.00 1.206 21 6 24
41,398,305.60 1.000 21 6 60
35,829,943.39 1.179 20 6 0
476,709.64 1.000 17 6 0
1,027,998.99 1.000 20 6 60
357,508.57 1.000 19 6 0
397,000.00 1.000 30 6 60
372,354.06 1.000 31 6 0
468,000.00 1.500 33 6 24
S-70
Remaining
Term Remaining Maximum Minimum Initial
Principal to Amortization Mortgage Gross Mortgage Mortgage Periodic
Balance Maturity Term Age Rate Index Margin Rate Rate Rate Cap
($) (Months) (Months) (Months) (%) Type (%) (%) (%) (%)
-------------- --------- ------------ -------- -------- ------- ------ -------- -------- --------
Six-Month
1,353,387.14 355 355 5 6.467 LIBOR 6.091 11.715 6.467 3.000
Six-Month
1,115,500.03 354 354 6 6.625 LIBOR 6.582 12.625 6.625 3.000
Six-Month
3,674,986.86 356 356 4 6.769 LIBOR 6.280 12.912 6.769 2.594
Six-Month
371,350.00 358 358 2 5.909 LIBOR 5.409 11.909 5.909 3.000
Six-Month
143,480.83 358 358 2 5.875 LIBOR 5.375 11.875 5.875 3.000
Six-Month
465,369.82 354 354 6 5.840 LIBOR 5.650 11.840 5.840 2.000
Six-Month
1,099,904.82 356 356 4 6.335 LIBOR 6.020 12.335 6.335 3.000
Six-Month
344,000.00 357 357 3 5.625 LIBOR 4.125 17.250 5.625 3.000
Six-Month
860,919.29 355 355 5 5.703 LIBOR 5.814 11.703 5.703 3.000
Six-Month
3,262,618.03 358 358 2 6.109 LIBOR 5.609 12.109 6.109 3.000
Six-Month
63,200.00 359 359 1 7.875 LIBOR 6.500 13.875 7.875 3.000
Six-Month
9,448,574.26 358 358 2 6.127 LIBOR 5.609 12.127 6.127 3.000
1,791,140.06 179 356 4 10.257 Fixed n/a n/a n/a n/a
110,291.43 175 175 5 7.627 Fixed n/a n/a n/a n/a
1,675,282.72 358 358 2 10.087 Fixed n/a n/a n/a n/a
1,288,853.44 176 356 4 9.470 Fixed n/a n/a n/a n/a
13,005,823.51 177 356 4 9.683 Fixed n/a n/a n/a n/a
1,640,398.83 175 355 5 10.293 Fixed n/a n/a n/a n/a
201,828.05 175 355 5 10.409 Fixed n/a n/a n/a n/a
54,202.17 175 175 5 11.000 Fixed n/a n/a n/a n/a
363,259.05 191 191 3 9.896 Fixed n/a n/a n/a n/a
156,212.95 229 229 4 10.351 Fixed n/a n/a n/a n/a
78,788.02 359 359 1 11.625 Fixed n/a n/a n/a n/a
2,921,731.26 358 358 2 9.720 Fixed n/a n/a n/a n/a
221,702.91 358 358 2 8.673 Fixed n/a n/a n/a n/a
63,864.84 359 359 1 9.838 Fixed n/a n/a n/a n/a
Original
Subsequent Adjustment Interest
Principal Periodic Months to Rate Only
Balance Rate Cap Next Rate Frequency Term
($) (%) Adjustment (Months) (Months)
------------ ------------ ---------- ---------- --------
1.000 31 6 36
1,353,387.14
1.000 30 6 60
1,115,500.03
1.173 32 6 0
3,674,986.86
1.000 34 6 60
371,350.00
1.000 34 6 0
143,480.83
1.000 54 6 0
465,369.82
1.000 56 6 0
1,099,904.82
1.000 57 6 24
344,000.00
1.000 55 6 60
860,919.29
1.000 58 6 0
3,262,618.03
1.000 59 6 60
63,200.00
1.000 58 6 60
9,448,574.26 n/a n/a n/a 0
1,791,140.06 n/a n/a n/a 0
110,291.43 n/a n/a n/a 0
1,675,282.72 n/a n/a n/a 0
1,288,853.44 n/a n/a n/a 0
13,005,823.51 n/a n/a n/a 0
1,640,398.83 n/a n/a n/a 0
201,828.05 n/a n/a n/a 0
54,202.17 n/a n/a n/a 0
363,259.05 n/a n/a n/a 0
156,212.95 n/a n/a n/a 0
78,788.02 n/a n/a n/a 0
2,921,731.26 n/a n/a n/a 0
221,702.91 n/a n/a n/a 0
63,864.84
S-71
There will be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics assumed in preparing the tables entitled
"Percent of Initial Certificate Principal Balance Outstanding at the Specified
Percentages of the Prepayment Assumption". Any discrepancy may have an effect
upon the percentages of the initial Certificate Principal Balance outstanding,
and the weighted average lives, of the Offered Certificates set forth in the
tables. In addition, since the actual Mortgage Loans will have characteristics
that differ from those assumed in preparing the tables and since it is not
likely the level of Six-Month LIBOR or One-Month LIBOR will remain constant as
assumed, the Offered Certificates may mature earlier or later than indicated by
the tables. In addition, as described under "Description of the
Certificates-Principal Distributions on the Offered Certificates and the Class B
Certificates" in this prospectus supplement, the occurrence of the Stepdown Date
or a Trigger Event will have the effect of accelerating or decelerating the
amortization of the Offered Certificates, affecting the weighted average lives
of such certificates. Based on the foregoing assumptions, the tables indicate
the weighted average lives of each class of Offered Certificates and set forth
the percentages of the initial Certificate Principal Balance of such
certificates that would be outstanding after each of the Distribution Dates
shown, at various percentages of the Prepayment Assumption. Neither the
prepayment model used in this prospectus supplement nor any other prepayment
model or assumption purports to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
mortgage loans, including the Mortgage Loans. Variations in the prepayment
experience and the balance of the Mortgage Loans that prepay may increase or
decrease the percentages of initial Certificate Principal Balances, and weighted
average lives, shown in the following tables. These variations may occur even if
the average prepayment experience of all the Mortgage Loans equals any of the
specified percentages of the Prepayment Assumption.
S-72
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- ------------------------------------------- -------------- ------------ -------------- ------------- ---------------
DISTRIBUTION DATE
Initial Percentage........................ 100% 100% 100% 100% 100%
September 25, 2005........................ 99 81 66 57 45
September 25, 2006........................ 98 64 40 28 13
September 25, 2007........................ 97 50 21 9 0
September 25, 2008........................ 96 38 20 9 0
September 25, 2009........................ 95 31 14 9 0
September 25, 2010........................ 93 27 10 6 0
September 25, 2011........................ 91 22 8 4 0
September 25, 2012........................ 89 19 5 3 0
September 25, 2013........................ 87 16 4 2 0
September 25, 2014........................ 85 13 3 1 0
September 25, 2015........................ 82 11 2 1 0
September 25, 2016........................ 80 9 1 * 0
September 25, 2017........................ 77 8 1 0 0
September 25, 2018........................ 73 6 1 0 0
September 25, 2019........................ 64 5 * 0 0
September 25, 2020........................ 61 4 0 0 0
September 25, 2021........................ 57 3 0 0 0
September 25, 2022........................ 53 3 0 0 0
September 25, 2023........................ 48 2 0 0 0
September 25, 2024........................ 43 2 0 0 0
September 25, 2025........................ 38 1 0 0 0
September 25, 2026........................ 34 1 0 0 0
September 25, 2027........................ 31 1 0 0 0
September 25, 2028........................ 27 * 0 0 0
September 25, 2029........................ 23 * 0 0 0
September 25, 2030........................ 19 0 0 0 0
September 25, 2031........................ 14 0 0 0 0
September 25, 2032........................ 9 0 0 0 0
September 25, 2033........................ 4 0 0 0 0
September 25, 2034........................ 0 0 0 0 0
Weighted Average Life in Years (1) 18.23 4.73 2.50 1.80 1.08
Weighted Average Life in Years (1)(2) 18.19 4.44 2.30 1.65 1.08
- ---------------------
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from the
date of issuance of the certificate to the related Distribution Date, (b) adding
the results and (c) dividing the sum by the aggregate amount of the distribution
of principal described in clause (a) above.
(2) Assumes that either the Class CE Certificateholder or the Servicer exercises
its option to purchase the Mortgage Loans on the earliest possible Distribution
Date on which it is permitted to exercise this option. SEE "POOLING AND
SERVICING AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
S-73
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-2A
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- ------------------------------------------- -------------- ------------ -------------- ------------- ---------------
DISTRIBUTION DATE
Initial Percentage........................ 100% 100% 100% 100% 100%
September 25, 2005........................ 99 82 66 58 47
September 25, 2006........................ 98 65 41 29 14
September 25, 2007........................ 97 51 22 10 0
September 25, 2008........................ 97 39 20 10 0
September 25, 2009........................ 95 32 15 9 0
September 25, 2010........................ 94 27 11 6 0
September 25, 2011........................ 92 23 8 4 0
September 25, 2012........................ 90 19 6 3 0
September 25, 2013........................ 88 16 4 2 0
September 25, 2014........................ 85 14 3 1 0
September 25, 2015........................ 83 11 2 1 0
September 25, 2016........................ 80 9 2 * 0
September 25, 2017........................ 77 8 1 0 0
September 25, 2018........................ 74 7 1 0 0
September 25, 2019........................ 60 5 * 0 0
September 25, 2020........................ 56 4 0 0 0
September 25, 2021........................ 53 3 0 0 0
September 25, 2022........................ 49 3 0 0 0
September 25, 2023........................ 44 2 0 0 0
September 25, 2024........................ 40 2 0 0 0
September 25, 2025........................ 35 1 0 0 0
September 25, 2026........................ 32 1 0 0 0
September 25, 2027........................ 29 1 0 0 0
September 25, 2028........................ 26 * 0 0 0
September 25, 2029........................ 22 * 0 0 0
September 25, 2030........................ 18 0 0 0 0
September 25, 2031........................ 14 0 0 0 0
September 25, 2032........................ 9 0 0 0 0
September 25, 2033........................ 4 0 0 0 0
September 25, 2034........................ 0 0 0 0 0
Weighted Average Life in Years (1) 17.95 4.79 2.56 1.86 1.11
Weighted Average Life in Years (1)(2) 17.90 4.50 2.35 1.70 1.11
- ---------------------
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from the
date of issuance of the certificate to the related Distribution Date, (b) adding
the results and (c) dividing the sum by the aggregate amount of the distribution
of principal described in clause (a) above.
(2) Assumes that either the Class CE Certificateholder or the Servicer exercises
its option to purchase the Mortgage Loans on the earliest possible Distribution
Date on which it is permitted to exercise this option. SEE "POOLING AND
SERVICING AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
S-74
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-2B
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- ------------------------------------------- -------------- ------------ -------------- ------------- ---------------
DISTRIBUTION DATE
Initial Percentage........................ 100% 100% 100% 100% 100%
September 25, 2005........................ 99 69 44 30 11
September 25, 2006........................ 97 42 1 0 0
September 25, 2007........................ 96 19 0 0 0
September 25, 2008........................ 94 0 0 0 0
September 25, 2009........................ 92 0 0 0 0
September 25, 2010........................ 89 0 0 0 0
September 25, 2011........................ 86 0 0 0 0
September 25, 2012........................ 83 0 0 0 0
September 25, 2013........................ 79 0 0 0 0
September 25, 2014........................ 75 0 0 0 0
September 25, 2015........................ 71 0 0 0 0
September 25, 2016........................ 66 0 0 0 0
September 25, 2017........................ 61 0 0 0 0
September 25, 2018........................ 56 0 0 0 0
September 25, 2019........................ 33 0 0 0 0
September 25, 2020........................ 27 0 0 0 0
September 25, 2021........................ 21 0 0 0 0
September 25, 2022........................ 14 0 0 0 0
September 25, 2023........................ 7 0 0 0 0
September 25, 2024........................ 0 0 0 0 0
September 25, 2025........................ 0 0 0 0 0
September 25, 2026........................ 0 0 0 0 0
September 25, 2027........................ 0 0 0 0 0
September 25, 2028........................ 0 0 0 0 0
September 25, 2029........................ 0 0 0 0 0
September 25, 2030........................ 0 0 0 0 0
September 25, 2031........................ 0 0 0 0 0
September 25, 2032........................ 0 0 0 0 0
September 25, 2033........................ 0 0 0 0 0
September 25, 2034........................ 0 0 0 0 0
Weighted Average Life in Years (1) 13.07 1.84 0.99 0.78 0.59
Weighted Average Life in Years (1)(2) 13.07 1.84 0.99 0.78 0.59
- ---------------------
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from the
date of issuance of the certificate to the related Distribution Date, (b) adding
the results and (c) dividing the sum by the aggregate amount of the distribution
of principal described in clause (a) above.
(2) Assumes that either the Class CE Certificateholder or the Servicer exercises
its option to purchase the Mortgage Loans on the earliest possible Distribution
Date on which it is permitted to exercise this option. SEE "POOLING AND
SERVICING AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
S-75
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-2C
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- ------------------------------------------- -------------- ------------ -------------- ------------- ---------------
DISTRIBUTION DATE
Initial Percentage........................ 100% 100% 100% 100% 100%
September 25, 2005........................ 100 100 100 100 100
September 25, 2006........................ 100 100 100 73 36
September 25, 2007........................ 100 100 55 24 0
September 25, 2008........................ 100 98 51 24 0
September 25, 2009........................ 100 80 37 24 0
September 25, 2010........................ 100 67 27 16 0
September 25, 2011........................ 100 57 20 10 0
September 25, 2012........................ 100 48 14 7 0
September 25, 2013........................ 100 40 10 5 0
September 25, 2014........................ 100 34 8 3 0
September 25, 2015........................ 100 28 5 2 0
September 25, 2016........................ 100 24 4 1 0
September 25, 2017........................ 100 20 3 0 0
September 25, 2018........................ 100 16 2 0 0
September 25, 2019........................ 100 12 * 0 0
September 25, 2020........................ 100 10 0 0 0
September 25, 2021........................ 100 8 0 0 0
September 25, 2022........................ 100 6 0 0 0
September 25, 2023........................ 100 5 0 0 0
September 25, 2024........................ 100 4 0 0 0
September 25, 2025........................ 87 3 0 0 0
September 25, 2026........................ 81 3 0 0 0
September 25, 2027........................ 73 2 0 0 0
September 25, 2028........................ 64 1 0 0 0
September 25, 2029........................ 55 * 0 0 0
September 25, 2030........................ 45 0 0 0 0
September 25, 2031........................ 34 0 0 0 0
September 25, 2032........................ 22 0 0 0 0
September 25, 2033........................ 10 0 0 0 0
September 25, 2034........................ 0 0 0 0 0
Weighted Average Life in Years (1) 25.26 9.21 4.93 3.49 1.89
Weighted Average Life in Years (1)(2) 25.14 8.49 4.40 3.08 1.89
- ---------------------
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from the
date of issuance of the certificate to the related Distribution Date, (b) adding
the results and (c) dividing the sum by the aggregate amount of the distribution
of principal described in clause (a) above.
(2) Assumes that either the Class CE Certificateholder or the Servicer exercises
its option to purchase the Mortgage Loans on the earliest possible Distribution
Date on which it is permitted to exercise this option. SEE "POOLING AND
SERVICING AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
S-76
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-1
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- ------------------------------------------- -------------- ------------ -------------- ------------- ---------------
DISTRIBUTION DATE
Initial Percentage........................ 100% 100% 100% 100% 100%
September 25, 2005........................ 100 100 100 100 100
September 25, 2006........................ 100 100 100 100 100
September 25, 2007........................ 100 100 100 100 89
September 25, 2008........................ 100 100 56 93 89
September 25, 2009........................ 100 89 41 28 61
September 25, 2010........................ 100 75 30 17 35
September 25, 2011........................ 100 63 21 11 20
September 25, 2012........................ 100 53 16 7 10
September 25, 2013........................ 100 45 11 5 2
September 25, 2014........................ 100 37 8 3 0
September 25, 2015........................ 100 31 6 * 0
September 25, 2016........................ 100 26 4 0 0
September 25, 2017........................ 100 22 3 0 0
September 25, 2018........................ 100 18 * 0 0
September 25, 2019........................ 100 13 0 0 0
September 25, 2020........................ 100 11 0 0 0
September 25, 2021........................ 100 9 0 0 0
September 25, 2022........................ 100 7 0 0 0
September 25, 2023........................ 100 6 0 0 0
September 25, 2024........................ 100 5 0 0 0
September 25, 2025........................ 100 4 0 0 0
September 25, 2026........................ 94 2 0 0 0
September 25, 2027........................ 85 * 0 0 0
September 25, 2028........................ 75 0 0 0 0
September 25, 2029........................ 64 0 0 0 0
September 25, 2030........................ 52 0 0 0 0
September 25, 2031........................ 39 0 0 0 0
September 25, 2032........................ 26 0 0 0 0
September 25, 2033........................ 11 0 0 0 0
September 25, 2034........................ 0 0 0 0 0
Weighted Average Life in Years (1) 25.99 9.72 5.57 5.19 5.65
Weighted Average Life in Years (1)(2) 25.86 8.95 5.03 4.77 4.02
- ---------------------
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from the
date of issuance of the certificate to the related Distribution Date, (b) adding
the results and (c) dividing the sum by the aggregate amount of the distribution
of principal described in clause (a) above.
(2) Assumes that either the Class CE Certificateholder or the Servicer exercises
its option to purchase the Mortgage Loans on the earliest possible Distribution
Date on which it is permitted to exercise this option. SEE "POOLING AND
SERVICING AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
S-77
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-2
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- ------------------------------------------- -------------- ------------ -------------- ------------- ---------------
DISTRIBUTION DATE
Initial Percentage........................ 100% 100% 100% 100% 100%
September 25, 2005........................ 100 100 100 100 100
September 25, 2006........................ 100 100 100 100 100
September 25, 2007........................ 100 100 100 100 100
September 25, 2008........................ 100 100 56 39 44
September 25, 2009........................ 100 89 41 26 12
September 25, 2010........................ 100 75 30 17 7
September 25, 2011........................ 100 63 21 11 2
September 25, 2012........................ 100 53 16 7 0
September 25, 2013........................ 100 45 11 5 0
September 25, 2014........................ 100 37 8 0 0
September 25, 2015........................ 100 31 6 0 0
September 25, 2016........................ 100 26 3 0 0
September 25, 2017........................ 100 22 0 0 0
September 25, 2018........................ 100 18 0 0 0
September 25, 2019........................ 100 13 0 0 0
September 25, 2020........................ 100 11 0 0 0
September 25, 2021........................ 100 9 0 0 0
September 25, 2022........................ 100 7 0 0 0
September 25, 2023........................ 100 6 0 0 0
September 25, 2024........................ 100 4 0 0 0
September 25, 2025........................ 100 1 0 0 0
September 25, 2026........................ 94 0 0 0 0
September 25, 2027........................ 85 0 0 0 0
September 25, 2028........................ 75 0 0 0 0
September 25, 2029........................ 64 0 0 0 0
September 25, 2030........................ 52 0 0 0 0
September 25, 2031........................ 39 0 0 0 0
September 25, 2032........................ 26 0 0 0 0
September 25, 2033........................ 11 0 0 0 0
September 25, 2034........................ 0 0 0 0 0
Weighted Average Life in Years (1) 25.99 9.66 5.43 4.70 4.24
Weighted Average Life in Years (1)(2) 25.86 8.95 4.94 4.32 3.94
- ---------------------
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from the
date of issuance of the certificate to the related Distribution Date, (b) adding
the results and (c) dividing the sum by the aggregate amount of the distribution
of principal described in clause (a) above.
(2) Assumes that either the Class CE Certificateholder or the Servicer exercises
its option to purchase the Mortgage Loans on the earliest possible Distribution
Date on which it is permitted to exercise this option. SEE "POOLING AND
SERVICING AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
S-78
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-3
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- ------------------------------------------- -------------- ------------ -------------- ------------- ---------------
DISTRIBUTION DATE
Initial Percentage........................ 100% 100% 100% 100% 100%
September 25, 2005........................ 100 100 100 100 100
September 25, 2006........................ 100 100 100 100 100
September 25, 2007........................ 100 100 100 100 100
September 25, 2008........................ 100 100 56 39 21
September 25, 2009........................ 100 89 41 26 12
September 25, 2010........................ 100 75 30 17 7
September 25, 2011........................ 100 63 21 11 0
September 25, 2012........................ 100 53 16 7 0
September 25, 2013........................ 100 45 11 0 0
September 25, 2014........................ 100 37 8 0 0
September 25, 2015........................ 100 31 5 0 0
September 25, 2016........................ 100 26 0 0 0
September 25, 2017........................ 100 22 0 0 0
September 25, 2018........................ 100 18 0 0 0
September 25, 2019........................ 100 13 0 0 0
September 25, 2020........................ 100 11 0 0 0
September 25, 2021........................ 100 9 0 0 0
September 25, 2022........................ 100 7 0 0 0
September 25, 2023........................ 100 5 0 0 0
September 25, 2024........................ 100 0 0 0 0
September 25, 2025........................ 100 0 0 0 0
September 25, 2026........................ 94 0 0 0 0
September 25, 2027........................ 85 0 0 0 0
September 25, 2028........................ 75 0 0 0 0
September 25, 2029........................ 64 0 0 0 0
September 25, 2030........................ 52 0 0 0 0
September 25, 2031........................ 39 0 0 0 0
September 25, 2032........................ 26 0 0 0 0
September 25, 2033........................ 11 0 0 0 0
September 25, 2034........................ 0 0 0 0 0
Weighted Average Life in Years (1) 25.99 9.60 5.35 4.53 3.87
Weighted Average Life in Years (1)(2) 25.86 8.95 4.90 4.19 3.62
- ---------------------
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from the
date of issuance of the certificate to the related Distribution Date, (b) adding
the results and (c) dividing the sum by the aggregate amount of the distribution
of principal described in clause (a) above.
(2) Assumes that either the Class CE Certificateholder or the Servicer exercises
its option to purchase the Mortgage Loans on the earliest possible Distribution
Date on which it is permitted to exercise this option. SEE "POOLING AND
SERVICING AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
S-79
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-4
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- ------------------------------------------- -------------- ------------ -------------- ------------- ---------------
DISTRIBUTION DATE
Initial Percentage........................ 100% 100% 100% 100% 100%
September 25, 2005........................ 100 100 100 100 100
September 25, 2006........................ 100 100 100 100 100
September 25, 2007........................ 100 100 100 100 100
September 25, 2008........................ 100 100 56 39 21
September 25, 2009........................ 100 89 41 26 12
September 25, 2010........................ 100 75 30 17 6
September 25, 2011........................ 100 63 21 11 0
September 25, 2012........................ 100 53 16 7 0
September 25, 2013........................ 100 45 11 0 0
September 25, 2014........................ 100 37 8 0 0
September 25, 2015........................ 100 31 0 0 0
September 25, 2016........................ 100 26 0 0 0
September 25, 2017........................ 100 22 0 0 0
September 25, 2018........................ 100 18 0 0 0
September 25, 2019........................ 100 13 0 0 0
September 25, 2020........................ 100 11 0 0 0
September 25, 2021........................ 100 9 0 0 0
September 25, 2022........................ 100 7 0 0 0
September 25, 2023........................ 100 0 0 0 0
September 25, 2024........................ 100 0 0 0 0
September 25, 2025........................ 100 0 0 0 0
September 25, 2026........................ 94 0 0 0 0
September 25, 2027........................ 85 0 0 0 0
September 25, 2028........................ 75 0 0 0 0
September 25, 2029........................ 64 0 0 0 0
September 25, 2030........................ 52 0 0 0 0
September 25, 2031........................ 39 0 0 0 0
September 25, 2032........................ 26 0 0 0 0
September 25, 2033........................ 11 0 0 0 0
September 25, 2034........................ 0 0 0 0 0
Weighted Average Life in Years (1) 25.98 9.55 5.31 4.46 3.76
Weighted Average Life in Years (1)(2) 25.86 8.95 4.89 4.14 3.52
- ------------------
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from the
date of issuance of the certificate to the related Distribution Date, (b) adding
the results and (c) dividing the sum by the aggregate amount of the distribution
of principal described in clause (a) above.
(2) Assumes that either the Class CE Certificateholder or the Servicer exercises
its option to purchase the Mortgage Loans on the earliest possible Distribution
Date on which it is permitted to exercise this option. SEE "POOLING AND
SERVICING AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
S-80
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-5
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- ------------------------------------------- -------------- ------------ -------------- ------------- ---------------
DISTRIBUTION DATE
Initial Percentage........................ 100% 100% 100% 100% 100%
September 25, 2005........................ 100 100 100 100 100
September 25, 2006........................ 100 100 100 100 100
September 25, 2007........................ 100 100 100 100 100
September 25, 2008........................ 100 100 56 39 21
September 25, 2009........................ 100 89 41 26 12
September 25, 2010........................ 100 75 30 17 0
September 25, 2011........................ 100 63 21 11 0
September 25, 2012........................ 100 53 16 1 0
September 25, 2013........................ 100 45 11 0 0
September 25, 2014........................ 100 37 4 0 0
September 25, 2015........................ 100 31 0 0 0
September 25, 2016........................ 100 26 0 0 0
September 25, 2017........................ 100 22 0 0 0
September 25, 2018........................ 100 18 0 0 0
September 25, 2019........................ 100 13 0 0 0
September 25, 2020........................ 100 11 0 0 0
September 25, 2021........................ 100 9 0 0 0
September 25, 2022........................ 100 * 0 0 0
September 25, 2023........................ 100 0 0 0 0
September 25, 2024........................ 100 0 0 0 0
September 25, 2025........................ 100 0 0 0 0
September 25, 2026........................ 94 0 0 0 0
September 25, 2027........................ 85 0 0 0 0
September 25, 2028........................ 75 0 0 0 0
September 25, 2029........................ 64 0 0 0 0
September 25, 2030........................ 52 0 0 0 0
September 25, 2031........................ 39 0 0 0 0
September 25, 2032........................ 26 0 0 0 0
September 25, 2033........................ 11 0 0 0 0
September 25, 2034........................ 0 0 0 0 0
Weighted Average Life in Years (1) 25.97 9.48 5.25 4.39 3.66
Weighted Average Life in Years (1)(2) 25.86 8.95 4.88 4.11 3.45
- ------------------
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from the
date of issuance of the certificate to the related Distribution Date, (b) adding
the results and (c) dividing the sum by the aggregate amount of the distribution
of principal described in clause (a) above.
(2) Assumes that either the Class CE Certificateholder or the Servicer exercises
its option to purchase the Mortgage Loans on the earliest possible Distribution
Date on which it is permitted to exercise this option. SEE "POOLING AND
SERVICING AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
S-81
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-6
FIXED RATE MORTGAGE LOANS 0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
ADJUSTABLE RATE MORTGAGE LOANS 0% CPR 15% CPR 28% CPR 35% CPR 45% CPR
- ------------------------------------------- -------------- ------------ -------------- ------------- ---------------
DISTRIBUTION DATE
Initial Percentage........................ 100% 100% 100% 100% 100%
September 25, 2005........................ 100 100 100 100 100
September 25, 2006........................ 100 100 100 100 100
September 25, 2007........................ 100 100 100 100 100
September 25, 2008........................ 100 100 56 39 21
September 25, 2009........................ 100 89 41 26 12
September 25, 2010........................ 100 75 30 17 0
September 25, 2011........................ 100 63 21 11 0
September 25, 2012........................ 100 53 16 0 0
September 25, 2013........................ 100 45 11 0 0
September 25, 2014........................ 100 37 0 0 0
September 25, 2015........................ 100 31 0 0 0
September 25, 2016........................ 100 26 0 0 0
September 25, 2017........................ 100 22 0 0 0
September 25, 2018........................ 100 18 0 0 0
September 25, 2019........................ 100 13 0 0 0
September 25, 2020........................ 100 11 0 0 0
September 25, 2021........................ 100 * 0 0 0
September 25, 2022........................ 100 0 0 0 0
September 25, 2023........................ 100 0 0 0 0
September 25, 2024........................ 100 0 0 0 0
September 25, 2025........................ 100 0 0 0 0
September 25, 2026........................ 94 0 0 0 0
September 25, 2027........................ 85 0 0 0 0
September 25, 2028........................ 75 0 0 0 0
September 25, 2029........................ 64 0 0 0 0
September 25, 2030........................ 52 0 0 0 0
September 25, 2031........................ 39 0 0 0 0
September 25, 2032........................ 26 0 0 0 0
September 25, 2033........................ 10 0 0 0 0
September 25, 2034........................ 0 0 0 0 0
Weighted Average Life in Years (1) 25.97 9.39 5.20 4.33 3.57
Weighted Average Life in Years (1)(2) 25.86 8.95 4.88 4.09 3.39
- ------------------
*Indicates a number that is greater than zero but less than 0.5%.
(1) The weighted average life of a certificate is determined by (a) multiplying
the amount of each distribution of principal by the number of years from the
date of issuance of the certificate to the related Distribution Date, (b) adding
the results and (c) dividing the sum by the aggregate amount of the distribution
of principal described in clause (a) above.
(2) Assumes that either the Class CE Certificateholder or the Servicer exercises
its option to purchase the Mortgage Loans on the earliest possible Distribution
Date on which it is permitted to exercise this option. SEE "POOLING AND
SERVICING AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT.
S-82
There is no assurance that prepayments of the Mortgage Loans included
in the Mortgage Pool will conform to any of the levels of the Prepayment
Assumption indicated in the immediately preceding tables, or to any other level,
or that the actual weighted average lives of the Class A Certificates and the
Mezzanine Certificates will conform to any of the weighted average lives set
forth in the immediately preceding tables. Furthermore, the information
contained in the tables with respect to the weighted average lives of the Class
A Certificates and the Mezzanine Certificates is not necessarily indicative of
the weighted average lives that might be calculated or projected under different
or varying prepayment assumptions.
The characteristics of the Mortgage Loans will differ from those
assumed in preparing the immediately preceding tables. In addition, it is
unlikely that any Mortgage Loan will prepay at any constant percentage until
maturity or that all of the Mortgage Loans will prepay at the same rate. The
timing of changes in the rate of prepayments may significantly affect the actual
yield to maturity to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors.
YIELD SENSITIVITY OF THE MEZZANINE CERTIFICATES
If the Certificate Principal Balances of the Class CE, Class B-2, Class
B-1, Class M-6, Class M-5, Class M-4, Class M-3 and Class M-2 Certificates have
been reduced to zero, the yield to maturity on the Class M-1 Certificates will
become extremely sensitive to losses on the Mortgage Loans (and the timing
thereof) that are covered by subordination, because the entire amount of any
Realized Losses (to the extent not covered by Net Monthly Excess Cashflow) will
be allocated to the Class M-1 Certificates. If the Certificate Principal
Balances of the Class CE, Class B-2, Class B-1, Class M-6, Class M-5, Class M-4
and Class M-3 Certificates have been reduced to zero, the yield to maturity on
the Class M-2 Certificates will become extremely sensitive to losses on the
Mortgage Loans (and the timing thereof) that are covered by subordination,
because the entire amount of any Realized Losses (to the extent not covered by
Net Monthly Excess Cashflow) will be allocated to the Class M-2 Certificates. If
the Certificate Principal Balances of the Class CE, Class B-2, Class B-1, Class
M-6, Class M-5 and Class M-4 Certificates have been reduced to zero, the yield
to maturity on the Class M-3 Certificates will become extremely sensitive to
losses on the Mortgage Loans (and the timing thereof) that are covered by
subordination, because the entire amount of any Realized Losses (to the extent
not covered by Net Monthly Excess Cashflow) will be allocated to the Class M-3
Certificates. If the Certificate Principal Balances of the Class CE, Class B-2,
Class B-1, Class M-6 and Class M-5 Certificates have been reduced to zero, the
yield to maturity on the Class M-4 Certificates will become extremely sensitive
to losses on the Mortgage Loans (and the timing thereof) that are covered by
subordination, because the entire amount of any Realized Losses (to the extent
not covered by Net Monthly Excess Cashflow) will be allocated to the Class M-4
Certificates. If the Certificate Principal Balances of the Class CE, Class B-2,
Class B-1 and Class M-6 Certificates have been reduced to zero, the yield to
maturity on the Class M-5 Certificates will become extremely sensitive to losses
on the Mortgage Loans (and the timing thereof) that are covered by
subordination, because the entire amount of any Realized Losses (to the extent
not covered by Net Monthly Excess Cashflow) will be allocated to the Class M-5
Certificates. If the Certificate Principal Balances of the Class CE, Class B-2
and Class B-1 Certificates have been reduced to zero, the yield to maturity on
the Class M-6 Certificates will become extremely sensitive to losses on the
Mortgage Loans (and the timing thereof) that are covered by subordination,
because the entire amount of any Realized Losses (to the extent not covered by
Net Monthly Excess Cashflow) will be allocated to the Class M-6 Certificates.
The initial undivided interests in the trust fund evidenced by the Class M-1,
Class M-2, Class M-3, Class M-4, Class M-5, Class M-6, Class B and Class CE
Certificates are approximately 6.90%, approximately 5.50%, approximately 1.50%,
approximately 1.50%, approximately 1.25%, approximately 1.00%, approximately
3.25% and approximately 1.35%, respectively. Investors in the Mezzanine
Certificates should fully consider the risk that Realized Losses on the Mortgage
Loans could result
S-83
in the failure of investors to fully recover their investments. In addition,
except as otherwise provided in this prospectus supplement under "Description of
the Certificates--Allocation of Losses", once Realized Losses have been
allocated to the Mezzanine Certificates, their Certificate Principal Balances
will be permanently reduced by the amounts so allocated.
Therefore, the amounts of Realized Losses allocated to the Mezzanine
Certificates will no longer accrue interest nor will these amounts be
reinstated. However, Allocated Realized Loss Amounts may be paid to the holders
of the Mezzanine Certificates from Net Monthly Excess Cashflow in the priorities
set forth under "Description of the Certificates--Overcollateralization
Provisions" in this prospectus supplement.
Unless the Certificate Principal Balances of the Class A Certificates
have been reduced to zero, principal distributions on the Mezzanine Certificates
will only commence on or after the Stepdown Date and during periods in which a
Trigger Event is not in effect. As a result, the weighted average lives of the
Mezzanine Certificates will be longer than would otherwise be the case if
distributions of principal were allocated on a pro rata basis among all of the
Offered Certificates. As a result of the longer weighted average lives of the
Mezzanine Certificates, the holders of such certificates have a greater risk of
suffering a loss on their investments. For additional considerations relating to
the yield on the Mezzanine Certificates, see "Yield Considerations" in the
prospectus.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Ace Securities Corp. Home Equity Loan Trust, Series 2004-HE2, Asset
Backed Pass-Through Certificates will consist of fifteen classes of
certificates, designated as (i) the Class A-1 Certificates; (ii) the Class A-2A,
Class A-2B and Class A-2C Certificates (collectively, the "Class A-2
Certificates;" and together with the Class A-1 Certificates, the "Class A
Certificates"); (iii) the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5
and Class M-6 Certificates (collectively, the "Mezzanine Certificates"); (iv)
the Class B-1 Certificates and Class B-2 Certificates (together the "Class B
Certificates"); (v) the Class CE Certificates (together with the Mezzanine
Certificates and the Class B Certificates, the "Subordinate Certificates"); (vi)
the Class P Certificates; and (vii) the Class R Certificates (also referred to
herein as the "Residual Certificates"). Only the Class A Certificates and the
Mezzanine Certificates (collectively, the "Offered Certificates") are offered by
this prospectus supplement.
Distributions on the Offered Certificates will be made on the 25th day
of each month, or, if that day is not a business day, on the next succeeding
business day, beginning in October 2004 to the persons in whose names such
certificates are registered at the close of business on the Record Date. The
"Record Date" for the Class A Certificates and the Mezzanine Certificates is the
business day immediately preceding such Distribution Date, for so long as such
Certificates are held in book-entry form and the last business day of the month
immediately preceding the month in which the related Distribution Date occurs if
such certificates are held in physical form.
The certificates represent in the aggregate the entire beneficial
ownership interest in the trust fund consisting primarily of the Mortgage Pool
of conventional, one- to four-family, first and second lien fixed-rate and
adjustable-rate Mortgage Loans having original terms to maturity of not greater
than approximately 30 years. The Mortgage Loans have an aggregate principal
balance as of the Cut-off Date of approximately $540,000,117, subject to a
permitted variance as described under "The Mortgage Pool" in this prospectus
supplement.
S-84
The Class A Certificates and the Mezzanine Certificates will have the
initial Certificate Principal Balance set forth in the table appearing on the
cover of this prospectus supplement. The Pass-Through Rates on the Offered
Certificates will be calculated for each Distribution Date as described under
"--Pass-Through Rates" below. The Class A Certificates evidence an initial
undivided interest of approximately 77.75% in the trust fund, the Class M-1,
Class M-2, Class M-3, Class M-4, Class M-5 and Class M-6 Certificates evidence
initial undivided interests of approximately 6.90%, approximately 5.50%,
approximately 1.50%, approximately 1.50%, approximately 1.25%, and approximately
1.00%, respectively, in the trust fund and the Class B Certificates and the
Class CE Certificates evidence initial undivided interests of approximately
3.25% and approximately 1.35%, respectively, in the trust fund.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry Certificates (for so long
as they are registered in the name of the applicable depository or its nominee,
the "Book-Entry Certificates"). Persons acquiring beneficial ownership interests
in the Book-Entry Certificates ("Certificate Owners") will hold such
certificates through The Depository Trust Company ("DTC") in the United States,
or Clearstream Banking Luxembourg, formerly known as Cedelbank SA
("Clearstream"), or the Euroclear System ("Euroclear") in Europe, if they are
participants of such systems ("Clearstream Participants" or "Euroclear
Participants", respectively), or indirectly through organizations which are
Clearstream or Euroclear Participants. The Book-Entry Certificates will be
issued in one or more certificates which equal the aggregate Certificate
Principal Balance of such Certificates and will initially be registered in the
name of Cede & Co., the nominee of DTC. Clearstream and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in Clearstreams' and Euroclear's names on the books of their respective
depositories which in turn will hold such positions in customers' securities
accounts in the depositories, names on the books of DTC. Citibank, N.A. will act
as depositary for Clearstream, and JPMorgan Chase Bank will act as depository
for Euroclear (in such capacities, individually the "Relevant Depositary" and
collectively the "European Depositories"). Investors may hold such beneficial
interests in the Book-Entry Certificates in minimum denominations of $25,000.
Except as described below, no Certificate Owner acquiring a Book-Entry
Certificate (each, a "beneficial owner") will be entitled to receive a physical
certificate representing such Certificate (a "Definitive Certificate"). Unless
and until Definitive Certificates are issued, it is anticipated that the only
"Certificateholder" of the Offered Certificates will be Cede & Co., as nominee
of DTC. Certificate Owners will not be Certificateholders as that term is used
in the Pooling and Servicing Agreement. Certificate Owners are only permitted to
exercise their rights indirectly through DTC and participants of DTC ("DTC
Participants").
The Certificate Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant and on
the records of Clearstream or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Securities Administrator
through DTC and DTC Participants. While the Book-Entry Certificates are
outstanding (except under the circumstances described below), under the rules,
regulations and procedures creating and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among DTC Participants on
whose behalf it acts with respect to the Book-Entry Certificates and is required
to receive and transmit distributions
S-85
of principal of, and interest on, the Book-Entry Certificates. DTC Participants
and indirect participants with whom Certificate Owners have accounts with
respect to Book-Entry Certificates are similarly required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificate Owners. Accordingly, although Certificate Owners will not
possess certificates representing their respective interests in the Book-Entry
Certificates, the Rules provide a mechanism by which Certificate Owners will
receive distributions and will be able to transfer their interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificate Owners who are not DTC
Participants may transfer ownership of Book-Entry Certificates only through DTC
Participants and indirect participants by instructing such DTC Participants and
indirect participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Book-Entry
Certificates, which account is maintained with their respective DTC
Participants. Under the Rules and in accordance with DTC's normal procedures,
transfers of ownership of Book-Entry Certificates will be executed through DTC
and the accounts of the respective DTC Participants at DTC will be debited and
credited. Similarly, the DTC Participants and indirect participants will make
debits or credits, as the case may be, on their records on behalf of the selling
and purchasing Certificate Owners.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a DTC Participant
will be made during subsequent securities settlement processing and dated the
business day following the DTC settlement date. Such credits or any transactions
in such securities settled during such processing will be reported to the
relevant Euroclear Participants or Clearstream Participants (each as defined
below) on such business day. Cash received in Clearstream or Euroclear as a
result of sales of securities by or through a Clearstream Participant or
Euroclear Participant to a DTC Participant will be received with value on the
DTC settlement date but will be available in the relevant Clearstream or
Euroclear cash account only as of the business day following the DTC settlement
date. For information with respect to tax documentation procedures relating to
the Certificates, see "Global Clearance and Settlement and Documentation
Procedures-Certain U.S. Federal Income Tax Documentation Requirements" in Annex
I hereto.
Transfers between DTC Participants will occur in accordance with DTC
rules. Transfers between Clearstream Participants and Euroclear Participants
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and, directly or indirectly through Clearstream
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depository; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system, if the transaction
meets its settlement requirements, will deliver instructions to the Relevant
Depository to take action to effect final settlement on its behalf by delivering
or receiving securities in DTC, and making or receiving payment in accordance
with normal procedures for same day funds settlement applicable to DTC.
Clearstream Participants and Euroclear Participants may not deliver instructions
directly to the European Depositories.
DTC which is a New York-chartered limited purpose trust company,
performs services for its DTC Participants, some of which (and/or their
representatives) own DTC. In accordance with its
S-86
normal procedures, DTC is expected to record the positions held by each DTC
Participant in the Book-Entry Certificates, whether held for its own account or
as a nominee for another person. In general, beneficial ownership of Book-Entry
Certificates will be subject to the rules of DTC, as in effect from time to
time.
Clearstream, 67 Bd Grande-Duchesse Charlotte, L-1331 Luxembourg, was
incorporated in 1970 as a limited company under Luxembourg law. Clearstream is
owned by banks, securities dealers and financial institutions, and currently has
about 100 shareholders, including U.S. financial institutions or their
subsidiaries. No single entity may own more than five percent of Clearstream's
stock.
Clearstream is registered as a bank in Luxembourg, and as such is
subject to regulation by the Institute Monetaire Luxembourgeois, the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Clearstream holds securities for its customers and facilitates the
clearance and settlement of securities transactions by electronic book-entry
transfers between their accounts. Clearstream provides various services,
including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing.
Clearstream also deals with domestic securities markets in several countries
through established depository and custodial relationships. Clearstream has
established an electronic bridge with the Euroclear Operator (as defined below)
in Brussels to facilitate settlement of trades between systems. Clearstream
currently accepts over 70,000 securities issues on its books.
Clearstream's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Clearstream's United States customers are limited to
securities brokers and dealers and banks. Currently, Clearstream has
approximately 3,000 customers located in over 60 countries, including all major
European countries, Canada, and the United States. Indirect access to
Clearstream is available to other institutions which clear through or maintain a
custodial relationship with an account holder of Clearstream.
Euroclear was created in 1968 to hold securities for its participants
and to clear and settle transactions between Euroclear Participants through
simultaneous electronic book-entry delivery against payment, thereby eliminating
the need for physical movement of certificates and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 29 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Euroclear Bank S.A/N.V. (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of
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securities and cash from Euroclear, and receipts of payments with respect to
securities in Euroclear. All securities in Euroclear are held on a fungible
basis without attribution of specific certificates to specific securities
clearance accounts. The Euroclear Operator acts under the Terms and Conditions
only on behalf of Euroclear Participants, and has no record of or relationship
with persons holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Securities Administrator to Cede & Co. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable DTC Participants in accordance with DTC's normal procedures. Each DTC
Participant will be responsible for disbursing such payments to the Certificate
Owners of the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the Certificate Owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Certificate Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be forwarded by the Securities Administrator to Cede & Co.
Distributions with respect to Certificates held through Clearstream or Euroclear
will be credited to the cash accounts of Clearstream Participants or Euroclear
Participants in accordance with the relevant system's rules and procedures, to
the extent received by the Relevant Depository. Such distributions will be
subject to tax reporting in accordance with relevant United States tax laws and
regulations. SEE "MATERIAL FEDERAL INCOME TAX CONSIDERATIONS REMICS-TAXATION OF
CERTAIN FOREIGN INVESTORS" IN THE PROSPECTUS. Because DTC can only act on behalf
of Financial Intermediaries, the ability of a Certificate Owner to pledge
Book-Entry Certificates to persons or entities that do not participate in the
Depository system, or otherwise take actions in respect of such Book-Entry
Certificates, may be limited due to the lack of physical certificates for such
Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
market since certain potential investors may be unwilling to purchase
Certificates for which they cannot obtain physical certificates.
DTC has advised the Securities Administrator that, unless and until
Definitive Certificates are issued, DTC will take any action permitted to be
taken by the holders of the Book-Entry Certificates under the Pooling and
Servicing Agreement only at the direction of one or more Financial
Intermediaries to whose DTC accounts the Book-Entry Certificates are credited,
to the extent that such actions are taken on behalf of Financial Intermediaries
whose holdings include such Book-Entry Certificates. Clearstream or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Certificateholder under the Pooling and Servicing Agreement on
behalf of a Clearstream Participant or Euroclear Participant only in accordance
with its relevant rules and procedures and subject to the ability of the
Relevant Depository to effect such actions on its behalf through DTC. DTC may
take actions, at the direction of the related DTC Participants, with respect to
some Book-Entry Certificates which conflict with actions taken with respect to
other Book-Entry Certificates.
Definitive Certificates will be issued to Certificate Owners of the
Book-Entry Certificates, or their nominees, rather than to DTC or its nominee,
only if (a) DTC or the Depositor advises the Securities Administrator in writing
that DTC is no longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the Book-Entry
Certificates and the Depositor is unable to locate a qualified successor, (b)
the Depositor, at its sole option, with the consent of the Securities
Administrator, elects to terminate a book-entry system through DTC or (c) after
the occurrence of an Event of Default (as defined in the Pooling and Servicing
Agreement), Certificate Owners having percentage interests aggregating not less
than 51% of the Book-Entry Certificates advise the Securities Administrator and
DTC through the Financial
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Intermediaries and the DTC Participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of Certificate Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Securities Administrator will be required to cause DTC
to notify all Certificate Owners of the occurrence of such event and the
availability through DTC of Definitive Certificates. Upon surrender by DTC of
the global certificate or certificates representing the Book-Entry Certificates
and instructions for re-registration, the Securities Administrator will issue
Definitive Certificates, and thereafter the Securities Administrator will
recognize the holders of such Definitive Certificates as Certificateholders
under the Pooling and Servicing Agreement.
In the event any Definitive Certificates are issued, surrender of such
Definitive Certificates shall occur at the office designated from time to time
for such purposes by the certificate registrar. As of the Closing Date, the
certificate registrar designates its offices located at Sixth and Marquette,
Minneapolis, Minnesota 55479 for this purpose.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Book-Entry Certificates among DTC
Participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
None of the Depositor, the Servicer, the Master Servicer, the
Securities Administrator or the Trustee will have any responsibility for any
aspect of the records relating to or payments made on account of beneficial
ownership interests of the Book-Entry Certificates held by Cede & Co., as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests or any transfers thereof.
PASS-THROUGH RATES
The pass-through rate (the "Pass-Through Rate") on the Class A-1
Certificates will be a rate per annum equal to the lesser of (i) One-Month LIBOR
plus 0.320% in the case of each Distribution Date through and including the
Distribution Date on which the aggregate principal balance of the Mortgage Loans
(and properties acquired in respect thereof) remaining in the trust fund is
reduced to less than 10% of the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date (the "Optional Termination Date"), or One-Month
LIBOR plus 0.640%, in the case of any Distribution Date thereafter and (ii) the
applicable Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class A-2A Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 0.380% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 0.760%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for the Distribution Date.
The Pass Through Rate on the Class A-2B Certificates will be a rate per
annum equal to the lesser of (i) One Month LIBOR plus 0.210% in the case of each
Distribution Date through and including the Optional Termination Date, or One
Month LIBOR plus 0.420%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass Through Rate for the Distribution Date.
The Pass Through Rate on the Class A-2C Certificates will be a rate per
annum equal to the lesser of (i) One Month LIBOR plus 0.550% in the case of each
Distribution Date through and including the Optional Termination Date, or One
Month LIBOR plus 1.100%, in the case of any
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Distribution Date thereafter and (ii) the applicable Net WAC Pass Through Rate
for the Distribution Date.
The Pass-Through Rate on the Class M-1 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 0.690% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 1.035%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class M-2 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 1.200% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 1.800%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class M-3 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 1.400% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 2.100%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class M-4 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 1.850% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 2.775%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class M-5 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 1.950% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 2.925%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class M-6 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 3.400% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 5.100%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class B-1 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 3.500% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 5.250%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for the Distribution Date.
The Pass-Through Rate on the Class B-2 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 3.500% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 5.250%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for the Distribution Date.
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GLOSSARY
"ADMINISTRATION FEE RATE": With respect to each Mortgage Loan, the
Administration Fee Rate is equal to the sum of (i) the Master Servicing Fee
Rate, (ii) the Servicing Fee Rate and (iii) the rate at which the fee payable to
the Credit Risk Manager is calculated.
"ALLOCATED REALIZED LOSS AMOUNT": The Allocated Realized Loss Amount
with respect to any class of Mezzanine Certificates or Class B Certificates and
any Distribution Date is an amount equal to the sum of any Realized Loss
allocated to that class of certificates on the Distribution Date and any
Allocated Realized Loss Amount for that class remaining unpaid from the previous
Distribution Date.
"AVAILABLE DISTRIBUTION AMOUNT": The Available Distribution Amount for
any Distribution Date is equal to the sum, net of amounts payable or
reimbursable therefrom to the Servicer, the Master Servicer, the Securities
Administrator, the Custodian, the Credit Risk Manager or the Trustee, of an
amount equal to (i) the aggregate amount of scheduled monthly payments on the
Mortgage Loans due on the related Due Date and received on or prior to the
related Determination Date; (ii) unscheduled payments in respect of the Mortgage
Loans (including principal prepayments received during the related Prepayment
Period, Compensating Interest payments received for such Distribution Date,
insurance proceeds, liquidation proceeds and Subsequent Recoveries received
during the preceding calendar month and proceeds from repurchases of and
substitutions for the Mortgage Loans occurring during the immediately preceding
calendar month) and (iii) all P&I Advances with respect to the Mortgage Loans
received for the Distribution Date.
"CERTIFICATE INSURER REIMBURSEMENT AMOUNTS": The amount of all payments
made by the Certificate Insurer pursuant to the Class A-1 Policy which have not
been previously repaid, with interest thereon at the applicable Pass-Through
Rate, plus all costs and expenses incurred by the Certificate Insurer in
connection with any actions, suits or proceedings with respect to the Class A-1
Policy that have been certified by the Certificate Insurer to the Securities
Administrator, with interest thereon at the applicable Pass-Through Rate.
"CERTIFICATE PRINCIPAL BALANCE": The Certificate Principal Balance of
an Offered Certificate or Class B Certificate outstanding at any time represents
the then maximum amount that the holder of such certificate is entitled to
receive as distributions allocable to principal from the cash flow on the
Mortgage Loans and the other assets in the trust fund. The Certificate Principal
Balance of an Offered Certificate or a Class B Certificate as of any date of
determination is equal to the initial Certificate Principal Balance of such
certificate plus, in the case of a Subordinate Certificate, any Subsequent
Recoveries added to the Certificate Principal Balance of such Certificate, as
described under "Description of the Certificates - Allocation of Losses;
Subordination" in this prospectus supplement and, reduced by the aggregate of
(i) all amounts allocable to principal previously distributed with respect to
that certificate and (ii) any reductions in the Certificate Principal Balance of
any Subordinate Certificate deemed to have occurred in connection with
allocations of Realized Losses in the manner described in this prospectus
supplement. The Certificate Principal Balance of the Class CE Certificates as of
any date of determination is equal to the excess, if any, of (i) the then
aggregate principal balance of the Mortgage Loans over (ii) the then aggregate
Certificate Principal Balance of the Offered Certificates, the Class B
Certificates and the Class P Certificates. The initial Certificate Principal
Balance of the Class B-1 Certificates and the Class B-2 Certificates is equal to
approximately $9,450,000 and approximately $8,100,000, respectively. The initial
Certificate Principal Balance of the Class P Certificates is equal to $100.
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"CLASS A PRINCIPAL DISTRIBUTION AMOUNT": The Class A Principal
Distribution Amount is an amount equal to the sum of the Class A-1 Principal
Distribution Amount and the Class A-2 Principal Distribution Amount.
"CLASS A-1 ALLOCATION PERCENTAGE": For any Distribution Date is the
percentage equivalent of a fraction, the numerator of which is (x) the Group I
Principal Remittance Amount for such Distribution Date and the denominator of
which is (y) the Principal Remittance Amount for such Distribution Date.
"CLASS A-1 PRINCIPAL DISTRIBUTION AMOUNT": The Class A-1 Principal
Distribution Amount is an amount equal to the excess of (x) the Certificate
Principal Balance of the Class A-1 Certificates immediately prior to the
Distribution Date over (y) the lesser of (A) the product of (i) approximately
55.50% and (ii) the aggregate principal balance of the Group I Mortgage Loans as
of the last day of the related Due Period (after giving effect to scheduled
payments of principal due during the related Due Period, to the extent received
or advanced, and unscheduled collections of principal received during the
related Prepayment Period) and (B) the aggregate principal balance of the Group
I Mortgage Loans as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period) minus the product of (i) 0.50%
and (ii) the aggregate principal balance of the Group I Mortgage Loans as of the
Cut-off Date.
"CLASS A-2 ALLOCATION PERCENTAGE": For any Distribution Date is the
percentage equivalent of a fraction, the numerator of which is (x) the Group II
Principal Remittance Amount for such Distribution Date and the denominator of
which is (y) the Principal Remittance Amount for such Distribution Date.
"CLASS A-2 PRINCIPAL DISTRIBUTION AMOUNT": The Class A-2 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of the
Certificate Principal Balances of the Class A-2A, Class A-2B and Class A-2C
Certificates immediately prior to the Distribution Date over (y) the lesser of
(A) the product of (i) approximately 55.50% and (ii) the aggregate principal
balance of the Group II Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period) and (B)
the aggregate principal balance of the Group II Mortgage Loans as of the last
day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus the product of (i) 0.50% and (ii) the aggregate principal balance
of the Group II Mortgage Loans as of the Cut-off Date.
"CLASS B-1 PRINCIPAL DISTRIBUTION AMOUNT": The Class B-1 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
aggregate Certificate Principal Balance of the Class A Certificates after taking
into account the payment of the Class A Principal Distribution Amount on the
Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date, (iii) the Certificate Principal
Balance of the Class M-2 Certificates after taking into account the payment of
the Class M-2 Principal Distribution Amount on the Distribution Date, (iv) the
Certificate Principal Balance of the Class M-3 Certificates after taking into
account the payment of the Class M-3 Principal Distribution Amount on the
Distribution Date, (v) the Certificate Principal Balance of the Class M-4
Certificates after taking into account the payment of the Class M-4 Principal
Distribution Amount on the Distribution Date, (vi) the Certificate Principal
Balance of the Class M-5 Certificates after taking into account the payment of
the Class M-5 Principal Distribution Amount on the Distribution Date, (vii) the
Certificate Principal Balance of the Class M-6
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Certificates after taking into account the payment of the Class M-6 Principal
Distribution Amount on the Distribution Date and (viii) the Certificate
Principal Balance of the Class B-1 Certificates immediately prior to the
Distribution Date over (y) the lesser of (A) the product of (i) approximately
94.30% and (ii) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus the product of (i) 0.50% and (ii) the aggregate principal balance
of the Mortgage Loans as of the Cut-off Date.
"CLASS B-2 PRINCIPAL DISTRIBUTION AMOUNT": The Class B-2 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
aggregate Certificate Principal Balance of the Class A Certificates after taking
into account the payment of the Class A Principal Distribution Amount on the
Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date, (iii) the Certificate Principal
Balance of the Class M-2 Certificates after taking into account the payment of
the Class M-2 Principal Distribution Amount on the Distribution Date, (iv) the
Certificate Principal Balance of the Class M-3 Certificates after taking into
account the payment of the Class M-3 Principal Distribution Amount on the
Distribution Date, (v) the Certificate Principal Balance of the Class M-4
Certificates after taking into account the payment of the Class M-4 Principal
Distribution Amount on the Distribution Date, (vi) the Certificate Principal
Balance of the Class M-5 Certificates after taking into account the payment of
the Class M-5 Principal Distribution Amount on the Distribution Date, (vii) the
Certificate Principal Balance of the Class M-6 Certificates after taking into
account the payment of the Class M-6 Principal Distribution Amount on the
Distribution Date, (viii) the Certificate Principal Balance of the Class B-1
Certificates after taking into account the payment of the Class B-1 Principal
Distribution Amount on the Distribution Date and (ix) the Certificate Principal
Balance of the B-2 Certificates immediately prior to the Distribution Date over
(y) the lesser of (A) the product of (i) approximately 97.30% and (ii) the
aggregate principal balance of the Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus the product of (i) 0.50% and (ii) the aggregate principal balance
of the Mortgage Loans as of the Cut-off Date.
"CLASS M-1 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-1 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
aggregate Certificate Principal Balance of the Class A Certificates after taking
into account the payment of the Class A Principal Distribution Amount on the
Distribution Date and (ii) the Certificate Principal Balance of the Class M-1
Certificates immediately prior to the Distribution Date over (y) the lesser of
(A) the product of (i) approximately 69.30% and (ii) the aggregate principal
balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) and (B) the aggregate
principal balance of the Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period) minus
the product of (i) 0.50% and (ii) the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date.
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"CLASS M-2 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-2 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
aggregate Certificate Principal Balance of the Class A Certificates after taking
into account the payment of the Class A Principal Distribution Amount on the
Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date and (iii) the Certificate Principal
Balance of the Class M-2 Certificates immediately prior to the Distribution Date
over (y) the lesser of (A) the product of (i) approximately 80.30% and (ii) the
aggregate principal balance of the Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus the product of (i) 0.50% and (ii) the aggregate principal balance
of the Mortgage Loans as of the Cut-off Date.
"CLASS M-3 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-3 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
aggregate Certificate Principal Balance of the Class A Certificates after taking
into account the payment of the Class A Principal Distribution Amount on the
Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date, (iii) the Certificate Principal
Balance of the Class M-2 Certificates after taking into account the payment of
the Class M-2 Principal Distribution Amount on the Distribution Date and (iv)
the Certificate Principal Balance of the Class M-3 Certificates immediately
prior to the Distribution Date over (y) the lesser of (A) the product of (i)
approximately 83.30% and (ii) the aggregate principal balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) and (B) the aggregate principal balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus the product of (i) 0.50% and (ii)
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date.
"CLASS M-4 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-4 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
aggregate Certificate Principal Balance of the Class A Certificates after taking
into account the payment of the Class A Principal Distribution Amount on the
Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date, (iii) the Certificate Principal
Balance of the Class M-2 Certificates after taking into account the payment of
the Class M-2 Principal Distribution Amount on the Distribution Date, (iv) the
Certificate Principal Balance of the Class M-3 Certificates after taking into
account the payment of the Class M-3 Principal Distribution Amount on the
Distribution Date and (v) the Certificate Principal Balance of the Class M-4
Certificates immediately prior to the Distribution Date over (y) the lesser of
(A) the product of (i) approximately 86.30% and (ii) the aggregate principal
balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) and (B) the aggregate
principal balance of the Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period) minus
the product of (i) 0.50% and (ii) the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date.
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"CLASS M-5 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-5 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
aggregate Certificate Principal Balance of the Class A Certificates after taking
into account the payment of the Class A Principal Distribution Amount on the
Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date, (iii) the Certificate Principal
Balance of the Class M-2 Certificates after taking into account the payment of
the Class M-2 Principal Distribution Amount on the Distribution Date, (iv) the
Certificate Principal Balance of the Class M-3 Certificates after taking into
account the payment of the Class M-3 Principal Distribution Amount on the
Distribution Date, (v) the Certificate Principal Balance of the Class M-4
Certificates after taking into account the payment of the Class M-4 Principal
Distribution Amount on the Distribution Date and (vi) the Certificate Principal
Balance of the Class M-5 Certificates immediately prior to the Distribution Date
over (y) the lesser of (A) the product of (i) approximately 88.80% and (ii) the
aggregate principal balance of the Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate principal balance of the Mortgage Loans as of the
last day of the related Due Period (after giving effect to scheduled payments of
principal due during the related Due Period, to the extent received or advanced,
and unscheduled collections of principal received during the related Prepayment
Period) minus the product of (i) 0.50% and (ii) the aggregate principal balance
of the Mortgage Loans as of the Cut-off Date.
"CLASS M-6 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-6 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
aggregate Certificate Principal Balance of the Class A Certificates after taking
into account the payment of the Class A Principal Distribution Amount on the
Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date, (iii) the Certificate Principal
Balance of the Class M-2 Certificates after taking into account the payment of
the Class M-2 Principal Distribution Amount on the Distribution Date, (iv) the
Certificate Principal Balance of the Class M-3 Certificates after taking into
account the payment of the Class M-3 Principal Distribution Amount on the
Distribution Date, (v) the Certificate Principal Balance of the Class M-4
Certificates after taking into account the payment of the Class M-4 Principal
Distribution Amount on the Distribution Date, (vi) the Certificate Principal
Balance of the Class M-5 Certificates after taking into account the payment of
the Class M-5 Principal Distribution Amount on the Distribution Date and (vii)
the Certificate Principal Balance of the Class M-6 Certificates immediately
prior to the Distribution Date over (y) the lesser of (A) the product of (i)
approximately 90.80% and (ii) the aggregate principal balance of the Mortgage
Loans as of the last day of the related Due Period (after giving effect to
scheduled payments of principal due during the related Due Period, to the extent
received or advanced, and unscheduled collections of principal received during
the related Prepayment Period) and (B) the aggregate principal balance of the
Mortgage Loans as of the last day of the related Due Period (after giving effect
to scheduled payments of principal due during the related Due Period, to the
extent received or advanced, and unscheduled collections of principal received
during the related Prepayment Period) minus the product of (i) 0.50% and (ii)
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date.
"CREDIT ENHANCEMENT PERCENTAGE": The Credit Enhancement Percentage for
any Distribution Date is the percentage obtained by dividing (x) the aggregate
Certificate Principal Balance of the Subordinate Certificates by (y) the
aggregate principal balance of the Mortgage Loans, calculated after taking into
account distributions of principal on the Mortgage Loans and distribution of the
Principal Distribution Amount to the holders of the certificates then entitled
to distributions of principal on the Distribution Date.
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"DETERMINATION DATE": With respect to any Distribution Date, the 15th
day of the calendar month in which such Distribution Date occurs or, if such
15th day is not a business day, the business day immediately preceding such 15th
day.
"DUE PERIOD": The Due Period with respect to any Distribution Date
commences on the second day of the month immediately preceding the month in
which the Distribution Date occurs and ends on the first day of the month in
which the Distribution Date occurs.
"EXPENSE ADJUSTED MORTGAGE RATE": The Expense Adjusted Mortgage Rate on
any Mortgage Loan is equal to the then applicable Mortgage Rate on the Mortgage
Loan minus the Administration Fee Rate.
"EXTRA PRINCIPAL DISTRIBUTION AMOUNT": The Extra Principal Distribution
Amount for any Distribution Date will be the lesser of (i) the Net Monthly
Excess Cashflow for such Distribution Date and (ii) the Overcollateralization
Increase Amount.
"GROUP I INTEREST REMITTANCE AMOUNT": The Group I Interest Remittance
Amount for any Distribution Date is that portion of the Available Distribution
Amount for such Distribution Date that represents interest received or advanced
on the Group I Mortgage Loans minus any amounts payable or reimbursable
therefrom to the Servicer, the Trustee, the Custodian, the Master Servicer, the
Credit Risk Manager or the Securities Administrator.
"GROUP I PRINCIPAL DISTRIBUTION AMOUNT": The Group I Principal
Distribution Amount for any Distribution Date will be the sum of (i) the
principal portion of all scheduled monthly payments on the Group I Mortgage
Loans due during the related Due Period, whether or not received on or prior to
the related Determination Date; (ii) the principal portion of all proceeds
received in respect of the repurchase of a Group I Mortgage Loan (or, in the
case of a substitution, certain amounts representing a principal adjustment) as
required by the Pooling and Servicing Agreement during the immediately preceding
calendar month; (iii) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation proceeds and Subsequent
Recoveries received during the immediately preceding calendar month and all full
and partial principal prepayments received during the related Prepayment Period,
to the extent applied as recoveries of principal on the Group I Mortgage Loans
and (iv) the Class A-1 Allocation Percentage of the amount of any
Overcollateralization Increase Amount for such Distribution Date MINUS (v) the
Class A-1 Allocation Percentage of the amount of any Overcollateralization
Reduction Amount for such Distribution Date minus any amounts payable or
reimbursable therefrom to the Servicer, the Trustee, the Custodian, the Master
Servicer, the Credit Risk Manager or the Securities Administrator. In no event
will the Group I Principal Distribution Amount with respect to any Distribution
Date be (x) less than zero or (y) greater than the then outstanding aggregate
Certificate Principal Balance of the Offered Certificates and the Class B
Certificates.
"GROUP I PRINCIPAL REMITTANCE AMOUNT": The Group I Principal Remittance
Amount for any Distribution Date will be the sum of the amounts described in
clauses (i) through (iii) of the definition of Group I Principal Distribution
Amount net of any amounts payable or reimbursable therefrom to the Servicer, the
Trustee, the Custodian, the Master Servicer, the Credit Risk Manager or the
Securities Administrator.
"GROUP II INTEREST REMITTANCE AMOUNT": The Group II Interest
Remittance Amount for any Distribution Date is that portion of the Available
Distribution Amount for such Distribution Date that represents interest received
or advanced on the Group II Mortgage Loans minus any amounts payable or
reimbursable to the Servicer, the Trustee, the Custodian, the Master Servicer,
the Credit Risk Manager or the Securities Administrator.
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"GROUP II PRINCIPAL DISTRIBUTION AMOUNT": The Group II Principal
Distribution Amount for any Distribution Date will be the sum of (i) the
principal portion of all scheduled monthly payments on the Group II Mortgage
Loans due during the related Due Period, whether or not received on or prior to
the related Determination Date; (ii) the principal portion of all proceeds
received in respect of the repurchase of a Group II Mortgage Loan (or, in the
case of a substitution, certain amounts representing a principal adjustment) as
required by the Pooling and Servicing Agreement during the immediately preceding
calendar month; (iii) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation proceeds and Subsequent
Recoveries received during the immediately preceding calendar month and all full
and partial principal prepayments received during the related Prepayment Period,
to the extent applied as recoveries of principal on the Group II Mortgage Loans
and (iv) the Class A-2 Allocation Percentage of the amount of any
Overcollateralization Increase Amount for such Distribution Date MINUS (v) the
Class A-2 Allocation Percentage of the amount of any Overcollateralization
Reduction Amount for such Distribution Date minus any amounts payable or
reimbursable therefrom to the Servicer, the Trustee, the Custodian, the Master
Servicer, the Credit Risk Manager or the Securities Administrator. In no event
will the Group II Principal Distribution Amount with respect to any Distribution
Date be (x) less than zero or (y) greater than the then outstanding aggregate
Certificate Principal Balance of the Offered Certificates and the Class B
Certificates.
"GROUP II PRINCIPAL REMITTANCE AMOUNT": The Group II Principal
Remittance Amount for any Distribution Date will be the sum of the amounts
described in clauses (i) through (iii) of the definition of Group II Principal
Distribution Amount net of any amounts payable or reimbursable therefrom to the
Servicer, the Trustee, the Custodian, the Master Servicer, the Credit Risk
Manager or the Securities Administrator.
"INTEREST ACCRUAL PERIOD": The Interest Accrual Period for the Offered
Certificates and the Class B Certificates and any Distribution Date is the
period commencing on the Distribution Date of the month immediately preceding
the month in which such Distribution Date occurs (or, in the case of the first
period, commencing on the Closing Date), and ending on the day preceding such
Distribution Date. All distributions of interest on such certificates will be
based on a 360-day year and the actual number of days in the applicable Interest
Accrual Period.
"INTEREST CARRY FORWARD AMOUNT": The Interest Carry Forward Amount with
respect to any class of Offered Certificates and Class B Certificates and any
Distribution Date is equal to the amount, if any, by which the Interest
Distribution Amount for that class of certificates for the immediately preceding
Distribution Date exceeded the actual amount distributed on the certificates in
respect of interest on the immediately preceding Distribution Date, together
with any Interest Carry Forward Amount with respect to such class of
certificates remaining unpaid from the previous Distribution Date, plus interest
accrued thereon at the related Pass-Through Rate on the certificates for the
most recently ended Interest Accrual Period.
"INTEREST DISTRIBUTION AMOUNT": The Interest Distribution Amount for
any class of Offered Certificates and Class B Certificates on any Distribution
Date is equal to interest accrued during the related Interest Accrual Period on
the Certificate Principal Balance of that class immediately prior to the
Distribution Date at the Pass-Through Rate for that class reduced (to not less
than zero), in the case of each such class, by the allocable share, if any, for
that class of Prepayment Interest Shortfalls to the extent not covered by
Compensating Interest paid by the Master Servicer or the Servicer and shortfalls
resulting from the application of the Relief Act or similar state or local laws.
"INTEREST REMITTANCE AMOUNT": The Interest Remittance Amount for any
Distribution Date is the sum of the Group I Interest Remittance Amount and the
Group II Interest Remittance Amount.
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"NET MONTHLY EXCESS CASHFLOW": The Net Monthly Excess Cashflow for any
Distribution Date is equal to the sum of (i) any Overcollateralization Reduction
Amount and (ii) the excess of (x) the Available Distribution Amount for the
Distribution Date over (y) the sum for the Distribution Date of the aggregate of
the Senior Interest Distribution Amounts payable to the holders of the Class A
Certificates, the aggregate of the Interest Distribution Amounts payable to the
holders of the Mezzanine Certificates and the Class B Certificates and the
Principal Remittance Amount.
"NET WAC PASS-THROUGH RATE": The Net WAC Pass-Through Rate for any
Distribution Date and (A) the Class A-1 Certificates, is a rate per annum
(adjusted for the actual number of days elapsed in the related Interest Accrual
Period) equal to the weighted average of the Expense Adjusted Mortgage Rates on
the then outstanding Group I Mortgage Loans, weighted based on their Scheduled
Principal Balances as of the first day of the calendar month preceding the month
in which the Distribution Date occurs minus, with respect to the Class A-1
Certificates, a portion of the fee, expressed as a rate, payable to the
Certificate Insurer for providing the Class A-1 Policy.
(B) the Class A-2 Certificates, is a rate per annum (adjusted for the
actual number of days elapsed in the related Interest Accrual Period) equal to
the weighted average of the Expense Adjusted Mortgage Rates on the then
outstanding Group II Mortgage Loans, weighted based on their Scheduled Principal
Balances as of the first day of the calendar month preceding the month in which
the Distribution Date occurs.
(C) the Mezzanine Certificates, is a rate per annum (adjusted for the
actual number of days elapsed in the related Interest Accrual Period) equal to
the weighted average of the Expense Adjusted Mortgage Rates of (i) the Group I
Mortgage Loans and (ii) the Group II Mortgage Loans, weighted in proportion to
the results of subtracting from the aggregate Scheduled Principal Balance of
each loan group the Certificate Principal Balance of the related Class A
Certificates.
(D) the Class B Certificates, is a rate per annum (adjusted for the
actual number of days elapsed in the related Interest Accrual Period) equal to
the weighted average of the Expense Adjusted Mortgage Rates of (i) the Group I
Mortgage Loans and (ii) the Group II Mortgage Loans, weighted in proportion to
the results of subtracting from the aggregate Scheduled Principal Balance of
each loan group the Certificate Principal Balance of the related Class A
Certificates.
"NET WAC RATE CARRYOVER AMOUNT": With respect to the Offered
Certificates and the Class B Certificates and any Distribution Date on which the
Pass-Through Rate is limited to the applicable Net WAC Pass-Through Rate, an
amount equal to the sum of (i) the excess of (x) the amount of interest such
class would have been entitled to receive on such Distribution Date if the
applicable Net WAC Pass-Through Rate would not have been applicable to such
certificates on such Distribution Date over (y) the amount of interest paid on
such Distribution Date at the applicable Net WAC Pass-Through Rate plus (ii) the
related Net WAC Rate Carryover Amount for the previous Distribution Date not
previously distributed together with interest thereon at a rate equal to the
Pass-Through Rate for such class of certificates for the most recently ended
Interest Accrual Period determined without taking into account the applicable
Net WAC Pass-Through Rate.
"OVERCOLLATERALIZATION AMOUNT": The Overcollateralization Amount as of
any Distribution Date is equal to the amount by which aggregate outstanding
principal balance of the Mortgage Loans immediately following the Distribution
Date exceeds the sum of the Certificate Principal Balances of the Offered
Certificates, the Class B Certificates and the Class P Certificates after taking
into account payment of the Principal Remittance Amount on the related
Distribution Date.
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"OVERCOLLATERALIZATION INCREASE AMOUNT": An Overcollateralization
Increase Amount with respect to the Offered Certificates and the Class B
Certificates and any Distribution Date is any amount of Net Monthly Excess
Cashflow actually applied as an accelerated payment of principal to the extent
the Required Overcollateralization Amount exceeds the Overcollateralization
Amount.
"OVERCOLLATERALIZATION REDUCTION AMOUNT": An Overcollateralization
Reduction Amount for any Distribution Date is the amount by which the
Overcollateralization Amount exceeds the Required Overcollateralization Amount
limited to the Principal Remittance Amount. The Overcollateralization Reduction
Amount is equal to zero when a Trigger Event is in effect.
"PREPAYMENT PERIOD": With respect to any Distribution Date, the period
commencing on the 16th day of the month prior to the month in which the related
Distribution Date occurs and ending on the 15th day of the month in which such
Distribution Date occurs.
"PRINCIPAL DISTRIBUTION AMOUNT": The Principal Distribution Amount for
any Distribution Date is the sum of the Group I Principal Distribution Amount
and the Group II Principal Distribution Amount.
"PRINCIPAL REMITTANCE AMOUNT": The Principal Remittance Amount for any
Distribution Date is the sum of the Group I Principal Remittance Amount and the
Group II Principal Remittance Amount.
"REQUIRED OVERCOLLATERALIZATION AMOUNT": Initially, shall mean an
amount equal to the product of approximately (i) 1.35% and (ii) the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date, which may be
decreased as described under "--Overcollateralization Provisions" in this
prospectus supplement.
"SCHEDULED PRINCIPAL BALANCE": The Scheduled Principal Balance of any
Mortgage Loan as of any date of determination is equal to the principal balance
of the Mortgage Loan as of the Cut-off Date, after application of all scheduled
principal payments due on or before the Cut-off Date, whether or not received,
reduced by (i) the principal portion of all monthly payments due on or before
the date of determination, whether or not received; (ii) all amounts allocable
to unscheduled principal that were received prior to the calendar month in which
the date of determination occurs and (iii) any Bankruptcy Loss occurring as a
result of a Deficient Valuation that was incurred prior to the calendar month in
which the date of determination occurs.
"SENIOR INTEREST DISTRIBUTION AMOUNT": The Senior Interest Distribution
Amount for any Distribution Date is equal to the Interest Distribution Amount
for such Distribution Date for the Class A Certificates and the Interest Carry
Forward Amount, if any, for such Distribution Date for the Class A Certificates.
"STEPDOWN DATE": The Stepdown Date is the earlier to occur of (i) the
later to occur of (x) the Distribution Date occurring in October 2007 and (y)
the first Distribution Date on which the Credit Enhancement Percentage
(calculated for this purpose only after taking into account distributions of
principal on the Mortgage Loans, but prior to any distribution of the Principal
Distribution Amount to the holders of the certificates then entitled to
distributions of principal on the Distribution Date), is greater than or equal
to approximately 44.50% and (ii) the first Distribution Date on which the
Certificate Principal Balance of the Class A Certificates has been reduced to
zero.
"SUBSEQUENT RECOVERIES": As of any Distribution Date, amounts received
during the related Prepayment Period by the Servicer specifically related to a
defaulted Mortgage Loan or disposition of an REO Property prior to the related
Prepayment Period that resulted in a Realized
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Loss, after the liquidation or disposition of such defaulted Mortgage Loan, net
of any amounts reimbursable to the Servicer related to obtaining such Subsequent
Recovery.
"TRIGGER EVENT": With respect to any Distribution Date, a Trigger Event
is in effect if (x) the percentage obtained by dividing (i) the principal amount
of Mortgage Loans delinquent 60 days or more (including Mortgage Loans in
foreclosure, bankruptcy and REO) by (ii) the aggregate principal balance of the
Mortgage Loans, in each case, as of the last day of the previous calendar month
exceeds 36.00% of the Credit Enhancement Percentage with respect to such
Distribution Date or (y) the aggregate amount of Realized Losses incurred since
the Cut-off Date through the last day of the related Due Period divided by the
aggregate principal balance of the Mortgage Loans as of the Cut-off exceeds the
applicable percentages set forth below with respect to such Distribution Date:
DISTRIBUTION DATE PERCENTAGE
October 2007 to September 2008 4.00%, plus 1/12 of 1.50%
for each month thereafter
October 2008 to September 2009 5.50%, plus 1/12 of 0.75%
for each month thereafter
October 2009 to September 2010 6.25%, plus 1/12 of 0.50%
for each month thereafter
October 2010 and thereafter 6.75%
INTEREST DISTRIBUTIONS ON THE OFFERED CERTIFICATES AND THE CLASS B CERTIFICATES
Holders of the Offered Certificates and the Class B Certificates will
be entitled to receive on each Distribution Date, interest distributions in an
aggregate amount equal to interest accrued during the related Interest Accrual
Period on the Certificate Principal Balances thereof at the then-applicable
Pass-Through Rates thereon, in the priorities set forth below.
(A) On each Distribution Date, the Group I Interest Remittance Amount
will be distributed in the following order of priority:
FIRST, to the Certificate Insurer, the premium due in
connection with the Class A-1 Policy;
SECOND, to the holders of the Class A-1 Certificates, the
Senior Interest Distribution Amount allocable to the Class A-1 Certificates;
THIRD, concurrently, to the holders of the Class A-2A, Class
A-2B and Class A-2C Certificates, the Interest Distribution Amount allocable to
each such class, to the extent remaining unpaid after distribution of the Group
II Interest Remittance Amount as set forth in clause (B) below, on a PRO RATA
basis, based on the entitlement of each such class;
FOURTH, to the Certificate Insurer, any Certificate Insurer
Reimbursement Amounts; and
FIFTH, concurrently, to the holders of the Class A-2A, Class
A-2B and Class A-2C Certificates, the Interest Carry Forward Amount allocable to
each such class, to the extent remaining unpaid after distribution of the Group
II Interest Remittance Amount as set forth in clause (B) below, on a PRO RATA
basis, based on the entitlement of each such class.
(B) On each Distribution Date, the Group II Interest Remittance Amount
will be distributed in the following order of priority:
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FIRST, concurrently, to the holders of the Class A-2A, Class
A-2B and Class A-2C Certificates, the Senior Interest Distribution Amount
allocable to each such class, on a PRO RATA basis, based on the entitlement of
each such class;
SECOND, to the holders of the Class A-1 Certificates, the
Senior Interest Distribution Amount allocable to the Class A-1 Certificates, to
the extent remaining unpaid after distribution of the Group I Interest
Remittance Amount as set forth in clause (A) above; and
THIRD, to the Certificate Insurer, the premium due in
connection with the Class A-1 Policy and thereafter any Certificate Insurer
Reimbursement Amounts, in each case, to the extent remaining unpaid after
distribution of the Group I Interest Remittance Amount as set forth in clause
(A) above.
(C) On each Distribution Date, following the distributions of interest
to the holders of the Class A Certificates and the Certificate Insurer, any
Group I Interest Remittance Amount and any Group II Interest Remittance Amount
remaining will be distributed in the following order of priority:
FIRST, to the holders of the Class M-1 Certificates, the
Interest Distribution Amount allocable to the Class M-1 Certificates;
SECOND, to the holders of the Class M-2 Certificates, the
Interest Distribution Amount allocable to the Class M-2 Certificates;
THIRD, to the holders of the Class M-3 Certificates, the
Interest Distribution Amount allocable to the Class M-3 Certificates;
FOURTH, to the holders of the Class M-4 Certificates, the
Interest Distribution Amount allocable to the Class M-4 Certificates;
FIFTH, to the holders of the Class M-5 Certificates, the
Interest Distribution Amount allocable to the Class M-5 Certificates;
SIXTH, to the holders of the Class M-6 Certificates, the
Interest Distribution Amount allocable to the Class M-6 Certificates;
SEVENTH, to the holders of the Class B-1 Certificates, the
Interest Distribution Amount allocable to the Class B-1 Certificates; and
EIGHTH, to the holders of the Class B-2 Certificates, the
Interest Distribution Amount allocable to the Class B-2 Certificates.
On any Distribution Date, any shortfalls resulting from the application
of the Relief Act or any similar state or local law and any Prepayment Interest
Shortfalls to the extent not covered by Compensating Interest paid by the
Servicer or the Master Servicer will be allocated FIRST, to Net Monthly Excess
Cashflow according to the priorities set forth under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement,
SECOND, to the Class B-2 Certificates, THIRD, to the Class B-1 Certificates,
FOURTH, to the Class M-6 Certificates, FIFTH, to the Class M-5 Certificates,
SIXTH, to the Class M-4 Certificates, SEVENTH, to the Class M-3 Certificates,
EIGHTH, to the Class M-2 Certificates, NINTH, to the Class M-1 Certificates, and
TENTH, to the Class A Certificates, on a PRO RATA basis, based on their
respective Senior Interest Distribution Amounts before such reduction. The
holders of the Offered Certificates and the Class B Certificates will be
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entitled to reimbursement for any of these interest shortfalls, subject to
available funds, in the priorities described under "--OVERCOLLATERALIZATION
PROVISIONS" in this prospectus supplement.
With respect to any Distribution Date, to the extent that the aggregate
Interest Distribution Amount exceeds the Interest Remittance Amount, a shortfall
in interest distributions on one or more classes of Offered Certificates or
Class B Certificates will result and payments of Interest Carry Forward Amounts
to such classes of Offered Certificates or Class B Certificates will be made.
The Interest Carry Forward Amount with respect to the Class A Certificates, if
any, is distributed as part of the Senior Interest Distribution Amount on each
Distribution Date. The Interest Carry Forward Amount with respect to the
Mezzanine Certificates and the Class B Certificates, if any, may be carried
forward to succeeding Distribution Dates and, subject to available funds, will
be distributed in the manner set forth in "--OVERCOLLATERALIZATION PROVISIONS"
in this prospectus supplement.
Except as otherwise described in this prospectus supplement, on any
Distribution Date, distributions of the Interest Distribution Amount for a class
of certificates will be made in respect of that class of certificates, to the
extent provided in this prospectus supplement, on a PARI PASSU basis, based on
the Certificate Principal Balance of the certificates of each class.
CALCULATION OF ONE-MONTH LIBOR
With respect to each Interest Accrual Period (other than the initial
Interest Accrual Period) and the Offered Certificates and the Class B
Certificates, on the second business day preceding such Interest Accrual Period,
(each such date, an "Interest Determination Date"), the Securities Administrator
will determine One-Month LIBOR for such Interest Accrual Period. With respect to
the initial Interest Accrual Period, on the Closing Date, the Securities
Administrator will determine One-Month LIBOR for such Interest Accrual Period
based on information available on the second business day preceding the Closing
Date (the related "Interest Determination Date"). "One Month LIBOR" means, as of
any Interest Determination Date, the London interbank offered rate for one-month
U.S. dollar deposits which appears on Telerate Page 3750 (as defined herein) as
of 11:00 a.m. (London time) on such date. If such rate does not appear on
Telerate Page 3750, the rate for that day will be determined on the basis of the
offered rates of the Reference Banks (as defined herein) for one-month U.S.
dollar deposits, as of 11:00 a.m. (London time) on such Interest Determination
Date. The Securities Administrator will request the principal London office of
each of the Reference Banks to provide a quotation of its rate. If on such
Interest Determination Date two or more Reference Banks provide such offered
quotations, One-Month LIBOR for the related Interest Accrual Period shall be the
arithmetic mean of such offered quotations (rounded upwards if necessary to the
nearest whole multiple of 0.0625%). If on such Interest Determination Date fewer
than two Reference Banks provide such offered quotations, One-Month LIBOR for
the related Interest Accrual Period shall be the higher of (x) One-Month LIBOR
as determined on the previous Interest Determination Date and (y) the Reserve
Interest Rate (as defined herein).
As used in this section, "business day" means a day on which banks are
open for dealing in foreign currency and exchange in London and New York;
"Telerate Page 3750" means the display page currently so designated on the Dow
Jones Telerate Capital Markets Report (or such other page as may replace that
page on that service for the purpose of displaying comparable rates or prices);
"Reference Banks" means leading banks selected by the Securities Administrator
and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market (i) with an established place of business in London, (ii)
which have been designated as such by the Securities Administrator and (iii) not
controlling, controlled by, or under common control with, the Depositor or the
Securities Administrator, and "Reserve Interest Rate" shall be the rate per
annum that the Securities Administrator determines to be either (i) the
arithmetic mean (rounded upwards if necessary to the nearest whole multiple of
0.0625%) of the one-month U.S. dollar lending rates
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which New York City banks selected by the Securities Administrator are quoting
on the relevant Interest Determination Date to the principal London offices of
leading banks in the London interbank market or (ii) in the event that the
Securities Administrator can determine no such arithmetic mean, the lowest
one-month U.S. dollar lending rate which New York City banks selected by the
Securities Administrator are quoting on such Interest Determination Date to
leading European banks.
The establishment of One-Month LIBOR on each Interest Determination
Date by the Securities Administrator and the Securities Administrator's
calculation of the rate of interest applicable to the Offered Certificates and
the Class B Certificates for the related Interest Accrual Period shall (in the
absence of manifest error) be final and binding.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES AND THE CLASS B CERTIFICATES
On each Distribution Date, the Principal Distribution Amount will be
distributed to the holders of the Offered Certificates and Class B Certificates
then entitled to principal distributions. In no event will the Principal
Distribution Amount with respect to any Distribution Date be (i) less than zero
or (ii) greater than the then outstanding aggregate Certificate Principal
Balance of the Offered Certificates and the Class B Certificates.
(A) On each Distribution Date (i) prior to the Stepdown Date or (ii) on
which a Trigger Event is in effect, distributions in respect of principal to the
extent of the Group I Principal Distribution Amount will be made in the
following amounts and order of priority:
FIRST, to the holders of the Class A-1 Certificates, until the
Certificate Principal Balance of the Class A-1 Certificates has been reduced to
zero;
SECOND, to the Certificate Insurer, the amount of all
Certificate Insurer Reimbursement Amounts not repaid from interest collections
as described under "- Interest Distributions on the Offered Certificates and the
Class B Certificates" in this prospectus supplement; and
THIRD, concurrently, (i) to the holders of the Class A-2A
Certificates and (ii) to the holders of the Class A-2B Certificates and Class
A-2C Certificates, after taking into account the distribution of the Group II
Principal Distribution Amount as described in this prospectus supplement, on a
pro rata basis, based on the Certificate Principal Balance of each such class,
until the Certificate Principal Balance of each such class has been reduced to
zero; provided, however, that the pro rata allocation to the Class A-2B
Certificates and Class A-2C Certificates pursuant to this clause shall be based
on the total Certificate Principal Balance of the Class A-2B Certificates and
Class A-2C Certificates, but shall be distributed sequentially to the Class A-2B
Certificates and Class A-2C Certificates, in that order, until the Certificate
Principal Balance of each such class has been reduced to zero.
(B) On each Distribution Date (i) prior to the Stepdown Date or (ii) on
which a Trigger Event is in effect, distributions in respect of principal to the
extent of the Group II Principal Distribution Amount will be made in the
following amounts and order of priority:
FIRST, concurrently, (i) to the holders of the Class A-2A
Certificates and (ii) to the holders of the Class A-2B Certificates and Class
A-2C Certificates, on a pro rata basis, based on the Certificate Principal
Balance of each such class, until the Certificate Principal Balance of each such
class has been reduced to zero; provided, however, that the pro rata allocation
to the Class A-2B Certificates and Class A-2C Certificates pursuant to this
clause shall be based on the total Certificate Principal Balance of the Class
A-2B Certificates and Class A-2C Certificates, but shall be
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distributed sequentially to the Class A-2B Certificates and Class A-2C
Certificates, in that order, until the Certificate Principal Balance of each
such class has been reduced to zero;
SECOND, to the holders of the Class A-1 Certificates, after
taking into account the distribution of the Group I Principal Distribution
Amount as described above, until the Certificate Principal Balance of the Class
A-1 Certificates has been reduced to zero; and
THIRD, to the Certificate Insurer, the remaining amount of all
Certificate Insurer Reimbursement Amounts, after taking into account the
distribution of interest collections as described under "--Interest
Distributions on the Offered Certificates and the Class B Certificates" in this
prospectus supplement and the Group I Principal Distribution Amount as described
above.
(C) On each Distribution Date (i) prior to the Stepdown Date or (ii) on
which a Trigger Event is in effect, distributions in respect of principal to the
extent of the sum of the Group I Principal Distribution Amount and the Group II
Principal Distribution Amount remaining undistributed for such Distribution Date
will be made in the following amounts and order of priority:
FIRST, to the holders of the Class M-1 Certificates, until the
Certificate Principal Balance of the Class M-1 Certificates has been reduced to
zero;
SECOND, to the holders of the Class M-2 Certificates, until
the Certificate Principal Balance of the Class M-2 Certificates has been reduced
to zero;
THIRD, to the holders of the Class M-3 Certificates, until the
Certificate Principal Balance of the Class M-3 Certificates has been reduced to
zero;
FOURTH, to the holders of the Class M-4 Certificates, until
the Certificate Principal Balance of the Class M-4 Certificates has been reduced
to zero;
FIFTH, to the holders of the Class M-5 Certificates, until the
Certificate Principal Balance of the Class M-5 Certificates has been reduced to
zero;
SIXTH, to the holders of the Class M-6 Certificates, until the
Certificate Principal Balance of the Class M-6 Certificates has been reduced to
zero;
SEVENTH, to the holders of the Class B-1 Certificates, until
the Certificate Principal Balance of the Class B-1 Certificates has been reduced
to zero; and
EIGHTH, to the holders of the Class B-2 Certificates, until
the Certificate Principal Balance of the Class B-2 Certificates has been reduced
to zero.
(D) On each Distribution Date (i) on or after the Stepdown Date and
(ii) on which a Trigger Event is not in effect, distributions in respect of
principal to the extent of the Group I Principal Distribution Amount will be
made in the following amounts and order of priority:
FIRST, to the holders of the Class A-1 Certificates, the Class
A-1 Principal Distribution Amount, until the Certificate Principal Balance of
the Class A-1 Certificates has been reduced to zero;
SECOND, to the Certificate Insurer, the amount of all
Certificate Insurer Reimbursement Amounts not repaid from interest collections
as described under "--Interest Distributions on the Offered Certificates and the
Class B Certificates" in this prospectus supplement; and
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THIRD,. concurrently, (i) to the holders of the Class A-2A
Certificates and (ii) to the holders of the Class A-2B Certificates and Class
A-2C Certificates, after taking into account the distribution of the Group II
Principal Distribution Amount, as described in this prospectus supplement, up to
an amount equal to the amount, if any, of the Class A-2 Principal Distribution
Amount remaining unpaid on such Distribution Date, on a pro rata basis, based on
the Certificate Principal Balance of each such class, until the Certificate
Principal Balance of each such class has been reduced to zero; provided,
however, that the pro rata allocation to the Class A-2B Certificates and Class
A-2C Certificates pursuant to this clause shall be based on the total
Certificate Principal Balance of the Class A-2B Certificates and Class A-2C
Certificates, but shall be distributed sequentially to the Class A-2B
Certificates and Class A-2C Certificates, in that order, until the Certificate
Principal Balance of each such class has been reduced to zero.
(E) On each Distribution Date (i) on or after the Stepdown Date and
(ii) on which a Trigger Event is not in effect, distributions in respect of
principal to the extent of the Group II Principal Distribution Amount will be
made in the following amounts and order of priority:
FIRST, concurrently, (i) to the holders of the Class A-2A
Certificates and (ii) to the holders of the Class A-2B Certificates and Class
A-2C Certificates, the Class A-2 Principal Distribution Amount, on a pro rata
basis, based on the Certificate Principal Balance of each such class, until the
Certificate Principal Balance of each such class has been reduced to zero;
provided, however, that the pro rata allocation to the Class A-2B Certificates
and Class A-2C Certificates pursuant to this clause shall be based on the total
Certificate Principal Balance of the Class A-2B Certificates and Class A-2C
Certificates, but shall be distributed sequentially to the Class A-2B
Certificates and Class A-2C Certificates, in that order, until the Certificate
Principal Balance of each such class has been reduced to zero;
SECOND, to the holders of the A-1 Certificates, after taking
into account the distribution of the Group I Principal Distribution Amount, as
described herein, up to an amount equal to the amount, if any, of the Class A-1
Principal Distribution Amount remaining unpaid on such Distribution Date, until
the Certificate Principal Balance of the Class A-1 Certificates has been reduced
to zero; and
THIRD, to the Certificate Insurer, the remaining amount of all
Certificate Insurer Reimbursement Amounts, after taking into account the
distribution of interest collections as described under "--Interest
Distributions on the Offered Certificates and the Class B Certificates" in this
prospectus supplement and the Group I Principal Distribution Amount as described
above.
(F) On each Distribution Date (i) on or after the Stepdown Date and
(ii) on which a Trigger Event is not in effect, distributions in respect of
principal to the extent of the Principal Distribution Amount remaining
undistributed for such Distribution Date will be made in the following amounts
and order of priority:
FIRST, to the holders of the Class M-1 Certificates, the
lesser of (x) the excess of (i) the Principal Distribution Amount over (ii) the
amount distributed to the holders of the Class A Certificates under (D) and (E)
above, and (y) the Class M-1 Principal Distribution Amount, until the
Certificate Principal Balance of the Class M-1 Certificates has been reduced to
zero;
SECOND, to the holders of the Class M-2 Certificates, the
lesser of (x) the excess of (i) the Principal Distribution Amount over (ii) the
sum of the amounts distributed to the holders of the Class A Certificates under
(D) and (E) above and to the holders of the Class M-1 Certificates under clause
FIRST above, and (y) the Class M-2 Principal Distribution Amount, until the
Certificate Principal Balance of the Class M-2 Certificates has been reduced to
zero;
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THIRD, to the holders of the Class M-3 Certificates, the
lesser of (x) the excess of (i) the Principal Distribution Amount over (ii) the
sum of the amounts distributed to the holders of the Class A Certificates under
(D) and (E) above, to the holders of the Class M-1 Certificates under clause
FIRST above and to the holders of the Class M-2 Certificates under clause SECOND
above, and (y) the Class M-3 Principal Distribution Amount, until the
Certificate Principal Balance of the Class M-3 Certificates has been reduced to
zero;
FOURTH, to the holders of the Class M-4 Certificates, the
lesser of (x) the excess of (i) the Principal Distribution Amount over (ii) the
sum of the amounts distributed to the holders of the Class A Certificates under
(D) and (E) above, to the holders of the Class M-1 Certificates under clause
FIRST above, to the holders of the Class M-2 Certificates under clause SECOND
above and to the holders of the Class M-3 Certificates under clause THIRD above,
and (y) the Class M-4 Principal Distribution Amount, until the Certificate
Principal Balance of the Class M-4 Certificates has been reduced to zero;
FIFTH, to the holders of the Class M-5 Certificates, the
lesser of (x) the excess of (i) the Principal Distribution Amount over (ii) the
sum of the amounts distributed to the holders of the Class A Certificates under
(D) and (E) above, to the holders of the Class M-1 Certificates under clause
FIRST above, to the holders of the Class M-2 Certificates under clause SECOND
above, to the holders of the Class M-3 Certificates under clause THIRD above and
to the holders of the Class M-4 Certificates under clause FOURTH above, and (y)
the Class M-5 Principal Distribution Amount, until the Certificate Principal
Balance of the Class M-5 Certificates has been reduced to zero;
SIXTH, to the holders of the Class M-6 Certificates, the
lesser of (x) the excess of (i) the Principal Distribution Amount over (ii) the
sum of the amounts distributed to the holders of the Class A Certificates under
(D) and (E) above, to the holders of the Class M-1 Certificates under clause
FIRST above, to the holders of the Class M-2 Certificates under clause SECOND
above, to the holders of the Class M-3 Certificates under clause THIRD above, to
the holders of the Class M-4 Certificates under clause FOURTH above and to the
holders of the Class M-5 Certificates under clause FIFTH above, and (y) the
Class M-6 Principal Distribution Amount, until the Certificate Principal Balance
of the Class M-6 Certificates has been reduced to zero;
SEVENTH, to the holders of the Class B-1 Certificates, the
lesser of (x) the excess of (i) the Principal Distribution Amount over (ii) the
sum of the amounts distributed to the holders of the Class A Certificates under
(D) and (E) above, to the holders of the Class M-1 Certificates under clause
FIRST above, to the holders of the Class M-2 Certificates under clause SECOND
above, to the holders of the Class M-3 Certificates under clause THIRD above, to
the holders of the Class M-4 Certificates under clause FOURTH above, to the
holders of the Class M-5 Certificates under clause FIFTH above and to the
holders of the Class M-6 Certificates under clause SIXTH above, and (y) the
Class B-1 Principal Distribution Amount, until the Certificate Principal Balance
of the Class B-1 Certificates has been reduced to zero; and
EIGHTH, to the holders of the Class B-2 Certificates, the
lesser of (x) the excess of (i) the Principal Distribution Amount over (ii) the
sum of the amounts distributed to the holders of the Class A Certificates under
(D) and (E) above, to the holders of the Class M-1 Certificates under clause
FIRST above, to the holders of the Class M-2 Certificates under clause SECOND
above, to the holders of the Class M-3 Certificates under clause THIRD above, to
the holders of the Class M-4 Certificates under clause FOURTH above, to the
holders of the Class M-5 Certificates under clause FIFTH above, to the holders
of the Class M-6 Certificates under clause SIXTH above and to the holders of the
Class B-1 Certificates under clause SEVENTH above, and (y) the Class B-2
Principal Distribution Amount, until the Certificate Principal Balance of the
Class B-2 Certificates has been reduced to zero.
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The allocation of distributions in respect of principal to the Class A
Certificates on each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event has occurred, will have the effect of accelerating the
amortization of the Class A Certificates while, in the absence of Realized
Losses, increasing the respective percentage interest in the principal balance
of the Mortgage Loans evidenced by the Mezzanine Certificates and Class B
Certificates. Increasing the respective percentage interest in the trust fund of
the Mezzanine Certificates and the Class B Certificates relative to that of the
Class A Certificates is intended to preserve the availability of the
subordination provided by the Mezzanine Certificates and Class B Certificates.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the
Class A Certificates consists of subordination, as described in this section and
overcollateralization, as described under "--Overcollateralization Provisions"
in this prospectus supplement and in the case of the Class A-1 Certificates, the
Class A-1 Policy as described under "The Class A-1 Policy" in this prospectus
supplement.
The rights of the holders of the Subordinate Certificates to receive
distributions will be subordinated, to the extent described in this section, to
the rights of the holders of the Class A Certificates. This subordination is
intended to enhance the likelihood of regular receipt by the holders of the
Class A Certificates of the full amount of their scheduled monthly payments of
interest and principal and to afford holders of the Class A Certificates
protection against Realized Losses.
The protection afforded to the holders of the Class A Certificates by
means of the subordination of the Subordinate Certificates will be accomplished
by (i) the preferential right of the holders of the Class A Certificates to
receive on any Distribution Date, prior to distribution on the Subordinate
Certificates, distributions in respect of interest and principal, subject to
available funds and (ii) if necessary, the right of the holders of the Class A
Certificates to receive future distributions of amounts that would otherwise be
payable to the holders of the Subordinate Certificates.
In addition, (i) the rights of the holders of the Class M-1
Certificates will be senior to the rights of holders of the Class M-2, Class
M-3, Class M-4, Class M-5, Class M-6, Class B-1, Class B-2 and Class CE
Certificates, (ii) the rights of the holders of the Class M-2 Certificates will
be senior to the rights of the holders of the Class M-3, Class M-4, Class M-5,
Class M-6, Class B-1, Class B-2 and Class CE Certificates, (iii) the rights of
the holders of the Class M-3 Certificates will be senior to the rights of the
holders of the Class M-4, Class M-5, Class M-6, Class B-1, Class B-2 and Class
CE Certificates, (iv) the rights of the holders of the Class M-4 Certificates
will be senior to the rights of the holders of the Class M-5, Class M-6, Class
B-1, Class B-2 and Class CE Certificates, (v) the rights of the holders of the
Class M-5 Certificates will be senior to the rights of the holders of the Class
M-6, Class B-1, Class B-2 and Class CE Certificates, (vi) the rights of the
holders of the Class M-6 Certificates will be senior to the rights of the
holders of the Class B-1, Class B-2 and Class CE Certificates, (vii) the rights
of the holders of the Class B-1 Certificates will be senior to the rights of the
holders of the Class B-2 Certificates and Class CE Certificates and (viii) the
rights of the holders of the Class B-2 Certificates will be senior to the rights
of the holders of the Class CE Certificates. This subordination is intended to
enhance the likelihood of regular receipt by the holders of more senior
certificates of distributions in respect of interest and principal and to afford
these holders protection against Realized Losses.
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OVERCOLLATERALIZATION PROVISIONS
The weighted average Expense Adjusted Mortgage Rate for the Mortgage
Loans is expected to be higher than the weighted average of the Pass-Through
Rates on the Offered Certificates and the Class B Certificates, thus generating
excess interest collections which, in the absence of Realized Losses, will not
be necessary to fund interest distributions on the Offered Certificates and
Class B Certificates. Additional excess interest will be generated by the
portion of the Mortgage Pool represented by the Overcollateralization Amount.
The Pooling and Servicing Agreement requires that, on each Distribution Date,
the Net Monthly Excess Cashflow, if any, be applied on the related Distribution
Date as an accelerated payment of principal on the class or classes of Offered
Certificates and Class B Certificates then entitled to receive distributions in
respect of principal, but only to the limited extent described in this section.
With respect to any Distribution Date, any Net Monthly Excess Cashflow
(or, in the case of clause FIRST below, the Net Monthly Excess Cashflow
exclusive of any Overcollateralization Reduction Amount) shall be paid as
follows:
FIRST, to the holders of the class or classes of certificates
then entitled to receive distributions in respect of principal, in an amount
equal to any Extra Principal Distribution Amount, payable to such holders in
accordance with the priorities set forth under "--ALLOCATION OF EXTRA PRINCIPAL
DISTRIBUTION AMOUNT" below;
SECOND, to the holders of the Class M-1 Certificates, in an
amount equal to the Interest Carry Forward Amount allocable to the Class M-1
Certificates;
THIRD, to the holders of the Class M-2 Certificates, in an
amount equal to the Interest Carry Forward Amount allocable to the Class M-2
Certificates;
FOURTH, to the holders of the Class M-3 Certificates, in an
amount equal to the Interest Carry Forward Amount allocable to the Class M-3
Certificates;
FIFTH, to the holders of the Class M-4 Certificates, in an
amount equal to the Interest Carry Forward Amount allocable to the Class M-4
Certificates;
SIXTH, to the holders of the Class M-5 Certificates, in an
amount equal to the Interest Carry Forward Amount allocable to the Class M-5
Certificates;
SEVENTH, to the holders of the Class M-6 Certificates, in an
amount equal to the Interest Carry Forward Amount allocable to the Class M-6
Certificates;
EIGHTH, to the holders of the Class B-1 Certificates, in an
amount equal to the Interest Carry Forward Amount allocable to the Class B-1
Certificates;
NINTH, to the holders of the Class B-2 Certificates, in an
amount equal to the Interest Carry Forward Amount allocable to the Class B-2
Certificates;
TENTH, to the holders of the Class M-1 Certificates, in an
amount equal to the Allocated Realized Loss Amount allocable to the Class M-1
Certificates;
ELEVENTH, to the holders of the Class M-2 Certificates, in an
amount equal to the Allocated Realized Loss Amount allocable to the Class M-2
Certificates;
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TWELFTH, to the holders of the Class M-3 Certificates, in an
amount equal to the Allocated Realized Loss Amount allocable to the Class M-3
Certificates;
THIRTEENTH, to the holders of the Class M-4 Certificates, in
an amount equal to the Allocated Realized Loss Amount allocable to the Class M-4
Certificates;
FOURTEENTH, to the holders of the Class M-5 Certificates, in
an amount equal to the Allocated Realized Loss Amount allocable to the Class M-5
Certificates;
FIFTEENTH, to the holders of the Class M-6 Certificates, in an
amount equal to the Allocated Realized Loss Amount allocable to the Class M-6
Certificates;
SIXTEENTH, to the holders of the Class B-1 Certificates, in an
amount equal to the Allocated Realized Loss Amount allocable to the Class B-1
Certificates;
SEVENTEENTH, to the holders of the Class B-2 Certificates, in
an amount equal to the Allocated Realized Loss Amount allocable to the Class B-2
Certificates;
EIGHTEENTH, concurrently to the holders of the Class A
Certificates, in an amount equal to such certificates' allocated share of any
Prepayment Interest Shortfalls on the related Mortgage Loans to the extent not
covered by Compensating Interest paid by the Master Servicer or the Servicer and
any shortfalls resulting from the application of the Relief Act or similar state
or local law or the bankruptcy code with respect to the related Mortgage Loans;
NINETEENTH, to the holders of the Class M-1 Certificates, in
an amount equal to the Class M-1 Certificates' allocated share of any Prepayment
Interest Shortfalls on the Mortgage Loans to the extent not covered by
Compensating Interest paid by the Master Servicer or the Servicer and any
shortfalls resulting from the application of the Relief Act or similar state or
local law or the bankruptcy code with respect to the Mortgage Loans;
TWENTIETH, to the holders of the Class M-2 Certificates, in an
amount equal to the Class M-2 Certificates' allocated share of any Prepayment
Interest Shortfalls on the Mortgage Loans to the extent not covered by
Compensating Interest paid by the Master Servicer or the Servicer and any
shortfalls resulting from the application of the Relief Act or similar state or
local law or the bankruptcy code with respect to the Mortgage Loans;
TWENTY-FIRST, to the holders of the Class M-3 Certificates, in
an amount equal to the Class M-3 Certificates' allocated share of any Prepayment
Interest Shortfalls on the Mortgage Loans to the extent not covered by
Compensating Interest paid by the Master Servicer or the Servicer and any
shortfalls resulting from the application of the Relief Act or similar state or
local law or the bankruptcy code with respect to the Mortgage Loans;
TWENTY-SECOND, to the holders of the Class M-4 Certificates,
in an amount equal to the Class M-4 Certificates' allocated share of any
Prepayment Interest Shortfalls on the Mortgage Loans to the extent not covered
by Compensating Interest paid by the Master Servicer or the Servicer and any
shortfalls resulting from the application of the Relief Act or similar state or
local law or the bankruptcy code with respect to the Mortgage Loans;
TWENTY-THIRD, to the holders of the Class M-5 Certificates, in
an amount equal to the Class M-5 Certificates' allocated share of any Prepayment
Interest Shortfalls on the Mortgage Loans to the extent not covered by
Compensating Interest paid by the Master Servicer or the Servicer and any
shortfalls resulting from the application of the Relief Act or similar state or
local law or the bankruptcy code with respect to the Mortgage Loans;
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TWENTY-FOURTH, to the holders of the Class M-6 Certificates,
in an amount equal to the Class M-6 Certificates' allocated share of any
Prepayment Interest Shortfalls on the Mortgage Loans to the extent not covered
by Compensating Interest paid by the Master Servicer or the Servicer and any
shortfalls resulting from the application of the Relief Act or similar state or
local law or the bankruptcy code with respect to the Mortgage Loans;
TWENTY-FIFTH, to the holders of the Class B-1 Certificates, in
an amount equal to the Class B-1 Certificates' allocated share of any Prepayment
Interest Shortfalls on the Mortgage Loans to the extent not covered by
Compensating Interest paid by the Master Servicer or the Servicer and any
shortfalls resulting from the application of the Relief Act or similar state or
local law or the bankruptcy code with respect to the Mortgage Loans;
TWENTY-SIXTH, to the holders of the Class B-2 Certificates, in
an amount equal to the Class B-2 Certificates' allocated share of any Prepayment
Interest Shortfalls on the Mortgage Loans to the extent not covered by
Compensating Interest paid by the Master Servicer or the Servicer and any
shortfalls resulting from the application of the Relief Act or similar state or
local law or the bankruptcy code with respect to the Mortgage Loans;
TWENTY-SEVENTH, to the Reserve Fund (the "Reserve Fund")
established in accordance with the terms of the Pooling and Servicing Agreement
the amount by which the sum of the Net WAC Rate Carryover Amounts, if any, with
respect to the Offered Certificates and the Class B Certificates exceeds the sum
of any amounts received by the Securities Administrator with respect to the Cap
Agreements since the prior Distribution Date and any amounts in the Reserve Fund
that were not distributed on prior Distribution Dates;
TWENTY-EIGHTH, to the holders of the Class P Certificates and
Class CE Certificates as provided in the Pooling and Servicing Agreement; and
TWENTY-NINTH, to the holders of the Residual Certificates, any
remaining amounts.
On each Distribution Date, the Securities Administrator will deposit
all amounts received with respect to the Cap Agreements in the Reserve Fund. On
each Distribution Date, after making the distributions required under "Interest
Distributions on the Offered Certificates and the Class B Certificates",
"Principal Distributions on the Offered Certificates and the Class B
Certificates" and after the distribution of the Net Monthly Excess Cashflow as
described above, the Securities Administrator will withdraw from the Reserve
Fund the amounts on deposit therein (which shall include any payments received
under the Cap Agreements) and distribute such amounts to the Class A
Certificates, the Mezzanine Certificates and the Class B Certificates in respect
of any Net WAC Rate Carryover Amounts due to each such class in the following
manner and order of priority:
(A) any amounts received by the Securities Administrator on account of
the Group I Cap Agreement will be distributed to the holders of the Class A-1
Certificates in respect of the related Net WAC Rate Carryover Amount for such
Distribution Date;
(B) any amounts received by the Securities Administrator on account of
the Group II Cap Agreement will be distributed concurrently to the holders of
the Class A-2A, Class A-2B and Class A-2C Certificates on a PRO rata basis,
based on the entitlement of each such class, in respect of the related Net WAC
Rate Carryover Amount for such Distribution Date;
(C) any remaining amounts received by the Securities Administrator on
account of the Cap Agreements will be distributed sequentially to the holders of
the Class M-1, Class M-2, Class M-3,
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Class M-4, Class M-5, Class M-6, Class B-1 and Class B-2 Certificates, in that
order, in respect of the related Net WAC Rate Carryover Amount for each such
class for such Distribution Date;
(D) any amounts deposited in the Reserve Fund from the Net Monthly
Excess Cashflow will be distributed:
FIRST, concurrently, (i) to the holders of the Class A-1
Certificates, the related Net WAC Rate Carryover Amount for such Distribution
Date to the extent not paid pursuant to clause (A) above, and (ii) to the
holders of the Class A-2A, Class A-2B and Class A-2C Certificates, on a pro rata
basis, based on the entitlement of each such class, the related Net WAC Rate
Carryover Amount for such Distribution Date to the extent not paid pursuant to
clause (B) above;
SECOND, to the holders of the Class M-1 Certificates, the
related Net WAC Rate Carryover Amount for such Distribution Date to the extent
not paid pursuant to clause (C) above;
THIRD, to the holders of the Class M-2 Certificates, the
related Net WAC Rate Carryover Amount for such Distribution Date to the extent
not paid pursuant to clause (C) above;
FOURTH, to the holders of the Class M-3 Certificates, the
related Net WAC Rate Carryover Amount for such Distribution Date to the extent
not paid pursuant to clause (C) above;
FIFTH, to the holders of the Class M-4 Certificates, the
related Net WAC Rate Carryover Amount for such Distribution Date to the extent
not paid pursuant to clause (C) above;
SIXTH, to the holders of the Class M-5 Certificates, the
related Net WAC Rate Carryover Amount for such Distribution Date to the extent
not paid pursuant to clause (C) above;
SEVENTH, to the holders of the Class M-6 Certificates, the
related Net WAC Rate Carryover Amount for such Distribution Date to the extent
not paid pursuant to clause (C) above;
EIGHTH, to the holders of the Class B-1 Certificates, the
related Net WAC Rate Carryover Amount for such Distribution Date to the extent
not paid pursuant to clause (C) above; and
NINTH, to the holders of the Class B-2 Certificates, the
related Net WAC Rate Carryover Amount for such Distribution Date to the extent
not paid pursuant to clause (C) above.
As of the Closing Date, the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date will exceed the sum of the aggregate Certificate
Principal Balances of the Offered Certificates, the Class B Certificates and the
Class P Certificates by an amount equal to approximately $7,290,017, which is
equal to the initial Certificate Principal Balance of the Class CE Certificates.
This amount represents approximately 1.35% of the aggregate principal balance of
the Mortgage Loans as of the Cut-off Date, which is the initial amount of
overcollateralization required to be provided by the Mortgage Pool under the
Pooling and Servicing Agreement. Under the Pooling and Servicing Agreement the
Overcollateralization Amount is required to be maintained at the "Required
Overcollateralization Amount." In the event that Realized Losses are incurred on
the Mortgage Loans, such Realized Losses may result in an overcollateralization
deficiency since the Realized Losses will reduce the principal balance of the
Mortgage Loans without a corresponding reduction to the aggregate Certificate
Principal Balances of the Offered Certificates and the Class B Certificates. In
the event of an overcollateralization deficiency, the Pooling and Servicing
Agreement requires the payment from Net Monthly Excess Cashflow, subject to
available funds, of an amount equal to the overcollateralization deficiency,
which shall constitute a principal distribution on the Offered Certificates and
the Class B Certificates in
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reduction of the Certificate Principal Balances of the Offered Certificates and
the Class B Certificates. This has the effect of accelerating the amortization
of the Offered Certificates and the Class B Certificates relative to the
amortization of the Mortgage Loans, and of increasing the Overcollateralization
Amount.
On and after the Stepdown Date and provided that a Trigger Event is not
in effect the Required Overcollateralization Amount may be permitted to decrease
("step down"), to a level equal to approximately 2.70% of the then current
aggregate outstanding principal balance of the Mortgage Loans (after giving
effect to principal payments to be distributed on the related Distribution
Date), subject to a floor equal to the product (i) 0.50% and (ii) the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date. In the event
that the Required Overcollateralization Amount is permitted to step down on any
Distribution Date, the Pooling and Servicing Agreement provides that a portion
of the principal which would otherwise be distributed to the holders of the
Offered Certificates and the Class B Certificates on the related Distribution
Date shall be distributed to the holders of the Class CE Certificates pursuant
to the priorities set forth above.
With respect to each Distribution Date, the Overcollateralization
Reduction Amount, after taking into account all other distributions to be made
on the related Distribution Date, shall be distributed as Net Monthly Excess
Cashflow pursuant to the priorities set forth above. This has the effect of
decelerating the amortization of the Offered Certificates and Class B
Certificates relative to the amortization of the Mortgage Loans, and of reducing
the Overcollateralization Amount. However, if on any Distribution Date a Trigger
Event is in effect, the Required Overcollateralization Amount will not be
permitted to step down on the related Distribution Date.
ALLOCATION OF EXTRA PRINCIPAL DISTRIBUTION AMOUNT
On each Distribution Date (a) prior to the Stepdown Date or (b) on
which a Trigger Event is in effect, the Extra Principal Distribution Amount
shall be distributed as follows:
FIRST, concurrently (i) to the holders of the Class A-1
Certificates, (ii) to the holders of the Class A-2A Certificates and (iii) to
the holders of the Class A-2B Certificates and Class A-2C Certificates, on a pro
rata basis, based on the Certificate Principal Balance of each such class, until
the Certificate Principal Balance of each such class has been reduced to zero,
provided, however that the pro rata allocation to the Class A-2B Certificates
and Class A-2C Certificates pursuant to this clause shall be based on the total
Certificate Principal Balance of the Class A-2B Certificates and Class A-2C
Certificates, but shall be distributed sequentially to the Class A-2B
Certificates and Class A-2C Certificates, in that order, until the Certificate
Principal Balance of each such class has been reduced to zero;
SECOND, sequentially, to the holders of the Class M-1, Class
M-2, Class M-3, Class M-4, Class M-5 and Class M-6 Certificates, in that order,
until the Certificate Principal Balance of each such class has been reduced to
zero; and
THIRD, sequentially, to the holders of the Class B-1
Certificates and Class B-2 Certificates, in that order, until the Certificate
Principal Balance of each such class has been reduced to zero.
On each Distribution Date (a) on or after the Stepdown Date
and (b) on which a Trigger Event is not in effect, the holders of the Offered
Certificates and the Class B Certificates shall be entitled to receive
distributions in respect of principal to the extent of the Extra Principal
Distribution Amount in the following amounts and order of priority:
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FIRST, (a) the lesser of (x) the Group I Principal
Distribution Amount and (y) the Class A-1 Principal Distribution Amount, shall
be distributed to the holders of the Class A-1 Certificates until the
Certificate Principal Balance of the Class A-1 Certificates has been reduced to
zero and (b) the lesser of (x) the Group II Principal Distribution Amount and
(y) the Class A-2 Principal Distribution Amount, shall be distributed
concurrently (i) to the holders of the Class A-2A Certificates and (ii) to the
holders of the Class A-2B Certificates and Class A-2C Certificates, on a pro
rata basis, based on the Certificate Principal Balance of each such class, until
the Certificate Principal Balance of each such class has been reduced to zero,
provided, however that the pro rata allocation to the Class A-2B Certificates
and Class A-2C Certificates pursuant to this clause shall be based on the total
Certificate Principal Balance of the Class A-2B Certificates and Class A-2C
Certificates, but shall be distributed sequentially to the Class A-2B
Certificates and Class A-2C Certificates, in that order, until the Certificate
Principal Balance of each such class has been reduced to zero;
SECOND, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the amount distributed to the holders of the Class
A Certificates under clause FIRST above, and (y) the Class M-1 Principal
Distribution Amount, shall be distributed to the holders of the Class M-1
Certificates, until the Certificate Principal Balance of the Class M-1
Certificates has been reduced to zero;
THIRD, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amounts distributed to the holders
of the Class A Certificates under clause FIRST above and to the holders of the
Class M-1 Certificates under clause SECOND above, and (y) the Class M-2
Principal Distribution Amount, shall be distributed to the holders of the Class
M-2 Certificates, until the Certificate Principal Balance of the Class M-2
Certificates has been reduced to zero;
FOURTH, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amounts distributed to the holders
of the Class A Certificates under clause FIRST above, to the holders of the
Class M-1 Certificates under clause SECOND above and to the holders of the Class
M-2 Certificates under clause THIRD above, and (y) the Class M-3 Principal
Distribution Amount, shall be distributed to the holders of the Class M-3
Certificates, until the Certificate Principal Balance of the Class M-3
Certificates has been reduced to zero;
FIFTH, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amounts distributed to the holders
of the Class A Certificates under clause FIRST above, to the holders of the
Class M-1 Certificates under clause SECOND above, to the holders of the Class
M-2 Certificates under clause THIRD above and to the holders of the Class M-3
Certificates under clause FOURTH above and (y) the Class M-4 Principal
Distribution Amount, shall be distributed to the holders of the Class M-4
Certificates, until the Certificate Principal Balance of the Class M-4
Certificates has been reduced to zero;
SIXTH, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amounts distributed to the holders
of the Class A Certificates under clause FIRST above, to the holders of the
Class M-1 Certificates under clause SECOND above, to the holders of the Class
M-2 Certificates under clause THIRD above, to the holders of the Class M-3
Certificates under clause FOURTH above and to the holders of the Class M-4
Certificates under clause FIFTH above and (y) the Class M-5 Principal
Distribution Amount, shall be distributed to the holders of the Class M-5
Certificates, until the Certificate Principal Balance of the Class M-5
Certificates has been reduced to zero;
SEVENTH, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amounts distributed to the holders
of the Class A Certificates under clause FIRST above, to the holders of the
Class M-1 Certificates under clause SECOND above, to the holders of the
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Class M-2 Certificates under clause THIRD above, to the holders of the Class M-3
Certificates under clause FOURTH above, to the holders of the Class M-4
Certificates under clause FIFTH above and to the holders of the Class M-5
Certificates under clause SIXTH above and (y) the Class M-6 Principal
Distribution Amount, shall be distributed to the holders of the Class M-6
Certificates, until the Certificate Principal Balance of the Class M-6
Certificates has been reduced to zero;
EIGHTH, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amounts distributed to the holders
of the Class A Certificates under clause FIRST above, to the holders of the
Class M-1 Certificates under clause SECOND above, to the holders of the Class
M-2 Certificates under clause THIRD above, to the holders of the Class M-3
Certificates under clause FOURTH above, to the holders of the Class M-4
Certificates under clause FIFTH above, to the holders of the Class M-5
Certificates under clause SIXTH above and to the holders of the Class M-6
Certificates under clause SEVENTH above and (y) the Class B-1 Principal
Distribution Amount, shall be distributed to the holders of the Class B-1
Certificates, until the Certificate Principal Balance of the Class B-1
Certificates has been reduced to zero; and
NINTH, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the sum of the amounts distributed to the holders
of the Class A Certificates under clause FIRST above, to the holders of the
Class M-1 Certificates under clause SECOND above, to the holders of the Class
M-2 Certificates under clause THIRD above, to the holders of the Class M-3
Certificates under clause FOURTH above, to the holders of the Class M-4
Certificates under clause FIFTH above, to the holders of the Class M-5
Certificates under clause SIXTH above, to the holders of the Class M-6
Certificates under clause SEVENTH above, to the holders of the Class B-1
Certificates under clause EIGHTH above and (y) the Class B-2 Principal
Distribution Amount, shall be distributed to the holders of the Class B-2
Certificates, until the Certificate Principal Balance of the Class B-2
Certificates has been reduced to zero.
ALLOCATION OF LOSSES; SUBORDINATION
With respect to any defaulted Mortgage Loan that is finally liquidated
through foreclosure sale or disposition of the related Mortgaged Property (if
acquired on behalf of the certificateholders by deed in lieu of foreclosure or
otherwise), the amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which the related Mortgage Loan was finally liquidated
or charged-off, after application of all amounts recovered (net of amounts
reimbursable to the Servicer or the Master Servicer for P&I Advances, servicing
advances and other related expenses, including attorneys' fees) towards interest
and principal owing on the Mortgage Loan. The amount of loss realized and any
Bankruptcy Losses are referred to in this prospectus supplement as "Realized
Losses." In the event that amounts recovered in connection with the final
liquidation of a defaulted Mortgage Loan are insufficient to reimburse the
Servicer or the Master Servicer for P&I Advances, servicing advances and unpaid
servicing fees, these amounts may be reimbursed to the Servicer or the Master
Servicer out of any funds in the collection account prior to any remittance to
the Trustee of funds for distribution on the certificates. In addition, to the
extent the Servicer receives Subsequent Recoveries with respect to any defaulted
Mortgage Loan, the amount of the Realized Loss with respect to that defaulted
Mortgage Loan will be reduced to the extent such recoveries are applied to
reduce the Certificate Principal Balance of any class of Certificates on any
Distribution Date.
Any Realized Losses on the Mortgage Loans will be allocated on any
Distribution Date: FIRST, to Net Monthly Excess Cashflow, SECOND, to the Class
CE Certificates, THIRD, to the Class B-2 Certificates until the Certificate
Principal Balance of the Class B-2 Certificates has been reduced to zero,
FOURTH, to the Class B-1 Certificates until the Certificate Principal Balance of
the Class B-1 Certificates has been reduced to zero, FIFTH, to the Class M-6
Certificates until the Certificate
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Principal Balance of the Class M-6 Certificates has been reduced to zero, SIXTH,
to the Class M-5 Certificates, until the Certificate Principal Balance of the
Class M-5 Certificates has been reduced to zero, SEVENTH, to the Class M-4
Certificates until the Certificate Principal Balance of the Class M-4
Certificates has been reduced to zero, EIGHTH, to the Class M-3 Certificates
until the Certificate Principal Balance of the Class M-3 Certificates has been
reduced to zero, NINTH, to the Class M-2 Certificates until the Certificate
Principal Balance of the Class M-2 Certificates has been reduced to zero, and
TENTH, to the Class M-1 Certificates until the Certificate Principal Balance of
the Class M-1 Certificates has been reduced to zero.
The Pooling and Servicing Agreement does not permit the allocation of
Realized Losses to the Class A-1, Class A-2 or Class P Certificates. Investors
in the Class A-1 Certificates and Class A-2 Certificates should note that
although Realized Losses cannot be allocated to the Class A-1 Certificates and
Class A-2 Certificates, under certain loss scenarios there will not be enough
principal and interest on the Mortgage Loans to pay the Class A-1 Certificates
and Class A-2 Certificates all interest and principal amounts to which they are
then entitled; provided, however that, subject to the limitations described in
this prospectus supplement and the Class A-1 Policy, the Class A-1 Certificates
will have the benefit of the Class A-1 Policy which guarantees the timely
distribution of interest and the ultimate distribution of principal to the Class
A-1 Certificates.
Except as described below, once Realized Losses have been allocated to
the Mezzanine Certificates and the Class B Certificates, such amounts with
respect to such certificates will no longer accrue interest, and such amounts
will not be reinstated thereafter. However, Allocated Realized Loss Amounts may
be paid to the holders of the Mezzanine Certificates and the Class B
Certificates from Net Monthly Excess Cashflow, according to the priorities set
forth under "--Overcollateralization Provisions" above.
Any allocation of a Realized Loss to a Mezzanine Certificate or Class B
Certificate will be made by reducing the Certificate Principal Balance of that
Certificate by the amount so allocated as of the Distribution Date in the month
following the calendar month in which the Realized Loss was incurred.
Notwithstanding anything to the contrary described in this prospectus
supplement, in no event will the Certificate Principal Balance of any Mezzanine
Certificate or Class B Certificate be reduced more than once in respect of any
particular amount both (i) allocable to such certificate in respect of Realized
Losses and (ii) payable as principal to the holder of such certificate from Net
Monthly Excess Cashflow.
A "Bankruptcy Loss" is a Deficient Valuation or a Debt Service
Reduction. With respect to any Mortgage Loan, a "Deficient Valuation" is a
valuation by a court of competent jurisdiction of the Mortgaged Property in an
amount less than the then outstanding indebtedness under the Mortgage Loan,
which valuation results from a proceeding initiated under the United States
Bankruptcy Code. A "Debt Service Reduction" is any reduction in the amount which
a mortgagor is obligated to pay on a monthly basis with respect to a Mortgage
Loan as a result of any proceeding initiated under the United States Bankruptcy
Code, other than a reduction attributable to a Deficient Valuation.
In the event that the Servicer receives any Subsequent Recoveries, such
Subsequent Recoveries will be distributed as part of the Available Distribution
Amount in accordance with the priorities described under "Description of the
Certificates" in this prospectus supplement and the Certificate Principal
Balance of each class of Subordinate Certificates that has been reduced by the
allocation of a Realized Loss to such certificate will be increased, in order of
seniority, by the amount of such Subsequent Recoveries but only to the extent
that such certificate has not been reimbursed for the amount of such Realized
Loss (or any portion thereof) allocated to such certificate from Net Monthly
Excess Cashflow as described under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement.
Holders of such certificates will
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not be entitled to any payment in respect of current interest on the amount of
such increases for any Interest Accrual Period preceding the Distribution Date
on which such increase occurs.
P&I ADVANCES
Subject to the limitations set forth in the following paragraph, the
Servicer will be obligated to advance or cause to be advanced on or before each
Servicer Remittance Date (as defined in the Pooling and Servicing Agreement) its
own funds, or funds in the collection account that are not included in the
Available Distribution Amount for the Distribution Date. The amount of the
Servicer's advance will be equal to the aggregate of all scheduled payments of
principal and interest, net of the related Servicing Fees, that were due during
the related Due Period on the Mortgage Loans and that were delinquent on the
related Determination Date, plus amounts representing assumed payments not
covered by any current net income on the Mortgaged Properties acquired by
foreclosure or deed in lieu of foreclosure (net of the related Servicing Fees).
These advances are referred to in this prospectus supplement as "P&I Advances".
P&I Advances are required to be made only to the extent they are deemed
by the Servicer to be recoverable from related late collections, insurance
proceeds or liquidation proceeds. The purpose of making the P&I Advances is to
maintain a regular cash flow to the certificateholders, rather than to guarantee
or insure against losses. The Servicer will not be required to make any P&I
Advances with respect to reductions in the amount of the monthly payments on any
Mortgage Loans due to bankruptcy proceedings or the application of the Relief
Act or similar state or local laws. All P&I Advances will be reimbursable to the
Servicer or Master Servicer from late collections, insurance proceeds and
liquidation proceeds from the Mortgage Loan as to which the unreimbursed P&I
Advance was made. In addition, any P&I Advances previously made in respect of
any Mortgage Loan that are deemed by the Servicer or Master Servicer to be
nonrecoverable from related late collections, insurance proceeds or liquidation
proceeds may be reimbursed to the Servicer or Master Servicer out of any funds
in the collection account prior to the distributions on the certificates. In the
event that the Servicer fails in its obligation to make any required P&I
Advance, a successor Servicer (which may be the Master Servicer), will be
obligated to make the P&I Advance on the Distribution Date for which the
Servicer was required to make such P&I Advance, to the extent required in the
Pooling and Servicing Agreement.
The Pooling and Servicing Agreement provides that the Servicer may
enter into a facility with any person which provides that such person may fund
P&I Advances or servicing advances, although no such facility shall reduce or
otherwise affect the obligations of the Servicer to fund such P&I Advances or
servicing advances. Any P&I Advances or servicing advances funded by an
advancing person will be reimbursed to the advancing person in the same manner
as reimbursements would be made to the Servicer.
The Pooling and Servicing Agreement also provides that the Servicer may
pledge its servicing rights under the Pooling and Servicing Agreement to one or
more lenders. Upon an Event of Default by the Servicer under the Pooling and
Servicing Agreement, the Master Servicer may terminate the Servicer and the
Master Servicer will, or under certain circumstances, the Servicer or its
designee may, appoint a successor servicer. In any event, the successor servicer
must meet the requirements for successor servicers under the Pooling and
Servicing Agreement (including receipt of confirmation from each Rating Agency
that the appointment of such successor servicer would not lead to a
qualification, downgrade or withdrawal of the ratings then assigned to the
Offered Certificates and the approval of the Certificate Insurer in accordance
with the terms and conditions of the Pooling and Servicing Agreement).
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REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Securities Administrator will make
available to each holder of a certificate, a statement (and, at its option, any
additional files containing the same information in an alternative format)
available each month via the Securities Administrator's internet website.
Assistance in using the website can be obtained by calling the Securities
Administrator's customer service desk at (301) 815-6600. Parties that are unable
to use the above distribution options are entitled to have a paper copy mailed
to them via first class mail by calling the Securities Administrator's customer
service desk and indicating such. The Securities Administrator shall have the
right to change the way such statements are distributed in order to make such
distribution more convenient and/or more accessible to the above parties and the
Securities Administrator shall provide timely and adequate notification to all
above parties regarding any such changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Securities Administrator will, upon written request, prepare
and deliver to each holder of a Certificate of record during the previous
calendar year a statement containing information necessary to enable
Certificateholders to prepare their tax returns. Such statements will not have
been examined and reported upon by an independent public accountant.
THE ORIGINATORS
GENERAL
The principal originators of the Mortgage Loans are: Ownit Mortgage
Solutions, Inc. f/k/a Oakmont Mortgage Company Inc., a California corporation,
with respect to approximately 45.89% of the Mortgage Loans and Encore Credit
Corp., a California corporation, with respect to approximately 23.41% of the
Mortgage Loans, in each case, by aggregate principal balance as of the Cut-off
Date. The remainder of the Mortgage Loans were originated by various
originators, none of which have originated more than 10% of the Mortgage Loans
by aggregate principal balance as of the Cut-off Date.
OWNIT MORTGAGE SOLUTIONS, INC. F/K/A OAKMONT MORTGAGE COMPANY INC.
The information set forth in the following paragraphs has been provided
by Ownit Mortgage Solutions, Inc. f/k/a Oakmont Mortgage Company Inc. ("Ownit").
None of the Mortgage Loan Seller, the Master Servicer, the Servicers, the
Depositor, the Securities Administrator, the Trustee, the Underwriter, Encore
Credit Corp., the Credit Risk Manager or the Certificate Insurer or any of their
respective affiliates has made or will make any representation as to the
accuracy or completeness of this information.
Founded in 1989, Ownit is a mortgage bank focused on serving brokers
around the United States with an innovative product line. Its network of offices
nationwide, including Ownit's corporate headquarters in Woodland Hills, CA
offers a comprehensive line of mortgage solutions.
Ownit originations are primarily wholesale through mortgage loan
brokers. Mortgage loans originated by Ownit are subprime first and second liens
mortgage loans secured by 1-4 family residential properties.
ENCORE CREDIT CORP.
The information set forth in the following paragraphs has been provided
by Encore Credit Corp. ("Encore"). None of the Master Servicer, the Servicer,
the Securities Administrator, the
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Mortgage Loan Seller, the Depositor, the Trustee, the Underwriter, Ownit
Mortgage Solutions, Inc. f/k/a Oakmont Mortgage Company, the Credit Risk Manager
or the Certificate Insurer or any of their respective affiliates has made or
will make any representation as to the accuracy or completeness of this
information.
Encore Credit Corp. (sometimes referred to herein as "Encore" or
"Encore Credit") began its operations in January of 2002 and funded its first
loan on March 20, 2002. Encore's principal executive offices, as well as its
primary centralized processing center, is located at 101 Innovation Drive, Suite
200, Irvine, California 92612. Encore also operates a centralized processing
center at its offices in Downer's Grove, Illinois.
Encore is engaged in the business of originating, purchasing and
selling non-conforming mortgage loans. Encore originates its loans through
mortgage loan brokers and correspondents nationwide. Encore's loans are
principally first lien, fixed or adjustable rate mortgages secured by one to
four family residences.
THE SERVICER
The information set forth in the following paragraphs has been provided
by the Servicer. None of the Depositor, the Mortgage Loan Seller, the
originators, the Trustee, the Master Servicer, the Securities Administrator, the
Underwriter, the Credit Risk Manager, the Certificate Insurer or any of their
respective affiliates has made or will make any representation as to the
accuracy or completeness of this information.
The Servicer is a federally chartered savings bank with its home office
in Fort Lee, New Jersey, its servicing operations in Orlando, Florida and its
corporate offices in West Palm Beach, Florida. The Servicer is a wholly owned
subsidiary of Ocwen Financial Corporation, a public financial services holding
company ("OCN") headquartered in West Palm Beach, Florida. OCN's primary
businesses are the servicing, special servicing and resolution of nonconforming,
subperforming and nonperforming residential and commercial mortgage loans for
third parties, as well as providing loan servicing technology and
business-to-business e-commerce solutions for the mortgage and real estate
industries.
The Servicer is rated as a "Strong" residential subprime servicer and
residential special servicer by Standard & Poor's and has an "RPS2" rating as a
subprime servicer and an "RSS2" rating as special servicer from Fitch Ratings
("Fitch"). The Servicer is also rated "SQ2" ("Above Average") as a primary
servicer of subprime loans and as a special servicer by Moody's Investors
Service, Inc. Such rating was lowered one level from "SQ1", on February 17,
2004. In addition, on March 1, 2004, Fitch Ratings announced that the Servicer's
ratings as a primary servicer of residential subprime mortgage loans would
remain on "Rating Watch Negative" and on April 23, 2004, Standard & Poor's
placed its "Strong" residential subprime servicer and residential special
servicer ratings assigned to the Servicer on "Credit Watch with negative
implications".
The Servicer has been named as a defendant in several potential class
action lawsuits challenging its mortgage servicing practices. To date, no such
lawsuit has been certified by any court as a class action. On April 13, 2004,
these lawsuits were consolidated in a single proceeding in the United States
District Court for the District of Illinois under caption styled: Ocwen Federal
Bank FSB Mortgage Servicing Litigation, MDL Docket No. 1604. The Servicer
believes that its servicing practices comply with legal requirements. The
Servicer intends to defend against such lawsuits. The Servicer is also subject
to various other routine pending litigation in the ordinary course of its
business. While the outcome of litigation is always uncertain, the Servicer's
management is of the opinion that the resolution of any of these claims and
lawsuits will not have
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a material adverse effect on the results of its operations or financial
condition or its ability to service the mortgage loans.
On April 19, 2004, the Servicer entered into a Supervisory Agreement
with the Office of Thrift Supervision (the "OTS") memorializing various loan
servicing and customer service practices, some of which were previously adopted
by the Servicer and others to be implemented on a going forward basis. It is not
known whether the OTS or other regulatory agencies will seek to implement
additional measures relating to the Servicer's servicing practices.
The Servicer is an approved Freddie Mac and Fannie Mae seller/servicer.
As of June 30, 2004, the Servicer provided servicing for residential mortgage
loans with an aggregate unpaid principal balance of approximately $34.8 billion,
substantially all of which are being serviced for third parties.
As of June 30, 2004, OCN had approximately $1.189 billion in assets,
approximately $852 million in liabilities and approximately $327 million in
equity. As of June 30, 2004, the Servicer's core capital ratio was approximately
16.22% and its total risk-based capital ratio was approximately 18.28%, as
measured by the Office of Thrift Supervision. For the quarter ended June 30,
2004, OCN's net income was approximately $9.1 million, as compared to an
approximate net income of $6.8 million reported for the quarter ended March 31,
2004. OCN reported approximately $282.1 million of cash and cash equivalents as
of June 30,2004.
The following tables set forth, for the non-conforming credit mortgage
loan servicing portfolio serviced by the Servicer, certain information relating
to the delinquency, foreclosure, REO and loss experience with respect to such
mortgage loans (including loans in foreclosure in the Servicer's servicing
portfolio (which portfolio does not include mortgage loans that are subserviced
by others)) at the end of the indicated periods. The indicated periods of
delinquency are based on the number of days past due on a contractual basis. No
mortgage loan is considered delinquent for these purposes until it is one month
past due on a contractual basis.
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DELINQUENCY AND FORECLOSURES
(DOLLARS IN THOUSANDS)
AS OF AS OF
DECEMBER 31, 2001 DECEMBER 31, 2002
------------------------------------------------ ----------------------------------------------
Percent Percent
By Percent By By Percent By
By No. Dollar By No. Dollar By No. Dollar By No. Dollar
of Loans Amount of Loans Amount of Loans Amount of Loans Amount
----------- ----------- -------- ------- -------- ----------- -------- -------
Total Portfolio ........ 186,955 $17,422,016 100.00% 100.00% 229,335 $26,356,007 100.00% 100.00%
Period of Delinquency(1)
30-59 Days ............. 8,520 $ 719,620 4.56% 4.13% 8,483 $ 858,552 3.70% 3.26%
60-89 Days ............. 3,755 $ 324,753 2.01% 1.86% 3,718 $ 393,762 1.62% 1.49%
90 Days or more ........ 22,709 $ 1,896,796 12.15% 10.89% 19,823 $ 1,820,509 8.64% 6.91%
----------- ----------- ------ ------ -------- ----------- ------ ------
Total Delinquent
Loans ................ 34,984 $ 2,941,169 18.71% 16.88% 32,024 $ 3,072,823 13.96% 11.66%
----------- ----------- ------ ------ -------- ----------- ------ ------
Loans in
Foreclosure(2) ....... 10,286 $ 908,884 5.50% 5.22% 8,323 $ 849,266 3.63% 3.22%
AS OF AS OF
DECEMBER 31, 2003 JUNE 30, 2004
------------------------------------------------ ----------------------------------------------
Percent Percent
By Percent By By Percent By
By No. Dollar By No. Dollar By No. Dollar By No. Dollar
of Loans Amount of Loans Amount of Loans Amount of Loans Amount
----------- ----------- -------- ------- -------- ----------- -------- -------
Total Portfolio ........ 256,891 $30,551,242 100.00% 100.00% 234,329 $27,604,512 100.00% 100.00
Period of Delinquency(1)
30-59 Days ............. 10,662 $ 1,117,125 4.15% 3.66% 9,429 $ 979,830 4.02% 3.55%
60-89 Days ............. 4,595 $ 488,900 1.79% 1.60% 4,284 $ 451,605 1.83% 1.64%
90 Days or more ........ 24,050 $ 2,341,837 9.36% 7.67% 23,360 $ 2,312,149 9.97% 8.38%
----------- ----------- ------ ------ -------- ----------- ------ ------
Total Delinquent
Loans ................ 39,307 $ 3,947,862 15.30% 12.92% 37,073 $ 3,743,583 15.82% 13.56%
----------- ----------- ------ ------ -------- ----------- ------ ------
Loans in
Foreclosure(2) ....... 9,800 $ 1,057,710 3.81% 3.46% 9,183 $ 996,476 3.92% 3.61%
- ----------------------------------
(1) Includes 16,034 loans totaling $1,443,908 for June 30, 2004 which were
delinquent at the time of transfer to the Servicer.
(2) Loans in foreclosure are also included under the heading "Total Delinquent
Loans."
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REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
AS OF AS OF
DECEMBER 31, 2001 DECEMBER 31, 2002
By By
By No. Dollar By No. Dollar
of Loans Amount of Loans Amount
----------- ------------ ---------- ------------
Total Portfolio.................. 186,955 $ 17,422,016 229,335 $ 26,356,007
Foreclosed Loans(1).............. 3,983 $ 301,782 3,484 $ 285,598
Foreclosure Ratio(2)............. 2.13% 1.73% 1.52% 1.08%
AS OF AS OF
DECEMBER 31, 2003 JUNE 30, 2004
-------------------------- -------------------------
By By
By No. Dollar By No. Dollar
of Loans Amount of Loans Amount
----------- ------------ ---------- ------------
Total Portfolio.................. 256,891 $ 30,551,242 234,329 $ 27,604,512
Foreclosed Loans(1).............. 4,849 $ 437,510 4,651 $ 424,622
Foreclosure Ratio(2)............. 1.89% 1.43% 1.98% 1.54%
- ----------------------------------
(1) For the purposes of these tables, "Foreclosed Loans" means the principal
balance of mortgage loans secured by mortgaged properties the title to which has
been acquired by the Servicer.
(2) The "Foreclosure Ratio" is equal to the aggregate principal balance or
number of Foreclosed Loans divided by the aggregate principal balance, or
number, as applicable, of mortgage loans in the total portfolio at the end of
the indicated period.
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LOAN GAIN/(LOSS) EXPERIENCE
(DOLLARS IN THOUSANDS)
AS OF AS OF
DECEMBER 31, DECEMBER 31,
2001 2002
-------------- --------------
Total Portfolio(1)........................................... $ 17,422,016 $ 26,356,007
Net Gains/(Losses)(2)(3)..................................... $ (266,262) $ (275,036)
Net Gains/(Losses) as a Percentage of Total Portfolio........ (1.53)% (1.04)%
AS OF
DECEMBER 31, AS OF
2003 JUNE 30, 2004
-------------- --------------
Total Portfolio(1)........................................... $ 30,551,242 $ 27,604,512
Net Gains/(Losses)(2)(3)..................................... $ (249,516) $ (324,786)
Net Gains/(Losses) as a Percentage of Total Portfolio........ (0.82)% (1.18)%
- ------------------------------------
(1) "Total Portfolio" on the date stated above is the principal balance of the
mortgage loans outstanding on the last day of the period.
(2) "Net Gains/(Losses)" are actual gains or losses incurred on liquidated
properties and shortfall payoffs for the preceding one year period. Gains or
losses on liquidated properties are calculated as net sales proceeds less unpaid
principal at the time of payoff. Shortfall payoffs are calculated as the
difference between principal payoff amount and unpaid principal at the time of
payoff.
(3) Includes $(108,412) as of June 30, 2004 of losses attributable to loans
which were delinquent as of the time of transfer to the Servicer.
While the above delinquency, foreclosure, real estate owned
and loss experiences reflect the Servicer's experiences for the periods
indicated, no assurance can be given that the delinquency, foreclosure, real
estate owned and loss experiences on the Mortgage Loans in the Mortgage Pool
will be similar. Accordingly, this information should not be considered to
reflect the credit quality of the Mortgage Loans included in the Mortgage Pool,
or as a basis of assessing the likelihood, amount or severity of losses on the
mortgage loans. The statistical data in the tables is based on all of the loans
in the Servicer's relevant servicing portfolio. The Mortgage Loans in the
Mortgage Pool may, in general, be more recently originated than, and are likely
to have other characteristics which distinguish them from, the majority of the
mortgage loans in the Servicer's servicing portfolio.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will provide customary servicing functions with respect to
the Mortgage Loans. Among other things, the Servicer is obligated under some
circumstances to make P&I Advances with respect to the Mortgage Loans. In
managing the liquidation of defaulted Mortgage Loans, the Servicer will have
sole discretion to take such action in maximizing recoveries to the
certificateholders including, without limitation, selling defaulted Mortgage
Loans and REO properties as described in the Pooling and Servicing Agreement.
The principal compensation to be paid to the Servicer in respect of the
servicing activities performed by the Servicer will be a servicing fee (the
"Servicing Fee") calculated at a per annum rate (the "Servicing Fee Rate") equal
to 0.50% with respect to each Mortgage Loan on the Scheduled Principal Balance
of each such Mortgage Loan. As additional servicing compensation, the Servicer
is entitled to retain all servicing-related fees, including assumption fees,
modification
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fees, extension fees, non-sufficient funds fees, late payment charges and other
ancillary fees and charges in respect of the Mortgage Loans (with the exception
of Prepayment Charges, which will be distributed to the holders of the Class P
Certificates), to the extent collected from mortgagors, together with any
interest or other income earned on funds held in the collections account and any
escrow accounts. In addition, the Servicer is entitled to retain any Prepayment
Interest Excess (as defined in the Pooling and Servicing Agreement) with respect
to the Mortgage Loans.
In general, the Servicer is obligated to offset any Prepayment Interest
Shortfall on any Distribution Date, with Compensating Interest on such
Distribution Date; provided that the Servicer is only required to pay
Compensating Interest in an amount up to the related Servicing Fee. The Servicer
is obligated to pay insurance premiums and other ongoing expenses associated
with the Mortgage Loans incurred by the Servicer in connection with its
responsibilities under the Pooling and Servicing Agreement and is entitled to
reimbursement for these expenses as provided in the Pooling and Servicing
Agreement. See "Description of the Agreements-Material Terms of the Pooling and
Servicing Agreements and Underlying Servicing Agreements-Retained Interest,
Servicing Compensation and Payment of Expenses" in the prospectus for
information regarding expenses payable by the Servicer.
THE MASTER SERVICER
GENERAL
The information set forth in the following paragraph has been provided
by the Master Servicer. None of the Depositor, the originators, the Mortgage
Loan Seller, the Servicer, the Trustee, the Underwriter, the Credit Risk
Manager, the Certificate Insurer or any of their respective affiliates has made
or will make any representation as to the accuracy or completeness of the
information.
Wells Fargo Bank, National Association ("Wells Fargo"), is a national
banking association, with its master servicing offices located at 9062 Old
Annapolis Road, Columbia, Maryland 21045. Wells Fargo is engaged in the business
of master servicing single family residential mortgage loans secured by
properties located in all 50 states and the District of Columbia. Wells Fargo is
one of the banking subsidiaries of Wells Fargo & Company.
The Master Servicer will be required to monitor the performance of the
Servicer under the Pooling and Servicing Agreement. In the event of a default by
the Servicer under the Pooling and Servicing Agreement, the Master Servicer, the
Servicer or its designee will appoint a successor servicer for such defaulting
Servicer or the Master Servicer will assume primary servicing obligations for
the Mortgage Loans itself.
MASTER SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect
of its master servicing activities for the certificates will be a master
servicing fee calculated at a rate set forth in the Pooling and Servicing
Agreement on the Scheduled Principal Balance of each such Mortgage Loan (the
"Master Servicing Fee Rate") together with any interest or other income earned
on funds held in the Distribution Account.
In the event that the Servicer fails to pay the amount of any
Prepayment Interest Shortfall required to be paid on any Distribution Date, the
Master Servicer shall pay such amount up to the master servicing fee payable to
the Master Servicer on such Distribution Date.
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THE TRUSTEE
HSBC Bank USA, National Association will be the Trustee under the
Pooling and Servicing Agreement. The Depositor and the Master Servicer may
maintain other banking relationships in the ordinary course of business with the
Trustee. The Trustee's corporate trust office is located at 452 Fifth Avenue,
New York, New York 10018, Attention: Corporate Trust, ACE Securities Corp., Home
Equity Loan Trust, Series 2004-HE2 or at such other address as the Trustee may
designate from time to time.
The Master Servicer will pay the Trustee the trustee's fee in respect
of its obligations under the Pooling and Servicing Agreement. The Pooling and
Servicing Agreement will provide that the Trustee and any director, officer,
employee or agent of the Trustee will be indemnified by the trust and will be
held harmless against any loss, liability, expense or cost including, without
limitation, attorneys fees and expenses (not including expenses and
disbursements incurred or made by the Trustee in the ordinary course of the
Trustee's performance in accordance with the provisions of the Pooling and
Servicing Agreement) incurred by the Trustee in connection with any pending or
threatened legal action or arising out of or in connection with the acceptance
or administration of its obligations and duties under the Pooling and Servicing
Agreement, the Certificates or the Custodial Agreement, other than any loss,
liability or expense (i) resulting from a breach of the obligations and duties
of the Servicer under the Pooling and Servicing Agreement (for which the Trustee
receives indemnity from the Servicer) or (ii) incurred by reason of willful
misfeasance, bad faith or negligence in the performance of the Trustee's duties
under the Pooling and Servicing Agreement, the Certificates or the Custodial
Agreement or by reason of reckless disregard, of the Trustee's obligations and
duties under the Pooling and Servicing Agreement, the Certificates or the
Custodial Agreement.
THE SECURITIES ADMINISTRATOR
Wells Fargo, as the Securities Administrator under the Pooling and
Servicing Agreement, will perform certain securities and tax administration
services for the Trust for so long as it is the Master Servicer. The Securities
Administrator's corporate trust office is located at 9062 Old Annapolis Road,
Columbia, Maryland 21045 or at such other address as the Securities
Administrator may designate from time to time.
The Securities Administrator may resign at any time including at such
time as the Master Servicer is removed or terminated, in which event the
Depositor will be obligated to appoint a successor Securities Administrator
reasonably acceptable to the Trustee. The Trustee may also remove the Securities
Administrator if the Securities Administrator ceases to be eligible to continue
as such under the Pooling and Servicing Agreement or if the Securities
Administrator becomes incapable of acting, bankrupt, insolvent or if a receiver
or public officer takes charge of the Securities Administrator or its property,
or if the Master Servicer is terminated or removed. Upon such resignation or
removal of the Securities Administrator, the Depositor will be entitled to
appoint a successor Securities Administrator reasonably acceptable to the
Trustee. The Securities Administrator may also be removed at any time by the
holders of certificates evidencing ownership of not less than 51% of the trust.
Any resignation or removal of the Securities Administrator and appointment of a
successor Securities Administrator will not become effective until acceptance of
the appointment by the successor Securities Administrator. The Securities
Administrator and the Master Servicer will be indemnified by the Trust Fund for
certain expenses as provided in the Pooling and Servicing Agreement.
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THE CUSTODIAN
The mortgage loan files with respect to the Mortgage Loans, will be
held by Wells Fargo Bank, National Association, a national banking association,
pursuant to a custodial agreement to be entered into among HSBC Bank USA,
National Association, as Trustee, Wells Fargo Bank, National Association, in its
capacity as custodian, and the Servicer. For additional information about Wells
Fargo Bank, National Association see "The Master Servicer" in this prospectus
supplement.
THE CREDIT RISK MANAGER
The Murrayhill Company, as credit risk manager for the trust (the
"Credit Risk Manager") will monitor the performance of the Servicer, and make
recommendations to the Servicer and/or Master Servicer regarding certain
delinquent and defaulted Mortgage Loans and will report to the Depositor on the
performance of such Mortgage Loans, pursuant to a Credit Risk Management
Agreement to be entered into by the Credit Risk Manager and the Servicer and/or
Master Servicer on or prior to the Closing Date. The Credit Risk Manager will
rely upon mortgage loan data that is provided to it by the Servicer and/or
Master Servicer in performing its advisory and monitoring functions. The Credit
Risk Manager will be entitled to receive a "Credit Risk Manager's Fee" until the
termination of the trust or until its removal by a vote of at least 66 2/3% of
the Certificateholders. Such fee will be paid by the trust and will be equal to
a per annum percentage of the then current aggregate principal balance of the
Mortgage Loans.
POOLING AND SERVICING AGREEMENT
GENERAL
The certificates will be issued under the Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement"), dated as of September 1, 2004
among the Depositor, the Servicer, the Master Servicer, the Securities
Administrator and the Trustee, a form of which is filed as an exhibit to the
registration statement. A Current Report on Form 8-K relating to the
certificates containing a copy of the Pooling and Servicing Agreement as
executed will be filed by the Depositor with the Securities and Exchange
Commission ("SEC") within fifteen days of the initial issuance of the
certificates. The trust fund created under the Pooling and Servicing Agreement
will consist of (i) all of the Depositor's right, title and interest in the
Mortgage Loans, the related mortgage notes, mortgages and other related
documents; (ii) all payments on or collections in respect of the Mortgage Loans
due after the Cut-off Date, together with any proceeds of the Mortgage Loans;
(iii) any Mortgaged Properties acquired on behalf of certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues received on
these mortgaged properties; (iv) the rights of the Trustee under all insurance
policies required to be maintained under the Pooling and Servicing Agreement;
(v) the rights of the Depositor under the Mortgage Loan Purchase Agreement; (vi)
payments made pursuant to the Cap Agreements, (vii) the Reserve Fund and any
amounts on deposit in the Reserve Fund from time to time and any proceeds
thereof and (viii) with respect to the Class A-1 Certificates only, the Class
A-1 Policy. Reference is made to the prospectus for important information in
addition to that set forth in this prospectus supplement regarding the trust
fund, the terms and conditions of the Pooling and Servicing Agreement and the
Offered Certificates. The Depositor will provide to a prospective or actual
certificate holder without charge, on written request, a copy, without exhibits,
of the Pooling and Servicing Agreement. Requests should be addressed to 6525
Morrison Blvd., Suite 318, Charlotte, North Carolina 28211.
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ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, the Depositor will transfer to the trust all of
its right, title and interest in and to each Mortgage Loan, the related mortgage
note, mortgage, assignment of mortgage in recordable form to the Trustee and
other related documents (collectively, the "Related Documents"), including all
scheduled payments with respect to each such Mortgage Loan due after the Cut-off
Date. The Trustee, concurrently with such transfer, will deliver the
certificates to the Depositor. Each Mortgage Loan transferred to the trust will
be identified on a schedule (the "Mortgage Loan Schedule") delivered to the
Trustee and the Servicer pursuant to the Pooling and Servicing Agreement. The
Mortgage Loan Schedule will include information such as the principal balance of
each Mortgage Loan as of the Cut-off Date, its Mortgage Rate as well as other
information with respect to each Mortgage Loan.
The Pooling and Servicing Agreement will require that, prior to the
closing date, the Depositor will deliver or cause to be delivered to the Trustee
(or the Custodian, as the Trustee's agent for such purpose) the mortgage notes
endorsed to the Trustee on behalf of the certificateholders and the Related
Documents. In lieu of delivery of original mortgages or mortgage notes, if such
original is not available or lost, the Depositor may deliver or cause to be
delivered true and correct copies thereof, or, with respect to a lost mortgage
note, a lost note affidavit. The assignments of mortgage are generally required
to be recorded by or on behalf of the Depositor in the appropriate offices for
real property records.
On or prior to the Closing Date, the Trustee or the Custodian on its
behalf will review the Mortgage Loans and the Related Documents pursuant to the
Pooling and Servicing Agreement and if any Mortgage Loan or Related Document is
found to be defective in any material respect and such defect is not cured
within 90 days following notification thereof to the Mortgage Loan Seller by the
Trustee or the Servicer, the Mortgage Loan Seller will be obligated either to
(i) substitute for such Mortgage Loan a Qualified Substitute Mortgage Loan;
however, such substitution is permitted only within two years of the Closing
Date and may not be made unless an opinion of counsel is provided to the effect
that such substitution will not disqualify any of the REMICs (as defined in the
Pooling and Servicing Agreement) as a REMIC or result in a prohibited
transaction tax under the Code; or (ii) purchase such Mortgage Loan at a price
(the "Purchase Price") equal to the outstanding principal balance of such
Mortgage Loan as of the date of purchase, plus all accrued and unpaid interest
thereon, computed at the Mortgage Rate through the end of the calendar month in
which the purchase is effected, plus the amount of any unreimbursed P&I Advances
and servicing advances made by the Servicer plus all unreimbursed costs and
damages incurred by the trust and the Trustee in connection with any violation
by any such Mortgage Loan of any predatory or abusive lending law. The Purchase
Price will be required to be remitted to the Servicer for deposit in the
Collection Account (as defined herein) for remittance to the Securities
Administrator prior to the next succeeding Distribution Date after such
obligation arises. The obligation of the Mortgage Loan Seller to repurchase or
substitute for a Deleted Mortgage Loan (as defined herein) is the sole remedy
regarding any defects in the Mortgage Loans and Related Documents available to
the certificateholders.
In connection with the substitution of a Qualified Substitute Mortgage
Loan, the Mortgage Loan Seller will be required to remit to the Servicer for
deposit in the Collection Account for remittance to the Securities Administrator
prior to the next succeeding Distribution Date after such obligation arises an
amount (the "Substitution Shortfall Amount") equal to the excess of the
principal balance of the related Deleted Mortgage Loan over the principal
balance of such Qualified Substitute Mortgage Loan.
A "Qualified Substitute Mortgage Loan" is a mortgage loan substituted
for a Deleted Mortgage Loan which must, on the date of such substitution, (i)
have an outstanding principal
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balance (or in the case of a substitution of more than one Mortgage Loan for a
Deleted Mortgage Loan, an aggregate principal balance), not in excess of the
principal balance of the Deleted Mortgage Loan; (ii) have a Mortgage Rate not
less than the Mortgage Rate of the Deleted Mortgage Loan and not more than 1% in
excess of the Mortgage Rate of such Deleted Mortgage Loan; (iii) if such
mortgage loan is an adjustable-rate mortgage loan, have a Maximum Mortgage Rate
and Minimum Mortgage Rate not less than the respective rate for the Deleted
Mortgage Loan and have a Gross Margin equal to or greater than the Deleted
Mortgage Loan; (iv) have the same Due Date as the Deleted Mortgage Loan; (v)
have a remaining term to maturity not more than one year earlier and not later
than the remaining term to maturity of the Deleted Mortgage Loan; (vi) comply
with each representation and warranty as to the Mortgage Loans set forth in the
Mortgage Loan Purchase Agreement (deemed to be made as of the date of
substitution); (vii) be of the same or better credit quality as the Mortgage
Loan being replaced; (viii) have the same lien priority on the related mortgaged
property as the Mortgage Loan being replaced and (ix) satisfy certain other
conditions specified in the Pooling and Servicing Agreement.
The Mortgage Loan Seller will make certain representations and
warranties as to the accuracy in all material respects of certain information
furnished to the Trustee with respect to each Mortgage Loan. In addition, the
Mortgage Loan Seller will represent and warrant, as of the Closing Date, that,
among other things: (i) at the time of transfer to the Depositor, the Mortgage
Loan Seller has transferred or assigned all of its right, title and interest in
each Mortgage Loan and the Related Documents, free of any lien; (ii) each
Mortgage Loan complied, at the time of origination, in all material respects
with applicable state and federal laws including, but not limited to, predatory
lending laws; (iii) the Mortgage Loans are not subject to the requirements of
the Home Ownership and Equity Protection Act of 1994 and no Mortgage Loan is
classified and/or defined as a "high cost", "covered" or "predatory" loan under
any other federal, state or local law or ordinance or regulation including, but
not limited to, the States of Georgia, Arkansas, Kentucky, New Jersey, New
Mexico or Illinois; and (iv) no proceeds from any Mortgage Loan were used to
purchase single premium credit insurance policies as part of the origination of,
or as a condition to closing, such Mortgage Loan. Upon discovery of a breach of
any such representation and warranty which materially and adversely affects the
interests of the certificateholders in the related Mortgage Loan and Related
Documents (determined without regard to the Class A-1 Policy or the Certificate
Insurer), the Mortgage Loan Seller will have a period of 90 days after the
earlier of discovery or receipt of written notice of the breach to effect a
cure; provided, however that any breach of the representations and warranties
set forth in clauses (ii), (iii) and (iv) above with respect to any Group I
Mortgage Loan shall be deemed to materially and adversely affect the interests
of the certificateholders in the related Group I Mortgage Loan. If the breach
cannot be cured within the 90-day period, the Mortgage Loan Seller will be
obligated to (i) substitute for such Deleted Mortgage Loan a Qualified
Substitute Mortgage Loan or (ii) purchase such Deleted Mortgage Loan from the
trust. The same procedure and limitations that are set forth above for the
substitution or purchase of Deleted Mortgage Loans as a result of deficient
documentation relating thereto will apply to the substitution or purchase of a
Deleted Mortgage Loan as a result of a breach of a representation or warranty in
the Mortgage Loan Purchase Agreement that materially and adversely affects the
interests of the certificateholders.
Mortgage Loans required to be transferred to the Mortgage Loan Seller
as described in the preceding paragraphs are referred to as "Deleted Mortgage
Loans."
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Servicer will establish and maintain or cause to be maintained a
separate trust account (the "Collection Account") for the benefit of the
certificateholders. The Collection Account will be an Eligible Account (as
defined in the Pooling and Servicing Agreement). Upon receipt by the
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Servicer of amounts in respect of the Mortgage Loans (excluding amounts
representing the related Servicing Fees or other servicing compensation,
reimbursement for P&I Advances and servicing advances and insurance proceeds to
be applied to the restoration or repair of a Mortgaged Property or similar
items), the Servicer will deposit such amounts in the Collection Account.
Amounts so deposited may be invested in Permitted Investments (as defined in the
Pooling and Servicing Agreement) maturing no later than one Business Day prior
to the date on which the amount on deposit therein is required to be remitted to
the Securities Administrator. All investment income on funds in the Collection
Account shall be for the benefit of the Servicer.
The Securities Administrator will establish an account (the
"Distribution Account") into which will be deposited amounts remitted to it by
the Servicer for distribution to certificateholders on a Distribution Date and
payment of certain fees and expenses of the trust. The Distribution Account will
be an Eligible Account. Amounts on deposit therein may be invested in Permitted
Investments maturing on or before the Business Day prior to the related
Distribution Date unless such Permitted Investments are invested in investments
managed or advised by the Securities Administrator or an affiliate thereof, in
which case such Permitted investments may mature on the related Distribution
Date.
EVENTS OF DEFAULT
Upon the occurrence of events of default described under "Description
of the Agreements-Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements-Events of Default under the Agreement" and
"-Rights Upon Events of Default under the Agreements" in the prospectus, the
Servicer may be removed as the Servicer of the Mortgage Loans in accordance with
the terms of the Pooling and Servicing Agreement. As further described in, and
in accordance with the provisions of, the Pooling and Servicing Agreement,
immediately upon the removal of the Servicer after the occurrence of an Event of
Default, a successor Servicer (which may be the Master Servicer) will become the
successor to the Servicer under the Pooling and Servicing Agreement; provided,
however that, under certain circumstances, the Servicer or its designee may
designate a successor Servicer with respect to the Mortgage Loans if it has been
terminated as the Servicer under the Pooling and Servicing Agreement. Any
successor Servicer appointed by the Servicer or its designee must qualify as a
successor Servicer under the Pooling and Servicing Agreement and be approved by
the Rating Agencies (by written confirmation that such appointment of a
successor Servicer would not result in the reduction or withdrawal of the rating
of any outstanding class of certificates) and be approved by the Certificate
Insurer in accordance with the terms and conditions of the Pooling and Servicing
Agreement. Any proceeds received in connection with the appointment of a
successor Servicer shall be the property of the Servicer or its designee.
Any successor to the Servicer appointed under the Pooling and Servicing
Agreement must be a housing loan servicing institution, acceptable to each
rating agency and reasonably acceptable to the Certificate Insurer, with a net
worth at the time of the appointment of at least $15,000,000. See "Description
of the Agreements-Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements-Events of Default under the Agreement" and
"-Rights Upon Events of Default under the Agreements" in the prospectus.
VOTING RIGHTS
At all times, 98% of all voting rights will be allocated among the
holders of the Class A Certificates, the Mezzanine Certificates, the Class B
Certificates and the Class CE Certificates in proportion to the then outstanding
Certificate Principal Balances of their respective certificates, 1% of all
voting
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rights will be allocated to the holders of the Class P Certificates in
proportion to the then outstanding Certificate Principal Balances of their
respective certificates and 1% of all voting rights will be allocated to the
holders of the Residual Certificates. Notwithstanding the foregoing, unless the
Certificate Insurer has defaulted on its obligations under the Class A-1 Policy
and such default is continuing, all voting rights allocated to the Class A-1
Certificates shall be solely exerciseable by the Certificate Insurer.
TERMINATION
The circumstances under which the obligations created by the Pooling
and Servicing Agreement will terminate in respect of the certificates are
described in "Description of the Securities-Termination" in the prospectus. The
Class CE Certificateholder or, if the Class CE Certificateholder fails to
exercise such option, Ocwen Federal Bank FSB (either the Class CE
Certificateholder or Ocwen Federal Bank FSB, the "Terminator") will have the
right to purchase all remaining Mortgage Loans and any properties acquired in
respect thereof and thereby effect early retirement of the certificates on any
Distribution Date following the Due Period during which the aggregate principal
balance of the Mortgage Loans and properties acquired in respect thereof
remaining in the trust fund at the time of purchase is reduced to less than 10%
of the aggregate principal balance of the Mortgage Loans as of the Cut-off Date.
In the event the Terminator exercises the option, the purchase price payable in
connection with the option will be equal to par with respect to the Mortgage
Loans and the fair market value of all properties acquired by the trust in
respect of any Mortgage Loans, plus accrued interest for each Mortgage Loan at
the related Mortgage Rate to but not including the first day of the month in
which the repurchase price is distributed, together with (to the extent not
covered by the foregoing) all amounts due and owing to the Trustee, the
Servicer, the Master Servicer, the Securities Administrator and the Certificate
Insurer as of the termination date. In the event the Terminator exercises this
option, the portion of the purchase price allocable to the Offered Certificates
and the Class B Certificates will be, to the extent of available funds, (i) 100%
of the then outstanding Certificate Principal Balance of the Offered
Certificates and the Class B Certificates, plus (ii) one month's interest on the
then outstanding Certificate Principal Balance of the Offered Certificates and
the Class B Certificates at the then applicable Pass-Through Rate for each such
class, plus (iii) any previously accrued but unpaid interest thereon to which
the holders of the Offered Certificates and the Class B Certificates are
entitled, together with the amount of any Net WAC Rate Carryover Amounts. The
holders of the Residual Certificates shall pledge any amount received in a
termination in excess of par to the holders of the Class CE Certificates. In no
event will the trust created by the Pooling and Servicing Agreement continue
beyond the expiration of 21 years from the death of the survivor of the persons
named in the Pooling and Servicing Agreement. See "Description of the
Securities-Termination" in the prospectus.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
As to any Mortgage Loan which is delinquent in payment by 90 days or
more, the Servicer or an affiliate of the Servicer may, at its option, purchase
such Mortgage Loan from the Trust at the Purchase Price for such Mortgage Loan,
under the circumstances described in the Pooling and Servicing Agreement.
THE CLASS A-1 POLICY
The Certificate Insurer will issue a certificate guaranty insurance
policy (referred to as the Class A-1 Policy in this prospectus supplement) for
the benefit of the Class A-1 Certificates. The following summary of the
provisions of the Class A-1 Policy does not purport to be complete and is
qualified in its entirety by reference to the Class A-1 Policy. The Trustee has
appointed the Securities Administrator as its agent in connection with the
receipt and distribution of all amounts required to be paid by the Certificate
Insurer under the Class A-1 Policy and the providing of any notices required to
be provided thereunder.
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The Certificate Insurer, in consideration of the payment of a premium
and subject to the terms of the Class A-1 Policy, unconditionally guarantees the
payment of Insured Amounts and Avoided Payments (to the extent described below)
to the Securities Administrator on behalf of the holders of the Class A-1
Certificates. The Certificate Insurer will pay Insured Amounts which are due for
payment to the Securities Administrator on the later of (1) the Distribution
Date the Insured Amount is distributable to the holders of the Class A-1
Certificates under the Pooling and Servicing Agreement, and (2) one (1) business
day following the business day the Certificate Insurer shall have received
notice by facsimile, simultaneously confirmed by telephone and subsequently
confirmed in writing, or written notice delivered to the Certificate Insurer at
its office specified in the Class A-1 Policy, from the Securities Administrator,
specifying that an Insured Amount is due in accordance with the terms of the
Class A-1 Policy a "Notice"); provided that, if such Notice is received after
10:00 AM, New York City time, on such business day, it shall be deemed to be
received on the following business day.
Pursuant to the Class A-1 Policy, the Certificate Insurer will pay any
Avoided Payment on the business day next following receipt on a business day by
the Certificate Insurer of (i) a certified copy of a final order of a court or
other body exercising jurisdiction in an Insolvency Proceeding to the effect
that the Securities Administrator or holder of a Class A-1 Certificate, as
applicable, is required to return such Avoided Payment paid during the Term of
the Policy because such Avoided Payment was avoided under applicable law, with
respect to which order the appeal period has expired without an appeal having
been filed (the "Final Order"), (ii) an assignment (in the form provided in the
Class A-1 Policy) properly completed and executed by the holder of a Class A-1
Certificate, irrevocably assigning to the Certificate Insurer all rights and
claims of such holder relating to or arising under such Avoided Payment and
(iii) a notice (in the form provided in the Class A-1 Policy) appropriately
completed and executed by the Securities Administrator; provided that, if such
documents are received after 10:00 AM, New York City time on such business day,
they will be deemed to be received the following business day. All payments made
by the Certificate Insurer in respect of Avoided Payments shall be disbursed to
the receiver, conservator, debtor-in-possession or trustee in bankruptcy named
in the Final Order, and not to the Securities Administrator or the holders of
the Class A-1 Certificates directly, unless the holder has previously paid such
Avoided Payment to such receiver, conservator, debtor-in-possession or trustee
in bankruptcy named in the Final Order, in which case the Certificate Insurer
will pay the Securities Administrator on behalf of such holder, subject to the
delivery of (a) the items referred to in clauses (i), (ii), and (iii) above to
the Certificate Insurer and (b) evidence satisfactory to the Certificate Insurer
that payment has been made to such receiver, conservator, debtor-in-possession
or trustee in bankruptcy named in the Final Order.
The Certificate Insurer shall not be obligated to make any payment in
respect of any Insured Amount or Avoided Payment representing a payment of
principal on the Class A-1 Certificates prior to the time the Certificate
Insurer would have been required to make a payment in respect of such principal
pursuant to the Class A-1 Policy.
The Certificate Insurer's obligation under the Class A-1 Policy will be
discharged to the extent that funds are received by the Securities Administrator
for payment to the holders of the Class A-1 Certificates whether or not those
funds are properly distributed by the Securities Administrator. Payments of
Insured Amounts and policy payments in respect of Avoided Payments will be made
only at the times for such payments set forth in the Class A-1 Policy, and no
payments which become due on an accelerated basis for any reason, including an
optional termination, will be made regardless of any acceleration of the Class
A-1 Certificates, unless the Certificate Insurer elects, in its sole discretion,
to pay such amounts in whole or in part (in which case the Insured Amounts will
include such accelerated payments as, when, and to the extent so elected by the
Certificate Insurer).
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For purposes of the Class A-1 Policy, a holder does not and may not
include any of the Trustee, the Seller, the Depositor or any of their respective
affiliates.
No person other than the Securities Administrator will be entitled to
present the Notice.
The Certificate Insurer will be subrogated to the rights of each holder
of the Class A-1 Certificates to the extent of any payment by the Certificate
Insurer under the Class A-1 Policy.
The Certificate Insurer agrees that if it shall be subrogated to the
rights of the holders of the Class A-1 Certificates, the rights of subrogation
shall be subordinate and junior in right of payment to the prior indefeasible
payment in full of any amounts due the holders on account of payments due under
the Class A-1 Certificates, but shall have the same priority as the Class A-1
Certificates in relation to the other classes of Certificates. In so doing, the
Certificate Insurer does not waive its rights to seek full payment of all
Certificate Insurer Reimbursement Amounts owed to it under the Pooling and
Servicing Agreement, without duplication of any payment to the Certificate
Insurer as subrogee. The Class A-1 Policy also does not cover any portion of the
Senior Interest Distribution Amount for the Class A-1 Certificates payable as a
result of an increase in the related Pass-Through Rate following the Optional
Termination Date.
The Class A-1 Policy will not cover Net WAC Rate Carryover Amounts,
Prepayment Interest Shortfalls or any shortfalls resulting from the application
of the Relief Act or similar state laws allocated to the Class A-1 Certificates,
nor does the Policy guarantee to the holders of the Class A-1 Certificates any
particular rate of principal payment. The Class A-1 Policy does not cover any
increase in the Pass-Through Rate following the Optional Termination Date. In
addition, the Class A-1 Policy does not cover shortfalls, if any, attributable
to the liability of the trust, any certificateholder, any REMIC or the
Securities Administrator for withholding taxes, if any (including interest and
penalties in respect of any liability for withholding taxes), nor any risk other
than Nonpayment of Scheduled Payments, including the failure of the Securities
Administrator to make any distribution required under the Pooling and Servicing
Agreement to the holders of the Class A-1 Certificates.
The following terms have the following meanings under the Class A-1
Policy:
"Avoided Payment" means with respect to the Class A-1 Certificates, any
payment of principal or interest previously distributed to a holder of a Class
A-1 Certificate by or on behalf of the Trust formed pursuant to the Pooling and
Servicing Agreement that is voided as a result of any Insolvency Proceeding and
which is returned by a holder of Class A-1 Certificates as required by a final,
nonappealable order of a court of competent jurisdiction.
"Certificate Deficiency Amount" means, with respect to the Class A-1
Certificates, as of any Distribution Date, the sum of the following amounts, in
each case after giving effect to distributions made on the Class A-1
Certificates on such Distribution Date from sources other than the Class A-1
Policy:
(i) the excess of (A) the Senior Interest Distribution Amount on the
Class A-1 Certificates and such Distribution Date (calculated without regard to
any step-up of the Pass-Through Rate following the Optional Termination Date),
over (B) the amount of the Available Distribution Amount allocated to pay such
Senior Interest Distribution Amount pursuant to the Pooling and Servicing
Agreement;
(ii) any Class A-1 Principal Loss Amount, if any, for such Distribution
Date, related to the Class A-1 Certificates; and
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(iii) without duplication of the amount specified in clause (ii), the
Certificate Principal Balance of the Class A-1 Certificates on their Final
Scheduled Distribution Date.
"Class A-1 Percentage" means the fraction, expressed as a percentage,
obtained by dividing the Certificate Principal Balance of the Class A-1
Certificates by the aggregate Certificate Principal Balance of the Class A-1
Certificates.
"Class A-1 Principal Loss Amount" means, as to any Distribution Date,
the amount by which (i) the aggregate Certificate Principal Balance of the Class
A-1 Certificates, after taking into account distributions in reduction of such
aggregate Certificate Principal Balance from sources other than the Class A-1
Policy on such Distribution Date, exceeds (ii) the aggregate principal balance
of the Group I Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period).
"Final Scheduled Distribution Date" means the Distribution Date
occurring in October 2034.
"Insolvency Proceeding" means the commencement after the Closing Date
of any bankruptcy, insolvency, readjustment of debt, reorganization, marshalling
of assets and liabilities or similar proceedings by or against any person, the
commencement, after the date hereof, of any proceedings by or against any person
for the winding up or liquidation of its affairs, or the consent, after the date
hereof, to the appointment of a trustee, conservator, receiver or liquidator in
any bankruptcy, insolvency, readjustment of debt, reorganization, marshalling of
assets and liabilities or similar proceedings of or relating to any person.
"Insured Amount" means, with respect to any Distribution Date and the
Class A-1 Certificates, that portion of the Scheduled Payments that shall become
due for payment but shall be unpaid by reason of Nonpayment on such Distribution
Date (which shall be equal to the amount of any related Certificate Deficiency
Amount).
"Insured Payments" means, with respect to any Distribution Date, the
aggregate amount actually paid by the Certificate Insurer to the Securities
Administrator in respect of Insured Amounts for a Distribution Date.
"Nonpayment" means, with respect to any Distribution Date, the failure
of the Securities Administrator to receive in full, in accordance with the terms
of the Pooling and Servicing Agreement, funds legally available to pay all or a
portion of the Scheduled Payment that is due for payment with respect to such
Distribution Date.
"Scheduled Payment" means, with respect to any Distribution Date with
respect to the Class A-1 Certificates during the Term of the Policy, (i) the
Senior Interest Distribution Amount due and payable in respect of the Class A-1
Certificates on such Distribution Date and (ii) (A) for any Distribution Date
earlier than the Final Scheduled Distribution Date, distributions allocated to
reduce the Certificate Principal Balance of the Class A-1 Certificates in an
amount at least sufficient to ensure that no Class A-1 Principal Loss Amount
exists on such Distribution Date and (B) for the Final Scheduled Distribution
Date, without duplication of the amount specified in clause (ii)(A), the
Certificate Principal Balance of the Class A-1 Certificates outstanding on such
Distribution Date, in each case, in accordance with the original terms of the
Class A-1 Certificates and the Pooling and Servicing Agreement when the Class
A-1 Certificates were issued and without regard to any subsequent amendment or
modification of the Class A-1 Certificates or the Pooling and Servicing
Agreement that has not been consented to in writing by the Certificate Insurer.
Notwithstanding
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the foregoing, "Scheduled Payments" shall in no event include payments which
become due on an accelerated basis as a result of any optional termination, in
whole or in part, or any other cause, unless the Certificate Insurer elects, in
its sole discretion, to pay such amounts in whole or in part (in which event
Scheduled Payments shall include such accelerated payments as, when, and to the
extent so elected by the Certificate Insurer). In the event that the Certificate
Insurer does not make such election, "Scheduled Payments" shall include payments
due in accordance with the original scheduled terms of the Class A-1
Certificates without regard to any acceleration. In addition, "Scheduled
Payments" shall not include, nor shall coverage be provided under the Class A-1
Policy in respect of, (i) any amounts due in respect of the Class A-1
Certificates attributable to any increase in interest rate, penalty or other sum
payable by the Trust by reason of any default or event of default in respect of
the Class A-1 Certificates, or by reason of any deterioration of the
creditworthiness of the Trust, (ii) any Relief Act Interest Shortfalls, (iii)
any Net WAC Rate Carryover Amounts, (iv) any Prepayment Interest Shortfalls, (v)
any portion of the Senior Interest Distribution Amount for the Class A-1
Certificates payable as the result of an increase in the related Pass-Through
Rate following the Optional Termination Date or (vi) any taxes, withholding or
other charge imposed by any governmental authority due in connection with the
payment of any Scheduled Payment to any holder or owner of a Class A-1
Certificate.
"Term of the Policy" means the period from and including the closing
date to and including the first date on which (i) all Scheduled Payments have
been paid that are required to be paid under the Pooling and Servicing
Agreement; (ii) any period during which any Scheduled Payment could have been
avoided in whole or in part as a preference payment under applicable bankruptcy,
insolvency, receivership or similar law has expired, and (iii) if any
proceedings requisite to avoidance as a preference payment have been commenced
prior to the occurrence of (i) and (ii) above, a final and nonappealable order
in resolution of each such proceeding has been entered; provided, further, that
if the holders of Insured Certificates are required to return any Avoided
Payment as a result of such Insolvency Proceeding, then the Term of the Policy
shall terminate on the date on which the Certificate Insurer has made all
payments required to be made under the terms of the Class A-1 Policy in respect
of all such Avoided Payments.
The Class A-1 Policy is issued under and will be construed under the
laws of the State of New York.
THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76
OF THE NEW YORK INSURANCE LAW DOES NOT COVER THE POLICY. THE FLORIDA INSURANCE
GUARANTY ASSOCIATION CREATED UNDER PART II OF CHAPTER 631 OF THE FLORIDA
INSURANCE CODE DOES NOT COVER THE POLICY. IN THE EVENT THAT THE CERTIFICATE
INSURER WERE TO BECOME INSOLVENT, THE CALIFORNIA INSURANCE GUARANTY ASSOCIATION,
ESTABLISHED PURSUANT TO ARTICLE 14.2 OF CHAPTER 1 OF PART 2 OF DIVISION I OF THE
CALIFORNIA INSURANCE CODE EXCLUDES FROM COVERAGE ANY CLAIMS ARISING UNDER THIS
CLASS A-1B Policy.
The Class A-1 Policy is not cancelable. The premium on the Class A-1
Policy is not refundable for any reason including payment, or provision being
made for payment, prior to maturity of the Class A-1 Certificates.
The Class A-1 Policy and the obligations of the Certificate Insurer
thereunder will terminate without any action on the part of the Certificate
Insurer or any other person on the last date of the Term of the Policy. Upon
termination of the Class A-1 Policy, the Trustee is required to deliver the
original of the Class A-1 Policy to the Certificate Insurer.
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THE CERTIFICATE INSURER
The following information has been supplied by the Certificate Insurer
for inclusion in this prospectus supplement. No representation is made by
Depositor, the Trustee, the Securities Administrator, the Master Servicer, the
Servicer, the Credit Risk Manager or any other entity as to the accuracy or
completeness of the information.
The Certificate Insurer accepts no responsibility for the accuracy or
completeness of this prospectus supplement or any other information or
disclosure contained herein, or omitted herefrom, other than with respect to the
accuracy of the information regarding the Certificate Insurer and its affiliates
set forth under this heading. In addition, the Certificate Insurer makes no
representation regarding the Class A-1 Certificates or the advisability of
investing in the Class A-1 Certificates.
GENERAL
XL Capital Assurance Inc. (the "Certificate Insurer" or "XLCA") is a
monoline financial guaranty insurance company incorporated under the laws of the
State of New York. The Certificate Insurer is currently licensed to do insurance
business in, and is subject to the insurance regulation and supervision by, the
State of New York, forty-eight other states, the District of Columbia, Puerto
Rico, the U.S. Virgin Islands and Singapore. The Insurer has a license
application pending with the State of Wyoming, the only state in which it is not
currently licensed.
The Certificate Insurer is an indirect wholly owned subsidiary of XL
Capital Ltd, a Cayman Islands corporation ("XL Capital Ltd"). Through its
subsidiaries, XL Capital Ltd is a leading provider of insurance and reinsurance
coverages and financial products to industrial, commercial and professional
service firms, insurance companies and other enterprises on a worldwide basis.
The common stock of XL Capital Ltd is publicly traded in the United States and
listed on the New York Stock Exchange (NYSE: XL). XL CAPITAL LTD IS NOT
OBLIGATED TO PAY THE DEBTS OF OR CLAIMS AGAINST THE CERTIFICATE INSURER.
The Certificate Insurer was formerly known as The London Assurance of
America Inc. ("London"), which was incorporated on July 25, 1991 under the laws
of the State of New York. On February 22, 2001, XL Reinsurance America Inc. ("XL
Re") acquired 100% of the stock of London. XL Re merged its former financial
guaranty subsidiary, known as XL Capital Assurance Inc. (formed September 13,
1999) with and into London, with London as the surviving entity. London
immediately changed its name to XL Capital Assurance Inc. All previous business
of London was 100% reinsured to Royal Indemnity Company, the previous owner at
the time of acquisition.
REINSURANCE
The Certificate Insurer has entered into a facultative quota share
reinsurance agreement with XL Financial Assurance Ltd ("XLFA"), an insurance
company organized under the laws of Bermuda, and an affiliate of the Insurer.
Pursuant to this reinsurance agreement, the Insurer expects to cede up to 90% of
its business to XLFA. The Certificate Insurer may also cede reinsurance to third
parties on a transaction-specific basis, which cessions may be any or a
combination of quota share, first loss or excess of loss. Such reinsurance is
used by the Certificate Insurer as a risk management device and to comply with
statutory and rating agency requirements and does not alter or limit the
Insurer's obligations under any financial guaranty insurance policy. With
respect to any transaction insured by XLCA, the percentage of risk ceded to XLFA
may be less than 90% depending on certain factors including, without limitation,
whether XLCA has obtained third party reinsurance covering the risk. As a
result, there can be no assurance as to the
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percentage reinsured by XLFA of any given financial guaranty insurance policy
issued by XLCA, including the Class A-1 Policy.
Based on the audited financials of XLFA, as of December 31, 2003, XLFA
had total assets, liabilities, redeemable preferred shares and shareholders'
equity of $831,762,000, $401,123,000, $39,000,000 and $391,639,000,
respectively, determined in accordance with generally accepted accounting
principles in the United States. XLFA's insurance financial strength is rated
"Aaa" by Moody's and "AAA" by S&P and Fitch. In addition, XLFA has obtained a
financial enhancement rating of "AAA" from S&P.
The obligations of XLFA to the Certificate Insurer under the
reinsurance agreement described above are unconditionally guaranteed by XL
Insurance (Bermuda) Ltd ("XLI"), a Bermuda company and one of the world's
leading excess commercial insurers. XLI is a wholly owned indirect subsidiary of
XL Capital Ltd. In addition to A.M. Best's rating of "A+" (Negative Outlook),
XLI's insurance financial strength rating is "Aa2" by Moody's, "AA-" by Standard
& Poor's and "AA" by Fitch. The ratings of XLFA and XLI are not recommendations
to buy, sell or hold securities, including the Class A-1 Certificates, and are
subject to revision or withdrawal at any time by Moody's, Standard & Poor's or
Fitch.
Notwithstanding the capital support provided to the Certificate Insurer
described in this section, the holders of the Class A-1 Certificates will have
direct recourse against the Certificate Insurer only, and neither XLFA nor XLI
will be directly liable to the holders of the Class A-1 Certificates.
FINANCIAL STRENGTH AND FINANCIAL ENHANCEMENT RATINGS OF XLCA
The Certificate Insurer's insurance financial strength is rated "Aaa"
by Moody's and "AAA" by S&P and Fitch. In addition, XLCA has obtained a
financial enhancement rating of "AAA" from S&P. These ratings reflect Moody's,
S&P's and Fitch's current assessment of the Certificate Insurer's
creditworthiness and claims-paying ability as well as the reinsurance
arrangement with XLFA described under "Reinsurance" above.
The above ratings are not recommendations to buy, sell or hold
securities, including the Class A-1 Certificates, and are subject to revision or
withdrawal at any time by Moody's, S&P or Fitch. Any downward revision or
withdrawal of these ratings may have an adverse effect on the market price of
the Class A-1 Certificates. The Certificate Insurer does not guaranty the market
price of the Class A-1 Certificates nor does it guaranty that the ratings on the
Class A-1 Certificates will not be revised or withdrawn.
CAPITALIZATION OF THE CERTIFICATE INSURER
Based on the audited statutory financial statements for XLCA as of
December 31, 2003 filed with the State of New York Insurance Department, XLCA
has total admitted assets of $329,701,823, total liabilities of $121,635,535 and
total capital and surplus of $208,066,288 determined in accordance with
statutory accounting practices prescribed or permitted by insurance regulatory
authorities ("SAP"). Based on the audited statutory financial statements for
XLCA as of December 31, 2002 filed with the State of New York Insurance
Department, XLCA has total admitted assets of $180,993,189, total liabilities of
$58,685,217 and total capital and surplus of $122,307,972 determined in
accordance with SAP.
For further information concerning XLCA and XLFA, see the financial
statements of XLCA and XLFA, and the notes thereto, incorporated by reference in
this prospectus supplement. The financial statements of XLCA and XLFA are
included as exhibits to the periodic reports filed with
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the Securities and Exchange Commission (the "Commission") by XL Capital Ltd and
may be reviewed at the EDGAR website maintained by the Commission. All financial
statements of XLCA and XLFA included in, or as exhibits to, documents filed by
XL Capital Ltd pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 on or prior to the date of this prospectus supplement, or
after the date of this prospectus supplement but prior to termination of the
offering of the Class A-1 Certificates, shall be deemed incorporated by
reference in this prospectus supplement. Except for the financial statements of
XLCA and XLFA, no other information contained in XL Capital Ltd's reports filed
with the Commission is incorporated by reference. Copies of the statutory
quarterly and annual statements filed with the State of New York Insurance
Department by XLCA are available upon request to the State of New York Insurance
Department.
REGULATION OF THE CERTIFICATE INSURER
The Certificate Insurer is regulated by the Superintendent of Insurance
of the State of New York. In addition, the Certificate Insurer is subject to
regulation by the insurance laws and regulations of the other jurisdictions in
which it is licensed. As a financial guaranty insurance company licensed in the
State of New York, the Certificate Insurer is subject to Article 69 of the New
York Insurance Law, which, among other things, limits the business of each
insurer to financial guaranty insurance and related lines, prescribes minimum
standards of solvency, including minimum capital requirements, establishes
contingency, loss and unearned premium reserve requirements, requires the
maintenance of minimum surplus to policyholders and limits the aggregate amount
of insurance which may be written and the maximum size of any single risk
exposure which may be assumed. The Certificate Insurer is also required to file
detailed annual financial statements with the New York Insurance Department and
similar supervisory agencies in each of the other jurisdictions in which it is
licensed.
The extent of state insurance regulation and supervision varies by
jurisdiction, but New York and most other jurisdictions have laws and
regulations prescribing permitted investments and governing the payment of
dividends, transactions with affiliates, mergers, consolidations, acquisitions
or sales of assets and incurrence of liabilities for borrowings.
THE FINANCIAL GUARANTY INSURANCE POLICIES ISSUED BY THE CERTIFICATE INSURER,
INCLUDING THE CLASS A-1 POLICY, ARE NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
The principal executive offices of the Certificate Insurer are located
at 1221 Avenue of the Americas, New York, New York 10020 and its telephone
number at this address is (212) 478-3400.
CAP AGREEMENTS AND THE CAP PROVIDER
The Offered Certificates and the Class B Certificates will have the
benefit of two separate interest rate cap agreements (each, a "Cap Agreement")
with respect to the Mortgage Loans. Each Cap Agreement will be documented
pursuant to a confirmation incorporating the terms and conditions of an ISDA
Master Agreement (Multicurrency-Cross Border), as supplemented by a schedule.
Pursuant to the Cap Agreement relating to the Class A-1 Certificates, Mezzanine
Certificates and Class B Certificates (the "Group I Cap Agreement"), The Royal
Bank of Scotland plc (together with any successor, the "Cap Provider") will
agree to pay to the Securities Administrator for the benefit of the holders of
the Class A-1 Certificates, Mezzanine Certificates and Class B Certificates a
monthly payment in an amount equal to the product of:
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(1) the excess, if any, of One-Month LIBOR over the strike rate for the
related Distribution Date (provided, however that if One-Month LIBOR exceeds
9.00% the payment due will be calculated as if One-Month LIBOR were 9.00%);
(2) the Group I Scheduled Notional Amount for the related Distribution
Date; and
(3) a fraction, the numerator of which is the actual number of days
elapsed from the previous Distribution Date to but excluding the current
Distribution Date (or, for the first Distribution Date, the actual number of
days elapsed from the Closing Date to but excluding the first Distribution
Date), and the denominator of which is 360.
The Group I Scheduled Notional Amount with respect to each Distribution
Date, which declines in accordance with the expected amortization of the Group I
Mortgage Loans, is set forth below.
GROUP I
SCHEDULED NOTIONAL
DISTRIBUTION DATE AMOUNT ($) STRIKE RATE (%)
- ---------------------- -------------------------- ------------------
November 2004 361,748,000 6.150
December 2004 352,923,000 6.358
January 2005 344,208,000 6.156
February 2005 335,598,000 6.159
March 2005 327,091,000 6.822
April 2005 318,687,000 6.164
May 2005 310,384,000 6.372
June 2005 302,196,000 6.168
July 2005 294,211,000 6.375
August 2005 286,428,000 6.171
September 2005 278,851,000 6.173
October 2005 271,474,000 6.380
November 2005 264,293,000 6.176
December 2005 257,301,000 6.384
January 2006 250,495,000 6.179
February 2006 243,869,000 6.195
March 2006 237,418,000 6.937
April 2006 231,141,000 6.323
May 2006 225,032,000 6.776
June 2006 219,092,000 7.880
July 2006 213,331,000 8.206
August 2006 207,720,000 7.946
September 2006 202,257,000 7.969
October 2006 196,938,000 8.260
November 2006 191,759,000 8.111
December 2006 186,719,000 8.923
January 2007 181,818,000 8.663
February 2007 177,046,000 8.667
March 2007 172,400,000 9.000
April 2007 167,876,000 8.727
The Group I Cap Agreement will terminate after the Distribution Date in
April 2007.
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Pursuant to the Cap Agreement relating to the Class A-2 Certificates,
Mezzanine Certificates and the Class B Certificates (the "Group II Cap
Agreement"), the Cap Provider will agree to pay to the Securities Administrator
for the benefit of the holders of such certificates a monthly payment in an
amount equal to the product of:
(1) the excess, if any, of One-Month LIBOR over the strike rate for the
related Distribution Date (provided, however that if One-Month LIBOR exceeds
9.00% the payment due will be calculated as if One-Month LIBOR were 9.00%);
(2) the Group II Scheduled Notional Amount for the related Distribution
Date; and
(3) a fraction, the numerator of which is the actual number of days
elapsed from the previous Distribution Date to but excluding the current
Distribution Date (or, for the first Distribution Date, the actual number of
days elapsed from the Closing Date to but excluding the first Distribution
Date), and the denominator of which is 360.
The Group II Scheduled Notional Amount with respect to each
Distribution Date, which declines in accordance with the expected amortization
of the Group II Mortgage Loans, is set forth below.
GROUP II
SCHEDULED NOTIONAL
DISTRIBUTION DATE AMOUNT ($) STRIKE RATE (%)
- ----------------------- ---------------------- ---------------------
November 2004 178,781,000 6.161
December 2004 174,618,000 6.372
January 2005 170,484,000 6.171
February 2005 166,378,000 6.176
March 2005 162,298,000 6.841
April 2005 158,244,000 6.183
May 2005 154,219,000 6.392
June 2005 150,225,000 6.188
July 2005 146,326,000 6.396
August 2005 142,519,000 6.191
September 2005 138,812,000 6.193
October 2005 135,201,000 6.402
November 2005 131,685,000 6.197
December 2005 128,260,000 6.405
January 2006 124,925,000 6.201
February 2006 121,676,000 6.203
March 2006 118,512,000 6.884
April 2006 115,431,000 6.220
May 2006 112,430,000 6.535
June 2006 109,509,000 6.915
July 2006 106,673,000 7.987
August 2006 103,910,000 7.761
September 2006 101,218,000 7.765
October 2006 98,596,000 8.023
November 2006 96,042,000 7.818
December 2006 93,555,000 8.358
January 2007 91,136,000 8.361
February 2007 88,779,000 8.371
March 2007 86,484,000 9.000
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April 2007 84,248,000 8.395
May 2007 82,069,000 8.756
June 2007 79,948,000 8.787
The Group II Cap Agreement will terminate after the Distribution Date
in June 2007.
The Cap Agreements will be governed by and construed in accordance with
the laws of the State of New York. The obligations of the Cap Provider are
limited to those specifically set forth in the Cap Agreements.
The Cap Provider is a Scottish banking organization and a direct,
wholly owned subsidiary of The Royal Bank of Scotland Group plc ("RBS Group"), a
diversified financial services group engaged in a wide range of banking,
financial and finance related activities in the United Kingdom and
internationally. The long-term unsecured, unsubordinated and unguaranteed debt
obligations of the Cap Provider are currently rated "AA" from S&P and "Aa1" from
Moody's.
Except for the information provided in the preceding paragraph, the Cap
Provider and RBS Group have not been involved in the preparation of, and do not
accept any responsibility for, this prospectus supplement or the accompanying
prospectus.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Thacher Proffitt & Wood LLP, counsel to the
Depositor, assuming compliance with the provisions of the Pooling and Servicing
Agreement, for federal income tax purposes, each of the REMICs established under
the Pooling and Servicing Agreement will qualify as a REMIC under the Code.
For federal income tax purposes (i) the Residual Certificates will
represent the "residual interests" in each REMIC elected by the trust and (ii)
the Offered Certificates and the Class B Certificates (exclusive of any right of
the holder of such certificates to receive payments from the Reserve Fund in
respect of Net WAC Rate Carryover Amounts), the Class P Certificates and the
Class CE Certificates will represent the "regular interests" in, and will be
treated as debt instruments of, a REMIC. See "Material Federal Income Tax
Considerations-REMICs" in the prospectus.
For federal income tax purposes, the Class M-5 Certificates and Class
M-6 Certificates may, and the other classes of Offered Certificates will not, be
treated as having been issued with original issue discount. The prepayment
assumption that will be used in determining the rate of accrual of original
issue discount, market discount and premium, if any, for federal income tax
purposes will be based on the assumption that, subsequent to the date of any
determination the fixed rate Mortgage Loans will prepay at a rate equal to 100%
PPC and the adjustable-rate Mortgage Loans prepay at a rate equal to 28% CPR. No
representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See "Material Federal Income Tax Consideration-General" and
"-REMICs-Taxation of Owners of Regular Securities" in the prospectus.
The holders of the Offered Certificates will be required to include in
income interest on their certificates in accordance with the accrual method of
accounting.
The Internal Revenue Service (the "IRS") has issued original issue
discount regulations (the "OID Regulations") under sections 1271 to 1275 of the
Code that address the treatment of debt instruments issued with original issue
discount, Purchasers of the Offered Certificates should be aware that the OID
Regulations do not adequately address certain issues relevant to, or are not
applicable to, prepayable securities such as the Offered Certificates. In
addition, there is
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considerable uncertainty concerning the application of the OID Regulations to
REMIC Regular Certificates that provide for payments based on an adjustable rate
such as the Offered Certificates. Because of the uncertainty concerning the
application of Section 1272(a)(6) of the Code to such certificates and because
the rules of the OID Regulations relating to debt instruments having an
adjustable rate of interest are limited in their application in ways that could
preclude their application to such certificates even in the absence of Section
1272(a)(6) of the Code, the IRS could assert that the Offered Certificates
should be treated as issued with original issue discount or should be governed
by the rules applicable to debt instruments having contingent payments or by
some other method not yet set forth in regulations. Prospective purchasers of
the Offered Certificates are advised to consult their tax advisors concerning
the tax treatment of such certificates.
In certain circumstances the OID Regulations permit the holder of a
debt instrument to recognize original issue discount under a method that differs
from that used by the issuer. Accordingly, the holder of an Offered Certificate
may be able to select a method for recognizing original issue discount that
differs from that used by the Trust in preparing reports to the
certificateholders and the IRS.
If the method for computing original issue discount described above
results in a negative amount for any period with respect to a Certificateholder,
the amount of original issue discount allocable to that period would be zero and
the Certificateholder will be permitted to offset that negative amount only
against future original issue discount, if any, attributable to those
Certificates.
Certain of the certificates may be treated for federal income tax
purposes as having been issued at a premium. Whether any holder of a certificate
will be treated as holding such certificate with amortizable bond premium will
depend on such certificateholders purchase price and the distributions remaining
to be made on such certificate at the time of its acquisition by such
certificateholder. Holders of such certificates should consult their own tax
advisors regarding the possibility of making an election to amortize such
premium. See "Material Federal Income Tax Considerations- REMICs--Taxation of
Owners of Regular Securities" in the Prospectus.
Each holder of an Offered Certificate is deemed to own an undivided
beneficial ownership interest in a REMIC Regular Interest and the right to
receive payments from the Reserve Fund in respect of Net WAC Rate Carryover
Amounts. The Reserve Fund is not an asset of any REMIC.
The treatment of amounts received by a holder of an Offered Certificate
under that certificateholder's right to receive a Net WAC Rate Carryover Amount
will depend on the portion, if any, of the certificateholder's purchase price
allocable thereto. Under the REMIC Regulations, each holder of an Offered
Certificate must allocate its purchase price for such certificate between its
undivided interest in the regular interest of a REMIC and its undivided interest
in the right to receive payments from the Reserve Fund in respect of Net WAC
Rate Carryover Amounts in accordance with the relative, fair market values of
each property right. The Pooling and Servicing Agreement will provide that the
Securities Administrator is required to treat payments made to the holders of
the Offered Certificates with respect to a Net WAC Rate Carryover Amount as
includible in income based on the regulations relating to notional principal
contracts. The OID regulations provide that the trust's allocation of the issue
price is binding on all holders unless the holder explicitly discloses on its
tax return that its allocation is different from the trust's allocation. For tax
reporting purposes, the Securities Administrator may, as required, treat the
right to receive payments from the Reserve Fund in respect of the Net WAC Rate
Carryover Amounts as having more than a DE MINIMIS value. The value of such
amount shall be available from the Securities Administrator upon request to the
extent it is provided to the Securities Administrator by the Underwriter.
Information regarding such amounts will be available from the Securities
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Administrator upon request. However, this assignment of value is not binding on
the IRS and the IRS could argue that a greater value should have been allocated
to the right to receive payments from the Reserve Fund in respect of Net WAC
Rate Carryover Amounts. If an argument of this kind were to be sustained, the
Offered Certificates could be viewed as having been issued with original issue
discount. Under the REMIC Regulations, the Trustee is required to account for
the REMIC Regular Interest and the right to receive payments from the Reserve
Fund in respect of Net WAC Rate Carryover Amounts as discrete property rights.
Holders of the Offered Certificates are advised to consult their own tax
advisors regarding the allocation of issue price, timing, character and source
of income and deductions resulting from the ownership of the Offered
Certificates. Treasury regulations have been promulgated under Section 1275 of
the Code generally providing for the integration of a "qualifying debt
instrument" with a hedge if the combined cash flows of the components are
substantially equivalent to the cash flows on a variable rate debt instrument.
However, these regulations specifically disallow integration of debt instruments
subject to Section 1272(a)(6) of the Code. Therefore, holders of the Offered
Certificates will be unable to use the integration method provided for under
these regulations with respect to the Offered Certificates. Ownership of the
right to Net WAC Rate Carryover Amounts will nevertheless entitle the owner to
amortize the separate price paid for the right to Net WAC Rate Carryover Amounts
under the regulations relating to notional principal contracts if this right is
treated as a "notional principal contract."
In the event that a certificateholder's right to receive Net WAC Rate
Carryover Amounts is characterized as a "Notional Principal Contract," upon the
sale of an Offered Certificate the amount of the sale allocated to the selling
certificateholder's right to receive payments from the Reserve Fund in respect
of the Net WAC Rate Carryover Amounts would be considered a "termination
payment" under the regulations relating to Notional Principal Contracts
allocable to the related certificate. A certificateholder will have gain or loss
from a termination of the right to receive payments from the Reserve Fund in
respect of Net WAC Rate Carryover Amounts equal to (i) any termination payment
it received or is deemed to have received minus (ii) the unamortized portion of
any amount paid (or deemed paid) by the certificateholder upon entering into or
acquiring its interest in the right to receive payments from the Reserve Fund in
respect of Net WAC Rate Carryover Amounts.
Gain or loss realized upon the termination of the right to receive
payments from the Reserve Fund in respect of Net WAC Rate Carryover Amounts will
generally be treated as capital gain or loss. Moreover, in the case of a bank or
thrift institution, Code Section 582(c) would likely not apply to treat such
gain or loss as ordinary.
This paragraph applies to the Offered Certificates exclusive of any
rights in the Reserve Fund. The Offered Certificates will be treated as assets
described in Section 7701(a)(19)(C) of the Code and "real estate assets" under
Section 856(c)(4)(A) of the Code generally in the same proportion that the
assets of the trust would be so treated. In addition, interest on the Offered
Certificates will be treated as "interest on obligations secured by mortgages on
real property" under Section 856(c)(3)(B) of the Code to the extent that the
Offered Certificates are treated as "real estate assets" under Section
856(c)(4)(A) of the Code. Moreover, the Offered Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code if transferred
to another REMIC on its startup day in exchange for a regular or residual
interest therein. However, as mentioned above, no portion of a Class A or
Mezzanine Certificateholder's basis or income allocable to a Basis Risk
Arrangement will qualify for such treatment. As a result, those Certificates are
not suitable investments for inclusion in another REMIC. See "Pooling and
Servicing Agreement--Termination" in this prospectus supplement and "Material
Federal Income Tax Considerations--REMICs--Characterization of Investments in
REMIC Securities" in the prospectus.
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The holders of the Offered Certificates will be required to include in
income interest on their certificates in accordance with the accrual method of
accounting. As noted above, each holder of an Offered Certificate will be
required to allocate a portion of the purchase price paid for such certificates
to the right to receive payments from the Reserve Fund in respect of Net WAC
Rate Carryover Amounts. The value of the right to receive any Net WAC Rate
Carryover Amount is a question of fact which could be subject to differing
interpretations. Because Net WAC Rate Carryover Amounts are treated as a
separate right of the Offered Certificates not payable by the REMIC, this right
will not be treated as a qualifying asset for any certificateholder that is a
mutual savings bank, domestic building and loan association, real estate
investment trust, or real estate mortgage investment conduit and any amounts
received from the reserve fund will not be qualifying real estate income for
real estate investment trusts.
For further information regarding federal income tax consequences of
investing in the Offered Certificates, see "Material Federal Income Tax
Considerations--REMICs" in the prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the amended and
restated underwriting agreement, dated as of July 8, 2002 and a terms agreement
dated as of September 20, 2004 (collectively, the "Underwriting Agreement"),
among the Underwriter and the Depositor, the Depositor has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Depositor, the
Offered Certificates.
Distribution of the Offered Certificates will be made from time to time
in negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor, will be
100.00% of the aggregate initial Certificate Principal Balance of the Offered
Certificates. In connection with the purchase and sale of the Offered
Certificates, the Underwriter may be deemed to have received compensation from
the Depositor in the form of underwriting discounts.
The Offered Certificates are offered subject to receipt and acceptance
by the Underwriter, to prior sale and to the Underwriter's right to reject any
order in whole or in part and to withdraw, cancel or modify the offer without
notice. It is expected that delivery of the Offered Certificates will be made
through the facilities of DTC, Clearstream and the Euroclear System on or about
the Closing Date. The Offered Certificates will be offered in Europe and the
United States of America.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against those civil liabilities set forth in the Underwriting
Agreement, including liabilities under the Securities Act of 1933, as amended,
or will contribute to payments the Underwriter may be required to make in
respect of these liabilities.
SECONDARY MARKET
There is currently no secondary market for the Offered Certificates and
there can be no assurance that a secondary market for the Offered Certificates
will develop or, if it does develop, that it will continue. The Underwriter
intends to establish a market in the Offered Certificates but it is not
obligated to do so. There can be no assurance that any additional information
regarding the Offered Certificates will be available through any other source.
In addition, the Depositor is not aware of any source through which price
information about the Offered Certificates will be available on an ongoing
basis. The limited nature of the information regarding the Offered Certificates
may adversely affect the liquidity of the Offered Certificates, even if a
secondary
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market for the Offered Certificates becomes available. The primary source of
information available to investors concerning the Offered Certificates will be
the monthly statements discussed herein under "Description of the
Certificates-Reports to Certificateholders" which will include information as to
the outstanding principal balance of the Offered Certificates and the status of
the applicable form of credit enhancement.
LEGAL OPINIONS
Legal matters relating to the Offered Certificates will be passed upon
for the Depositor and the Underwriter by Thacher Proffitt & Wood LLP, New York,
New York.
EXPERTS
The consolidated balance sheets of XLCA as of December 31, 2003 and
December 31, 2002 and the related consolidated statements of operations and
comprehensive 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 in this
prospectus supplement in reliance on the report of PricewaterhouseCoopers LLP,
independent registered public accounting firm, given on the authority of that
firm as experts in accounting and auditing.
The balance sheets of XLFA as of December 31, 2003 and December 31,
2002 and the related statements of operations and comprehensive income, changes
in shareholders' 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 in this prospectus supplement in reliance on
the report of PricewaterhouseCoopers, independent registered public accounting
firm, given on the authority of that firm as experts in accounting and auditing.
RATINGS
It is a condition to the issuance of the certificates that the Offered
Certificates receive at least the following ratings from Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P") and Moody's Investors
Service, Inc. ("Moody's"):
Class S&P Moody's
------------------ --------------- ---------------
Class A-1 AAA Aaa
Class A-2A AAA Aaa
Class A-2B AAA Aaa
Class A-2C AAA Aaa
Class M-1 AA+ Aa2
Class M-2 AA A2
Class M-3 A+ A3
Class M-4 A Baa1
Class M-5 A Baa2
Class M-6 A- Baa3
The ratings on the Class A-1 Certificates are without regard to the
Class A-1 Policy.
The ratings assigned to mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
the certificateholders are entitled. The
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rating process addresses structural and legal aspects associated with the
certificates, including the nature of the underlying mortgage loans. The ratings
assigned to mortgage pass-through certificates do not represent any assessment
of the likelihood that principal prepayments will be made by the mortgagors or
the degree to which such prepayments will differ from that originally
anticipated. The ratings do not address the possibility that certificateholders
might suffer a lower than anticipated yield due to non-credit events. In
addition, the ratings on the Offered Certificates do not address the likelihood
of receipt by the holders of such certificates of any amounts in respect of Net
WAC Rate Carryover Amounts.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the Offered Certificates are subsequently lowered for any
reason, no person or entity is obligated to provide any additional credit
support or credit enhancement with respect to the Offered Certificates.
The Depositor has not requested that any rating agency rate the Offered
Certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the Offered Certificates, or, if it
does, what rating would be assigned by any other rating agency. A rating on the
Offered Certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the Offered Certificates as stated in this section.
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related
securities" for purposes of SMMEA.
The Depositor makes no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Offered Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of any class of Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their legal
advisors in determining whether and to what extent any class of Offered
Certificates constitutes a legal investment or is subject to investment, capital
or other restrictions. See "Legal Investment" in the Prospectus.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
A fiduciary of any employee benefit plan or other plan or arrangement
subject to ERISA or Section 4975 of the Code (a "Plan"), or any insurance
company, whether through its general or separate accounts, or any other person
investing plan assets of a Plan, should carefully review with its legal advisors
whether the purchase or holding of Offered Certificates could give rise to a
transaction prohibited or not otherwise permissible under ERISA or Section 4975
of the Code. The purchase or holding of the Offered Certificates by or on behalf
of, or with Plan assets of, a Plan may qualify for exemptive relief under the
Underwriters' Exemption, as currently in effect and as described under "ERISA
Considerations" in the prospectus. The Underwriters' Exemption relevant to the
Offered Certificates was granted by the Department of Labor as Prohibited
Transaction Exemption ("PTE") 94-84 and FAN 97-03E, as amended by PTE 97-34 at
62 F.R. 39021, PTE 2000-58 at 65 F.R. 67765 and PTE 2002-41 at 67 F.R. 54487.
The Underwriters' Exemption was amended by PTE 2002-41 to permit a trustee to be
affiliated with an underwriter despite the restriction in PTE 2000-58 to the
contrary. However, the Underwriters' Exemption contains a number of conditions
which must be met for the exemption to apply, including the requirements that
the Offered
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Certificates be rated at least "BBB-" (or its equivalent) by Fitch Ratings,
Moody's or S&P at the time of the Plan's purchase and that the investing Plan
must be an "accredited investor" as defined in Rule 501(a)(1) of Regulation D
under the Securities Act. A fiduciary of a Plan contemplating purchasing an
Offered Certificate must make its own determination that the conditions set
forth in the Underwriters' Exemption will be satisfied with respect to the
certificates.
It is expected that the Underwriters' Exemption will apply to the
acquisition and holding of the Offered Certificates by Plans if the conditions
of the Underwriters' Exemption are met. A fiduciary of or other investor of Plan
assets contemplating purchasing an Offered Certificate must make its own
determination that the conditions described above will be satisfied for such
certificate. One requirement for eligibility of the Offered Certificates under
the Underwriters' Exemption is that all of the Mortgage Loans must have a
loan-to-value ratio of not more than 100%, based on the outstanding principal
balance of the Mortgage Loan and the fair market value of the mortgaged property
as of the closing date. It is possible that, if the fair market value of any of
the Mortgage Loans has declined substantially since origination, this
requirement may not be satisfied. This possibility is greater for the seasoned
Mortgage Loans than it is for the other Mortgage Loans.
Each beneficial owner of a Mezzanine Certificate or any interest
therein shall be deemed to have represented, by virtue of its acquisition or
holding of that certificate or interest therein, that either (i) it is not a
plan investor, (ii) it has acquired and is holding such Mezzanine Certificates
in reliance on the Underwriters' Exemption, and that it understands that there
are certain conditions to the availability of the Underwriters' Exemption,
including that the Mezzanine Certificates must be rated, at the time of
purchase, not lower than "BBB-" (or its equivalent) by Fitch Ratings, Moody's or
S&P, or (iii) (1) it is an insurance company, (2) the source of funds used to
acquire or hold the certificate or interest therein is an "insurance company
general account," as such term is defined in PTCE 95-60, and (3) the conditions
in Sections I and III of PTCE 95-60 have been satisfied.
If any Mezzanine Certificate or any interest therein is acquired or
held in violation of the conditions described in the preceding paragraph, the
next preceding permitted beneficial owner will be treated as the beneficial
owner of that Mezzanine Certificate, retroactive to the date of transfer to the
purported beneficial owner. Any purported beneficial owner whose acquisition or
holding of any such certificate or interest therein was effected in violation of
the conditions described in the preceding paragraph shall indemnify and hold
harmless the Depositor, the Trustee, the Servicer, the Master Servicer and the
Securities Administrator and the trust fund from and against any and all
liabilities, claims, costs or expenses incurred by those parties as a result of
that acquisition or holding.
Any fiduciary or other investor of Plan assets that proposes to acquire
or hold the Offered Certificates on behalf of or with Plan assets of any Plan
should consult with its counsel with respect to: (i) whether, with respect to
the Offered Certificates, the specific and general conditions and the other
requirements in the Underwriters' Exemption would be satisfied and (ii) the
potential applicability of the general fiduciary responsibility provisions of
ERISA and the prohibited transaction provisions of ERISA and Section 4975 of the
Internal Revenue Code to the proposed investment. SEE "ERISA CONSIDERATIONS" IN
THE PROSPECTUS.
The sale of any of the Offered Certificates to a Plan is in no respect
a representation by the Depositor or the related underwriter that an investment
in the Offered Certificates meets all relevant legal requirements relating to
investments by Plans generally or any particular Plan, or that an investment in
the Offered Certificates is appropriate for Plans generally or any particular
Plan.
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ANNEX I
GLOBAL CLEARANCE AND SETTLEMENT AND DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the Offered Certificates will
be offered globally (the "Global Securities") and will be available only in
book-entry form. Investors in the Global Securities may hold such Global
Securities through any of DTC, Clearstream or Euroclear. The Global Securities
will be tradable as home market instruments in both the European and U.S.
domestic markets. Initial settlement and all secondary trades will settle in
same-day funds.
Secondary market trading between investors holding Global Securities
through Clearstream and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositories of Clearstream and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be
subject to U.S. withholding taxes unless such holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede & Co. as nominee of DTC. Investors' interests in the Global
Securities will be represented through financial institutions acting on their
behalf as direct and indirect Participants in DTC. As a result, Clearstream and
Euroclear will hold positions on behalf of their participants through their
respective Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and sellers
accounts are located to ensure that settlement can be made on the desired value
date.
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TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
TRADING BETWEEN CLEARSTREAM AND/OR EUROCLEAR PARTICIPANTS. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PURCHASER. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
the actual number of days in such accrual period and a year assumed to consist
of 360 days. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the respective Depositary of the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Clearstream Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the Clearstream or Euroclear cash debt will be valued instead as
of the actual settlement date.
Clearstream Participants and Euroclear Participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of
credit to them, Clearstream Participants or Euroclear Participants can elect not
to preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream Participants or Euroclear
Participants purchasing Global Securities would incur overdraft charges for one
day, assuming they cleared the overdraft when the Global Securities were
credited to their accounts. However, interest on the Global Securities would
accrue from the value date. Therefore, in many cases the investment income on
the Global Securities earned during that one-day period may substantially reduce
or offset the amount of such overdraft charges, although this result will depend
on each Clearstream Participant's or Euroclear Participant's particular cost of
funds.
Since the settlement is taking place during New York business hours,
DTC Participants can employ their usual procedures for sending Global Securities
to the respective European Depositary for the benefit of Clearstream
Participants or Euroclear Participants. The sale proceeds will be available to
the DTC seller on the settlement date. Thus, to the DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING BETWEEN CLEARSTREAM OR EUROCLEAR SELLER AND DTC PURCHASER. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depository, to a DTC Participant. The seller will
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send instructions to Clearstream or Euroclear through a Clearstream Participant
or Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Clearstream Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream Participant's or Euroclear Participant's
account would be back-valued to the value date (which would be the preceding
day, when settlement occurred in New York). Should the Clearstream Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft incurred over
that one-day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that
purchase Global Securities from DTC Participants For deliver to Clearstream
Participants or Euroclear Participants should note that these trades would
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through Clearstream or Euroclear for one day (until the
purchase side of the day trade is reflected in their Clearstream or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Clearstream or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Clearstream Participant or
Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
EXEMPTION FOR NON-U.S. PERSONS (FORM W-8BEN). Beneficial owners of
Global Securities that are non-U.S. Persons can obtain a complete exemption from
the withholding tax by filing a signed Form W-8BEN (Certificate of Foreign
Status of Beneficial Owner for United States Tax Withholding). If the
information shown on Form W-8BEN changes, a new Form W-8BEN must be filed within
30 days of such change.
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EXEMPTION FOR NON-U.S. PERSONS WITH EFFECTIVELY CONNECTED INCOME (FORM
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income ineffectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States).
EXEMPTION OR REDUCED RATE FOR NON-U.S. PERSONS RESIDENT IN TREATY
COUNTRIES (FORM W-8BEN). Non-U.S. Persons that are Certificate Owners residing
in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax
Withholding). Form W-8BEN may be filed by the Certificate Owners or his agent.
EXEMPTION FOR U.S. PERSONS (FORM W-9). U.S. Persons can obtain a
complete exemption from the withholding tax by filing Form W-9 (Payers Request
for Taxpayer Identification Number and Certification).
U.S. FEDERAL INCOME TAX REPORTING PROCEDURE. The Certificate Owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds (the clearing agency, in the case of persons holding directly on
the books of the clearing agency). Form W-8BEN and Form W-8ECI are effective
until the third succeeding calendar year from the date such form is signed.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity treated as a corporation
or partnership for United States federal income tax purposes organized in or
under the laws of the United States or any state thereof or the District of
Columbia (unless, in the case of a partnership, Treasury regulations provide
otherwise), (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in Treasury regulations, certain trusts in
existence on August 20,1996, and treated as United States persons prior to such
date, that elect to continue to be treated as United States persons will also be
a U.S. Person. This summary does not deal with all aspects of U.S. Federal
income tax withholding that may be relevant to foreign holders of the Global
Securities. Investors are advised to consult their own tax advisors for specific
tax advice concerning their holding and disposing of the Global Securities.
I-4
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
ACE SECURITIES CORP.,
DEPOSITOR
THE TRUST FUNDS:
Each trust fund will be established to hold assets transferred to it by
ACE Securities Corp. The assets in each trust fund will generally consist of one
or more of the following:
o mortgage loans secured by one- to four-family residential
properties;
o unsecured home improvement loans;
o manufactured housing installment sale contracts;
o mortgage pass-through securities issued or guaranteed by Ginnie
Mae, Fannie Mae, or Freddie Mac; or
o previously issued asset-backed or mortgage-backed securities backed
by mortgage loans secured by residential properties or
participations in those types of loans.
The assets in your trust fund are specified in the prospectus
supplement for that particular trust fund, while the types of assets that may be
included in a trust fund, whether or not in your trust fund, are described in
greater detail in this prospectus.
THE SECURITIES:
ACE Securities Corp. will sell the securities pursuant to a prospectus
supplement. The securities will be grouped into one or more series, each having
is own distinct designation. Each series will be issued in one or more classes
and will evidence beneficial ownership of, or be secured by, the assets in the
trust fund that the series relates to. A prospectus supplement for a series will
specify all of the terms of the series and of each of the classes in the series.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is November 5, 2003.
TABLE OF CONTENTS
DESCRIPTION OF THE TRUST FUNDS.................................................3
USE OF PROCEEDS...............................................................17
YIELD CONSIDERATIONS..........................................................17
THE DEPOSITOR.................................................................24
DESCRIPTION OF THE SECURITIES.................................................24
DESCRIPTION OF THE AGREEMENTS.................................................39
DESCRIPTION OF CREDIT SUPPORT.................................................63
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.......................................66
CERTAIN LEGAL ASPECTS OF THE CONTRACTS........................................80
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS....................................84
STATE AND OTHER TAX CONSIDERATIONS...........................................127
ERISA CONSIDERATIONS.........................................................127
LEGAL INVESTMENT.............................................................135
METHODS OF DISTRIBUTION......................................................137
ADDITIONAL INFORMATION.......................................................138
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..............................138
LEGAL MATTERS................................................................139
FINANCIAL INFORMATION........................................................139
RATING ....................................................................139
INDEX OF DEFINED TERMS.......................................................140
2
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each trust fund (the "Assets") will include some
or all of the following types of assets:
o mortgage loans on residential properties, which may include Home
Equity Loans, home improvement contracts and Land Sale Contracts
(each as defined in this prospectus);
o home improvement installment sales contracts or installment loans
that are unsecured called unsecured home improvement Loans;
o manufactured housing installment sale contracts or installment loan
agreements referred to as contracts;
o any combination of "fully modified pass-through" mortgage-backed
certificates guaranteed by the Government National Mortgage
Association ("Ginnie Mae"), guaranteed mortgage pass-through
securities issued by Fannie Mae ("Fannie Mae") and mortgage
participation certificates issued by the Federal Home Loan Mortgage
Corporation ("Freddie Mac") (collectively, "Agency Securities");
o previously issued asset-backed certificates, collateralized
mortgage obligations or participation certificates (each, and
collectively, "Mortgage Securities") evidencing interests in, or
collateralized by, mortgage loans or Agency Securities; or
o a combination of mortgage loans, unsecured home improvement loans,
contracts, Agency Securities and/or Mortgage Securities.
The mortgage loans will not be guaranteed or insured by ACE Securities
Corp. or any of its affiliates. The mortgage loans will be guaranteed or insured
by a governmental agency or instrumentality or other person only if and to the
extent expressly provided in the prospectus supplement. The depositor will
select each Asset to include in a trust fund from among those it has purchased,
either directly or indirectly, from a prior holder (an "Asset Seller"), which
may be an affiliate of the depositor and which prior holder may or may not be
the originator of that mortgage loan.
The Assets included in the trust fund for your series may be subject to
various types of payment provisions:
o "Level Payment Assets," which may provide for the payment of
interest, and full repayment of principal, in level monthly
payments with a fixed rate of interest computed on their declining
principal balances;
o "Adjustable Rate Assets," which may provide for periodic
adjustments to their rates of interest to equal the sum of a fixed
margin and an index;
o "Buy Down Assets," which are Assets for which funds have been
provided by someone other than the related borrowers to reduce the
borrowers' monthly payments during the early period after
origination of those Assets;
o "Increasing Payment Assets," as described below;
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o "Interest Reduction Assets," which provide for the one-time
reduction of the interest rate payable on these Assets;
o "GEM Assets," which provide for (1) monthly payments during the
first year after origination that are at least sufficient to pay
interest due on these Assets, and (2) an increase in those monthly
payments in later years at a predetermined rate resulting in full
repayment over a shorter term than the initial amortization terms
of those Assets;
o "GPM Assets," which allow for payments during a portion of their
terms which are or may be less than the amount of interest due on
their unpaid principal balances, and this unpaid interest will be
added to the principal balances of those Assets and will be paid,
together with interest on the unpaid interest, in later years;
o "Step-up Rate Assets" which provide for interest rates that
increase over time;
o "Balloon Payment Assets;"
o "Convertible Assets" which are Adjustable Rate Assets subject to
provisions pursuant to which, subject to limitations, the related
borrowers may exercise an option to convert the adjustable interest
rate to a fixed interest rate; and
o "Bi-weekly Assets," which provide for payments to be made by
borrowers on a bi-weekly basis.
An "Increasing Payment Asset" is an Asset that provides for monthly
payments that are fixed for an initial period to be specified in the prospectus
supplement and which increase thereafter (at a predetermined rate expressed as a
percentage of the monthly payment during the preceding payment period, subject
to any caps on the amount of any single monthly payment increase) for a period
to be specified in the prospectus supplement from the date of origination, after
which the monthly payment is fixed at a level-payment amount so as to fully
amortize the Asset over its remaining term to maturity. The scheduled monthly
payment for an Increasing Payment Asset is the total amount required to be paid
each month in accordance with its terms and equals the sum of (1) the borrower's
monthly payments referred to in the preceding sentence and (2) payments made by
the respective servicers pursuant to buy-down or subsidy agreements. The
borrower's initial monthly payments for each Increasing Payment Asset are set at
the level-payment amount that would apply to an otherwise identical Level
Payment Asset having an interest rate some number of percentage points below the
Asset Rate of that Increasing Payment Asset. The borrower's monthly payments on
each Increasing Payment Asset, together with any payments made on the Increasing
Payment Asset by the related servicers pursuant to buy-down or subsidy
agreements, will in all cases be sufficient to allow payment of accrued interest
on the Increasing Payment Asset at the related interest rate, without negative
amortization. A borrower's monthly payments on an Increasing Payment Asset may,
however, not be sufficient to result in any reduction of the principal balance
of that Asset until after the period when those payments may be increased.
The Notes or Certificates, as applicable, will be entitled to payment
only from the assets of the related trust fund and will not be entitled to
payments from the assets of any other trust fund established by the depositor.
The assets of a trust fund may consist of certificates representing beneficial
ownership interests in, or indebtedness of, another trust fund that contains the
Assets, if specified in the prospectus supplement.
4
MORTGAGE LOANS
GENERAL
Each mortgage loan will generally be secured by a lien on (1) a one- to
four-family residential property (including a manufactured home) or a security
interest in shares issued by a cooperative housing corporation (a "Single Family
Property") or (2) a primarily residential property that consists of five or more
residential dwelling units, referred to as a multifamily property, which may
include limited retail, office or other commercial space ("Multi Family
Property" and together with Single Family Property, "Mortgaged Properties"). The
mortgage loans will be secured by first and/or junior mortgages or deeds of
trust or other similar security instruments creating a first or junior lien on
Mortgaged Property.
The Mortgaged Properties may also include:
o Apartment buildings owned by cooperative housing corporations
("Cooperatives"); and
o Leasehold interests in properties, the title to which is held by
third party lessors. The term of these leaseholds will exceed the
term of the related mortgage note by at least five years or some
other time period specified in the prospectus supplement.
The principal balance of mortgage loans secured by Mortgaged Property
consisting of Multi Family Property or apartment buildings owned by
Cooperatives shall not exceed 5% of the principal balance of all
mortgage loans conveyed to the trust fund.
The mortgage loans may include:
o Closed-end and/or revolving home equity loans or balances of these
home equity loans ("Home Equity Loans");
o Secured home improvement installment sales contracts and secured
installment loan agreements, known as home improvement contracts;
and
o Mortgage loans evidenced by contracts ("Land Sale Contracts") for
the sale of properties pursuant to which the borrower promises to
pay the amount due on the mortgage loans to the holder of the Land
Sale Contract with fee title to the related property held by that
holder until the borrower has made all of the payments required
pursuant to that Land Sale Contract, at which time fee title is
conveyed to the borrower.
The originator of each mortgage loan will have been a person other than
the depositor. The prospectus supplement will indicate if any originator is an
affiliate of the depositor. The mortgage loans will be evidenced by mortgage
notes secured by mortgages, deeds of trust or other security instruments (the
"Mortgages") creating a lien on the Mortgaged Properties. The Mortgaged
Properties will be located in any one of the fifty states, the District of
Columbia, Guam, Puerto Rico or any other territory of the United States. If
provided in the prospectus supplement, the mortgage loans may include loans
insured by the Federal Housing Administration (the "FHA") or partially
guaranteed by the Veteran's Administration (the "VA"). See "--FHA Loans and VA
Loans" below.
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LOAN-TO-VALUE RATIO
The "Loan-to-Value Ratio" of a mortgage loan at any particular time is
the ratio (expressed as a percentage) of the then outstanding principal balance
of the mortgage loan to the Value of the related Mortgaged Property. The "Value"
of a Mortgaged Property, other than for Refinance Loans, is generally the lesser
of (a) the appraised value determined in an appraisal obtained by the originator
at origination of that loan and (b) the sales price for that property.
"Refinance Loans" are loans made to refinance existing loans. Unless otherwise
specified in the prospectus supplement, the Value of the Mortgaged Property
securing a Refinance Loan is the appraised value of the Mortgaged Property
determined in an appraisal obtained at the time of origination of the Refinance
Loan. The value of a Mortgaged Property as of the date of initial issuance of
the related series may be less than the Value at origination and will fluctuate
from time to time based upon changes in economic conditions and the real estate
market.
PRIMARY MORTGAGE INSURANCE
Except in the case of high loan-to-value loans and as otherwise
specified in the related prospectus supplement, each mortgage loan having a
loan-to-value ratio at origination in excess of 80%, is required to be covered
by a primary mortgage guaranty insurance policy insuring against default on such
mortgage loan as to at least the principal amount thereof exceeding 75% of the
value of the mortgaged property at origination of the mortgage loan. This
insurance must remain in force at least until the mortgage loan amortizes to a
level that would produce a loan-to-value ratio lower than 80%. See "--Primary
Mortgage Insurance Policies".
MORTGAGE LOAN INFORMATION IN THE PROSPECTUS SUPPLEMENTS
Your prospectus supplement will contain information, as of the dates
specified in that prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to the mortgage loans,
including:
o the total outstanding principal balance and the largest, smallest
and average outstanding principal balance of the mortgage loans as
of, unless otherwise specified in that prospectus supplement, the
close of business on the first day of the month of formation of the
related trust fund (the "Cut-off Date");
o the type of property securing the mortgage loans;
o the weighted average (by principal balance) of the original and
remaining terms to maturity of the mortgage loans;
o the range of maturity dates of the mortgage loans;
o the range of the Loan-to-Value Ratios at origination of the
mortgage loans;
o the mortgage rates or range of mortgage rates and the weighted
average mortgage rate borne by the mortgage loans;
o the state or states in which most of the Mortgaged Properties are
located;
o information regarding the prepayment provisions, if any, of the
mortgage loans;
o for mortgage loans with adjustable mortgage rates ("ARM Loans"),
the index, the frequency of the adjustment dates, the range of
margins added to the index, and the
6
maximum mortgage rate or monthly payment variation at the time of
any adjustment of and over the life of the ARM Loan;
o information regarding the payment characteristics of the mortgage
loans, including balloon payment and other amortization provisions;
o the number of mortgage loans that are delinquent and the number of
days or ranges of the number of days those mortgage loans are
delinquent; and
o the material underwriting standards used for the mortgage loans.
If specific information respecting the mortgage loans is unknown to the
depositor at the time the Notes or Certificates, as applicable, are initially
offered, more general information of the nature described above will be provided
in the prospectus supplement, and specific information will be set forth in a
report that will be available to purchasers of the related Notes or
Certificates, as applicable, at or before the initial issuance of that Security
and will be filed as part of a Current Report on Form 8-K with the Securities
and Exchange Commission (the "Commission") within fifteen days after that
initial issuance. The characteristics of the mortgage loans included in a trust
fund will not vary by more than five percent (by total principal balance as of
the Cut-off Date) from the characteristics of the mortgage loans that are
described in the prospectus supplement.
The prospectus supplement will specify whether the mortgage loans
include (1) Home Equity Loans, which may be secured by Mortgages that are junior
to other liens on the related Mortgaged Property and/or (2) home improvement
contracts originated by a home improvement contractor and secured by a mortgage
on the related mortgaged property that is junior to other liens on the mortgaged
property. The home improvements purchased with the home improvement contracts
typically include replacement windows, house siding, roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods, solar heating panels,
patios, decks, room additions and garages. The prospectus supplement will
specify whether the home improvement contracts are FHA loans and, if so, the
limitations on any FHA insurance. In addition, the prospectus supplement will
specify whether the mortgage loans contain some mortgage loans evidenced by Land
Sale Contracts.
PAYMENT PROVISIONS OF THE MORTGAGE LOANS
All of the mortgage loans will provide for payments of principal,
interest or both, on due dates that occur monthly, quarterly or semi-annually or
at some other interval as is specified in the prospectus supplement or for
payments in another manner described in the prospectus supplement. Each mortgage
loan may provide for no accrual of interest or for accrual of interest on the
mortgage loan at a mortgage rate that is fixed over its term or that adjusts
from time to time, or that may be converted from an adjustable to a fixed
mortgage rate or a different adjustable mortgage rate, or from a fixed to an
adjustable mortgage rate, from time to time pursuant to an election or as
otherwise specified in the related mortgage note, in each case as described in
the prospectus supplement. Each mortgage loan may provide for scheduled payments
to maturity or payments that adjust from time to time to accommodate changes in
the mortgage rate or to reflect the occurrence of particular events or that
adjust on the basis of other methodologies, and may provide for negative
amortization or accelerated amortization, in each case as described in the
prospectus supplement. Each mortgage loan may be fully amortizing or require a
balloon payment due on its stated maturity date, in each case as described in
the prospectus supplement. Each mortgage loan may contain prohibitions on
prepayment (a "Lockout Period" and, the date of expiration thereof, a "Lock-out
Date") or require payment of a premium or a yield maintenance penalty (a
"Prepayment Premium") in connection with a prepayment, in each case as described
in the prospectus supplement. If the holders of any class or classes of Offered
Notes or Offered Certificates, as applicable, are entitled to all or a portion
of any Prepayment Premiums collected from the mortgage loans, the prospectus
supplement will specify the method or methods by which any of these amounts will
be allocated. See "--Assets" above.
7
REVOLVING CREDIT LINE LOANS
As more fully described in the prospectus supplement, the mortgage
loans may consist, in whole or in part, of revolving Home Equity Loans or
balances of these Home Equity Loans ("Revolving Credit Line Loans"). Interest on
each Revolving Credit Line Loan, excluding introductory rates offered from time
to time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of that loan. From time to time
before the expiration of the related draw period specified in a Revolving Credit
Line Loan, principal amounts on that Revolving Credit Line Loan may be drawn
down (up to a maximum amount as set forth in the prospectus supplement) or
repaid. If specified in the prospectus supplement, new draws by borrowers under
the Revolving Credit Line Loans will automatically become part of the trust fund
described in the prospectus supplement. As a result, the total balance of the
Revolving Credit Line Loans will fluctuate from day to day as new draws by
borrowers are added to the trust fund and principal payments are applied to
those balances and those amounts will usually differ each day, as more
specifically described in the prospectus supplement. Under some circumstances,
under a Revolving Credit Line Loan, a borrower may, during the related draw
period, choose an interest only payment option, during which the borrower is
obligated to pay only the amount of interest that accrues on the loan during the
billing cycle, and may also elect to pay all or a portion of the principal. An
interest only payment option may terminate at the end of the related draw
period, after which the borrower must begin paying at least a minimum monthly
portion of the average outstanding principal balance of the loan.
UNSECURED HOME IMPROVEMENT LOANS
The unsecured home improvement loans may consist of conventional
unsecured home improvement loans, unsecured installment loans and unsecured home
improvement loans that are FHA loans. Except as otherwise described in the
prospectus supplement, the unsecured home improvement loans will be fully
amortizing and will bear interest at a fixed or variable annual percentage rate.
UNSECURED HOME IMPROVEMENT LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement will contain information, as of the dates
specified in the prospectus supplement and to the extent then applicable and
specifically known to the depositor, with respect to any unsecured home
improvement loans, including:
o the total outstanding principal balance and the largest, smallest
and average outstanding principal balance of the unsecured home
improvement loans as of the applicable cut-off date;
o the weighted average, by principal balance, of the original and
remaining terms to maturity of the unsecured home improvement
loans;
o the earliest and latest origination date and maturity date of the
unsecured home improvements loans;
o the interest rates or range of interest rates and the weighted
average interest rates borne by the unsecured home improvement
loans;
o the state or states in which most of the unsecured home improvement
loans were originated.
o information regarding the prepayment provisions, if any, of the
unsecured home improvement loans;
8
o with respect to the unsecured home improvement loans with
adjustable interest rates, called ARM unsecured home improvement
loans, the index, the frequency of the adjustment dates, the range
of margins added to the index, and the maximum interest rate or
monthly payment variation at the time of any adjustment thereof and
over the life of the ARM unsecured home improvement loan;
o information regarding the payment characteristics of the unsecured
home improvement loans;
o the number of unsecured home improvement loans that are delinquent
and the number of days or ranges of the number of days that
unsecured home improvement loans are delinquent; and
o the material underwriting standards used for the unsecured home
improvement loans.
If specific information respecting the unsecured home improvement loans
is unknown to the depositor at the time Notes or Certificates, as applicable,
are initially offered, more general information of the nature described above
will be provided in the prospectus supplement, and specific information will be
set forth in a report that will be available to purchasers of the related Notes
or Certificates, as applicable, at or before the initial issuance thereof and
will be filed as part of a Current Report on Form 8-K with the Commission within
fifteen days after the related initial issuance. The characteristics of the
unsecured home improvement loans included in a trust fund will not vary by more
than five percent, by total principal balance as of the cut-off date, from the
characteristics thereof that are described in the prospectus supplement.
CONTRACTS
GENERAL
To the extent provided in the prospectus supplement, each contract will
be secured by a security interest in a new or used manufactured home, called a
Manufactured Home. The contracts may include contracts that are FHA loans. The
method of computing the Loan-to-Value Ratio of a contract will be described in
the prospectus supplement.
CONTRACT INFORMATION IN PROSPECTUS SUPPLEMENTS
Each prospectus supplement relating to a trust fund whose assets
include a substantial proportion of contracts will contain certain information,
as of the dates specified in that prospectus supplement and to the extent then
applicable and specifically known to the depositor, with respect to any
contracts, including:
o the total outstanding principal balance and the largest, smallest
and average outstanding principal balance of the contracts as of
the applicable cut-off date;
o whether the manufactured homes were new or used as of the
origination of the related contracts;
o the weighted average, by principal balance, of the original and
remaining terms to maturity of the contracts;
o the range of maturity dates of the contracts;
o the range of the Loan-to-Value Ratios at origination of the
contracts;
9
o the annual percentage rate on each contract, called a contract
rate, or range of contract rates and the weighted average contract
rate borne by the contracts;
o the state or states in which most of the manufactured homes are
located at origination;
o information regarding the prepayment provisions, if any, of the
contracts;
o for contracts with adjustable contract rates, referred to as ARM
contracts, the index, the frequency of the adjustment dates, and
the maximum contract rate or monthly payment variation at the time
of any adjustment thereof and over the life of the ARM contract;
o the number of contracts that are delinquent and the number of days
or ranges of the number of days those contracts are delinquent;
o information regarding the payment characteristics of the contracts;
and
o the material underwriting standards used for the contracts.
If specific information respecting the contracts is unknown to the
depositor at the time the Notes or Certificates, as applicable, are initially
offered, more general information of the nature described above will be provided
in the prospectus supplement, and specific information will be set forth in a
report that will be available to purchasers of the related Notes or
Certificates, as applicable, at or before the initial issuance thereof and will
be filed as part of a Current Report on Form 8-K with the Commission within
fifteen days after the related initial issuance. The characteristics of the
contracts included in a trust fund will not vary by more than five percent (by
total principal balance as of the cut-off date) from the characteristics thereof
that are described in the prospectus supplement.
The information described above regarding the contracts in a trust fund
may be presented in the prospectus supplement in combination with similar
information regarding the mortgage loans in the trust fund.
PAYMENT PROVISIONS OF THE CONTRACTS
All of the contracts will provide for payments of principal, interest
or both, on due dates that occur monthly or at some other interval as is
specified in the prospectus supplement or for payments in another manner
described in the prospectus supplement. Each contract may provide for no accrual
of interest or for accrual of interest thereon at a contract rate that is fixed
over its term or that adjusts from time to time, or as otherwise specified in
the prospectus supplement. Each contract may provide for scheduled payments to
maturity or payments that adjust from time to time to accommodate changes in the
contract rate as otherwise described in the prospectus supplement.
AGENCY SECURITIES
The Agency Securities will consist of any combination of Ginnie Mae
certificates, Fannie Mae certificates and Freddie Mac certificates, which may
include Stripped Agency Securities, as described below.
GINNIE MAE
Ginnie Mae is a wholly-owned corporate instrumentality of the United
States within the Department of Housing and Urban Development. Section 306(g) of
Title III of the Housing Act authorizes Ginnie Mae to guarantee the timely
payment of the principal of and interest on certificates
10
that are based on and backed by a pool of FHA loans, VA loans or by pools of
other eligible residential loans.
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts that may be
required to be paid under any guaranty under this subsection." To meet its
obligations under that guaranty, Ginnie Mae is authorized, under Section 306(d)
of the National Housing Act of 1934 (the "Housing Act"), to borrow from the
United States Treasury with no limitations as to amount, to perform its
obligations under its guarantee.
GINNIE MAE CERTIFICATES
Each Ginnie Mae certificate will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by an issuer approved by Ginnie
Mae or Fannie Mae as a seller- servicer of FHA loans or VA loans, except as
described below regarding Stripped Agency Securities (as defined below). The
loans underlying Ginnie Mae certificates may consist of FHA loans, VA loans and
other loans eligible for inclusion in loan pools underlying Ginnie Mae
certificates. Ginnie Mae certificates may be issued under either or both of the
Ginnie Mae I program and the Ginnie Mae II program, as described in the
prospectus supplement. If the trust fund includes Ginnie Mae certificates, your
prospectus supplement will include any material additional information regarding
the Ginnie Mae guaranty program, the characteristics of the pool underlying
those Ginnie Mae certificates, the servicing of the related pool, the payment of
principal and interest on Ginnie Mae certificates and other relevant matters
regarding the Ginnie Mae certificates.
Except as otherwise specified in the prospectus supplement or as
described below with respect to Stripped Agency Securities, each Ginnie Mae
certificate will provide for the payment, by or on behalf of the issuer, to the
registered holder of that Ginnie Mae certificate of monthly payments of
principal and interest equal to the holder's proportionate interest in the total
amount of the monthly principal and interest payments on each related FHA loan
or VA loan, minus servicing and guaranty fees totaling the excess of the
interest on that FHA loan or VA loan over the Ginnie Mae certificates' interest
rate. In addition, each payment to a holder of a Ginnie Mae certificate will
include proportionate pass-through payments to that holder of any prepayments of
principal of the FHA loans or VA loans underlying the Ginnie Mae certificate and
the holder's proportionate interest in the remaining principal balance in the
event of a foreclosure or other disposition of any related FHA loan or VA loan.
The Ginnie Mae certificates do not constitute a liability of, or
evidence any recourse against, the issuer of the Ginnie Mae certificates, the
depositor or any affiliates of the depositor, and the only recourse of a
registered holder (for example, the trustee) is to enforce the guaranty of
Ginnie Mae.
Ginnie Mae will have approved the issuance of each of the Ginnie Mae
certificates included in a trust fund in accordance with a guaranty agreement or
contract between Ginnie Mae and the issuer of the Ginnie Mae certificates.
Pursuant to that agreement, that issuer, in its capacity as servicer, is
required to perform customary functions of a servicer of FHA loans and VA loans,
including collecting payments from borrowers and remitting those collections to
the registered holder, maintaining escrow and impoundment accounts of borrowers
for payments of taxes, insurance and other items required to be paid by the
borrower, maintaining primary hazard insurance, and advancing from its own funds
to make timely payments of all amounts due on the Ginnie Mae certificate, even
if the payments received by that issuer on the loans backing the Ginnie Mae
certificate are less than the amounts due. If the issuer is unable to make
payments on a Ginnie Mae certificate as they become due, it must promptly notify
Ginnie Mae and request Ginnie Mae to make that payment. Upon that notification
and request, Ginnie Mae will make those payments directly to the registered
holder of the Ginnie Mae certificate. In the event no payment is made by the
issuer and the issuer fails to notify and request Ginnie Mae to make that
payment, the registered holder of the Ginnie Mae certificate has recourse
against only Ginnie Mae to obtain that payment. The trustee or its nominee, as
registered
11
holder of the Ginnie Mae certificates included in a trust fund, is entitled to
proceed directly against Ginnie Mae under the terms of the guaranty agreement or
contract relating to the Ginnie Mae certificates for any amounts that are unpaid
when due under each Ginnie Mae certificate.
The Ginnie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above so long as the
Ginnie Mae certificates and underlying residential loans meet the criteria of
the rating agency or agencies. The Ginnie Mae certificates and underlying
residential loans will be described in the prospectus supplement.
FANNIE MAE
Fannie Mae is a federally chartered and stockholder-owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended (the "Charter Act"). Fannie Mae was originally established in
1938 as a United States government agency to provide supplemental liquidity to
the mortgage market and was transformed into a stockholder- owned and privately
managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market by purchasing mortgage
loans from lenders. Fannie Mae acquires funds to purchase loans from many
capital market investors, thus expanding the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas. In addition, Fannie Mae issues
mortgage-backed securities primarily in exchange for pools of mortgage loans
from lenders. Fannie Mae receives fees for its guaranty of timely payment of
principal and interest on its mortgage-backed securities.
FANNIE MAE CERTIFICATES
Fannie Mae certificates are Guaranteed Mortgage Pass-Through
Certificates typically issued pursuant to a prospectus that is periodically
revised by Fannie Mae. Fannie Mae certificates represent fractional undivided
interests in a pool of mortgage loans formed by Fannie Mae. Each mortgage loan
must meet the applicable standards of the Fannie Mae purchase program. Mortgage
loans comprising a pool are either provided by Fannie Mae from its own portfolio
or purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae certificates included in a trust fund will
consist of conventional mortgage loans, FHA loans or VA loans. If the trust fund
includes Fannie Mae certificates, your prospectus supplement will include any
material additional information regarding the Fannie Mae program, the
characteristics of the pool underlying the Fannie Mae certificates, the
servicing of the related pool, payment of principal and interest on the Fannie
Mae certificates and other relevant matters about the Fannie Mae certificates.
Except as described below with respect to Stripped Agency Securities,
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate that
it will distribute amounts representing that holder's proportionate share of
scheduled principal and interest at the applicable interest rate provided for by
that Fannie Mae certificate on the underlying mortgage loans, whether or not
received, and that holder's proportionate share of the full principal amount of
any prepayment or foreclosed or other finally liquidated mortgage loan, whether
or not the related principal amount is actually recovered.
The obligations of Fannie Mae under its guarantees are obligations
solely of Fannie Mae and are not backed by, nor entitled to, the full faith and
credit of the United States. If Fannie Mae were unable to satisfy those
obligations, distributions to the holders of Fannie Mae certificates would
consist solely of payments and other recoveries on the underlying loans and,
accordingly, monthly distributions to the holders of Fannie Mae certificates
would be affected by delinquent payments and defaults on those loans.
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Fannie Mae certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae certificates backed by
pools containing graduated payment mortgage loans or multifamily loans) are
available in book-entry form only. For a Fannie Mae certificate issued in
book-entry form, distributions on the Fannie Mae certificate will be made by
wire, and for a fully registered Fannie Mae certificate, distributions will be
made by check.
The Fannie Mae certificates included in a trust fund may have other
characteristics and terms, different from those described above, as long as the
Fannie Mae certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Certificates. The Fannie Mae certificates
and underlying mortgage loans will be described in the prospectus supplement.
FREDDIE MAC
Freddie Mac is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"Freddie Mac Act"). Freddie Mac was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. It seeks to provide an enhanced degree of liquidity for residential
mortgage investments primarily by assisting in the development of secondary
markets for conventional mortgages. The principal activity of Freddie Mac
currently consists of the purchase of first lien, conventional residential
mortgage loans or participation interests in those mortgage loans and the resale
of the mortgage loans so purchased in the form of mortgage securities, primarily
Freddie Mac certificates. Freddie Mac is confined to purchasing, so far as
practicable, mortgage loans and participation interests in mortgage loans which
it deems to be of the quality, type and class as to meet generally the purchase
standards imposed by private institutional mortgage investors.
FREDDIE MAC CERTIFICATES
Each Freddie Mac certificate represents an undivided interest in a pool
of residential loans that may consist of first lien conventional residential
loans, FHA loans or VA loans (the "Freddie Mac Certificate Group"). Each of
these mortgage loans must meet the applicable standards set forth in the Freddie
Mac Act. A Freddie Mac Certificate Group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another Freddie Mac Certificate Group. If the trust
fund includes Freddie Mac certificates, your prospectus supplement will include
any material additional information regarding the Freddie Mac guaranty program,
the characteristics of the pool underlying that Freddie Mac certificate, the
servicing of the related pool, payment of principal and interest on the Freddie
Mac certificate and any other relevant matters about the Freddie Mac
certificates.
Except as described below with respect to Stripped Agency Securities,
Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest on the underlying mortgage loans to the extent of
the applicable interest rate on the registered holder's pro rata share of the
unpaid principal balance outstanding on the underlying mortgage loans in the
Freddie Mac Certificate Group represented by that Freddie Mac certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a Freddie Mac certificate collection by that holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
that holder's pro rata share of the principal, but does not, except if and to
the extent specified in the prospectus supplement, guarantee the timely payment
of scheduled principal. Pursuant to its guarantees, Freddie Mac also guarantees
ultimate collection of scheduled principal payments, prepayments of principal
and the remaining principal balance in the event of a foreclosure or other
disposition of a mortgage loan. Freddie Mac may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following the latest of
(1) foreclosure sale;
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(2) payment of the claim by any mortgage insurer; and
(3) the expiration of any right of redemption, but in any
event no later than one year after demand has been made upon the
borrower for accelerated payment of principal.
In taking actions regarding the collection of principal after default
on the mortgage loans underlying Freddie Mac certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
servicing judgment for the mortgage loans in the same manner as for mortgage
loans that it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each borrower, and Freddie Mac has not adopted
servicing standards that require that the demand be made within any specified
period.
Freddie Mac certificates are not guaranteed by the United States or by
any Federal Home Loan Bank and do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of Freddie Mac
under its guarantee are obligations solely of Freddie Mac and are not backed by,
nor entitled to, the full faith and credit of the United States. If Freddie Mac
were unable to satisfy those obligations, distributions to holders of Freddie
Mac certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on those mortgage loans.
The Freddie Mac certificates included in a trust fund may have other
characteristics and terms, different from those described above, so long as the
Freddie Mac certificates and underlying mortgage loans meet the criteria of the
rating agency or agencies rating the Notes or Certificates, as applicable. The
Freddie Mac certificates and underlying mortgage loans will be described in the
prospectus supplement.
STRIPPED AGENCY SECURITIES
The Ginnie Mae certificates, Fannie Mae certificates or Freddie Mac
certificates may be issued in the form of certificates ("Stripped Agency
Securities") that represent an undivided interest in all or part of either the
principal distributions (but not the interest distributions) or the interest
distributions (but not the principal distributions), or in some specified
portion of the principal or interest distributions (but not all of those
distributions), on an underlying pool of mortgage loans or other Ginnie Mae
certificates, Fannie Mae certificates or Freddie Mac certificates. Ginnie Mae,
Fannie Mae or Freddie Mac, as applicable, will guarantee each Stripped Agency
Security to the same extent as that entity guarantees the underlying securities
backing the Stripped Agency Securities or to the extent described above for a
Stripped Agency Security backed by a pool of mortgage loans, unless otherwise
specified in the prospectus supplement. If the trust fund includes Stripped
Agency Securities, your prospectus supplement will include any material
additional information regarding the characteristics of the assets underlying
the Stripped Agency Securities, the payments of principal and interest on the
Stripped Agency Securities and other relevant matters about the Stripped Agency
Securities.
MORTGAGE SECURITIES
The Mortgage Securities will represent beneficial interests in loans of
the type that would otherwise be eligible to be mortgage loans, unsecured home
improvement loans, contract or Agency Securities, or collateralized obligations
secured by mortgage loans, unsecured home improvement loans, contract or Agency
Securities. The Mortgage Securities will have been
(1) issued by an entity other than the depositor or its
affiliates;
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(2) acquired in bona fide secondary market transactions from
persons other than the issuer of the Mortgage Securities or its
affiliates; and
(3) (a) offered and distributed to the public pursuant to an
effective registration statement or (b) purchased in a transaction not
involving any public offering from a person who is not an affiliate of
the issuer of those securities at the time of sale (nor an affiliate of
the issuer at any time during the preceding three months); provided a
period of two years elapsed since the later of the date the securities
were acquired from the issuer.
Although individual Underlying Loans may be insured or guaranteed by
the United States or an agency or instrumentality of the United States, they
need not be, and Mortgage Securities themselves will not be so insured or
guaranteed. Except as otherwise set forth in the prospectus supplement, Mortgage
Securities will generally be similar to Notes or Certificates, as applicable,
offered under this prospectus.
The prospectus supplement for the Notes or Certificates, as applicable,
of each series evidencing interests in a trust fund including Mortgage
Securities will include a description of the Mortgage Securities and any related
credit enhancement, and the related mortgage loans, unsecured home improvement
loans, contracts, or Agency Securities will be described together with any other
mortgage loans or Agency Securities included in the trust fund of that series.
As used in this prospectus, the terms "mortgage loans," unsecured home
improvement loans, contracts, include the mortgage loans, unsecured home
improvement loans, contracts, as applicable, underlying the Mortgage Securities
in your trust fund. References in this prospectus to advances to be made and
other actions to be taken by the master servicer in connection with the Assets
may include any advances made and other actions taken pursuant to the terms of
the applicable Mortgage Securities.
FHA LOANS AND VA LOANS
FHA loans will be insured by the FHA as authorized under the Housing
Act, and the United States Housing Act of 1937, as amended. One- to four-family
FHA loans will be insured under various FHA programs including the standard FHA
203-b programs to finance the acquisition of one- to four-family housing units
and the FHA 245 graduated payment mortgage program. The FHA loans generally
require a minimum down payment of approximately 5% of the original principal
amount of the FHA loan. No FHA loan may have an interest rate or original
principal balance exceeding the applicable FHA limits at the time of origination
of that FHA loan.
Mortgage loans, unsecured home improvement loans, contracts, that are
FHA loans are insured by the FHA (as described in the prospectus supplement, up
to an amount equal to 90% of the sum of the unpaid principal of the FHA loan, a
portion of the unpaid interest and other liquidation costs) pursuant to Title I
of the Housing Act.
There are two primary FHA insurance programs that are available for
multifamily loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow HUD to
insure multifamily loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for co-insurance of those loans made under Sections 221(d)(3) and
(d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of this type
of multifamily loan may be up to 40 years and the ratio of the loan amount to
property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure multifamily
loans made for the purchase or refinancing of existing apartment projects that
are at least three years old. Section 244 also provides for co-insurance of
mortgage loans made under Section 223(f). Under Section 223(f), the loan
proceeds cannot be used for substantial rehabilitation work, but repairs may be
made for up to, in general, the greater of 15% of the value of the project and a
dollar amount per apartment unit
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established from time to time by HUD. In general the loan term may not exceed 35
years and a loan-to-value ratio refinancing of a project.
VA loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits a veteran (or in some instances the spouse
of a veteran) to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchasers and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no VA loan will have an original principal
amount greater than five times the partial VA guarantee for that VA loan. The
maximum guarantee that may be issued by the VA under this program will be set
forth in the prospectus supplement.
PRE-FUNDING ACCOUNTS
To the extent provided in a prospectus supplement, a portion of the
proceeds of the issuance of Notes or Certificates, as applicable, may be
deposited into an account maintained with the trustee (a "Pre-Funding Account").
In that case, the depositor will be obligated to sell at a predetermined price
- -- and the trust fund for the related series of Notes or Certificates, as
applicable, will be obligated to purchase -- additional Assets (the "Subsequent
Assets") from time to time, and as frequently as daily, within the period (not
to exceed three months) specified in the prospectus supplement (the "Pre-Funding
Period") after the issuance of the Notes or Certificates, as applicable, having
a total principal balance approximately equal to the amount on deposit in the
Pre-Funding Account (the "Pre-Funded Amount") for that series on the date of its
issuance. The Pre-Funded Amount for a series will be specified in the prospectus
supplement, and will not in any case exceed 50% of the total initial Security
Balance of the related Notes or Certificates, as applicable. Any Subsequent
Assets will be required to satisfy specific eligibility criteria more fully set
forth in the prospectus supplement, which criteria will be consistent with the
eligibility criteria of the Assets initially included in the trust fund, subject
to those exceptions that are expressly stated in the prospectus supplement. In
addition, specific conditions must be satisfied before the Subsequent Assets are
transferred into the trust fund, for example, the delivery to the rating
agencies and to the trustee of any required opinions of counsel. See "ERISA
Considerations --Pre-Funding Accounts" for additional information regarding
Pre-Funding Accounts.
Except as set forth in the following sentence, the Pre-Funded Amount
will be used only to purchase Subsequent Assets. Any portion of the Pre-Funded
Amount remaining in the Pre-Funding Account at the end of the Pre-Funding Period
will be used to prepay one or more classes of Notes or Certificates, as
applicable, in the amounts and in the manner specified in the prospectus
supplement. In addition, if specified in the prospectus supplement, the
depositor may be required to deposit cash into an account maintained by the
trustee (the "Capitalized Interest Account") for the purpose of assuring the
availability of funds to pay interest on the Notes or Certificates, as
applicable, during the Pre-Funding Period. Any amount remaining in the
Capitalized Interest Account at the end of the Pre-Funding Period will be
remitted as specified in the prospectus supplement.
Amounts deposited in the Pre-Funding and Capitalized Interest Accounts
will be permitted to be invested, pending application, only in eligible
investments authorized by each applicable rating agency.
ACCOUNTS
Each trust fund will include one or more accounts, established and
maintained on behalf of the securityholders into which the person or persons
designated in the prospectus supplement will, to the extent described in this
prospectus and in the prospectus supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the trust
fund. This
16
type of account may be maintained as an interest bearing or a non-interest
bearing account, and funds held in that account may be held as cash or invested
in some short-term, investment grade obligations, in each case as described in
the prospectus supplement. See "Description of the Agreements--Material Terms of
the Pooling and Servicing Agreements and Underlying Servicing
Agreements--Collection Account and Related Accounts."
CREDIT SUPPORT
If so provided in the prospectus supplement, partial or full protection
against some defaults and losses on the Assets in the related trust fund may be
provided to one or more classes of Notes or Certificates, as applicable, in the
related series in the form of subordination of one or more other classes of
Notes or Certificates, as applicable, in that series or by one or more other
types of credit support, for example, a letter of credit, insurance policy,
guarantee, reserve fund or another type of credit support, or a combination of
these (any of these types of coverage for the Notes or Certificates, as
applicable, of any series, is referred to generally as "credit support"). The
amount and types of coverage, the identification of the entity providing the
coverage (if applicable) and related information for each type of credit
support, if any, will be described in the prospectus supplement for a series of
Notes or Certificates, as applicable. See "Description of Credit Support."
CASH FLOW AGREEMENTS
If so provided in the prospectus supplement, the trust fund may include
guaranteed investment contracts pursuant to which moneys held in the funds and
accounts established for the related series will be invested at a specified
rate. The trust fund may also include other agreements, for example, interest
rate swap agreements, interest rate cap or floor agreements, currency swap
agreements or similar agreements provided to reduce the effects of interest rate
or currency exchange rate fluctuations on the Assets or on one or more classes
of Notes or Certificates, as applicable. (Currency swap agreements might be
included in the trust fund if some or all of the Assets were denominated in a
non-United States currency.) The principal terms of any related guaranteed
investment contract or other agreement (any of these types of agreement, a "Cash
Flow Agreement"), including provisions relating to the timing, manner and amount
of payments under these documents and provisions relating to the termination of
these documents, will be described in the prospectus supplement for the related
series. In addition, the prospectus supplement will provide information with
respect to the borrower under any Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Notes or
Certificates, as applicable, will be applied by the depositor to the purchase of
Assets, or the repayment of the financing incurred in that purchase, and to pay
for some of the expenses incurred in connection with that purchase of Assets and
sale of Notes or Certificates, as applicable. The depositor expects to sell the
Notes or Certificates, as applicable, from time to time, but the timing and
amount of offerings of Notes or Certificates, as applicable, will depend on a
number of factors, including the volume of Assets acquired by the depositor,
prevailing interest rates, availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
securityholder, the Interest Rate of the Security, the receipt and timing of
receipt of distributions on the Security and the weighted average life of the
Assets in the related trust fund (which may be affected by prepayments,
defaults, liquidations or repurchases).
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INTEREST RATE
Notes or Certificates, as applicable, of any class within a series may
have fixed, variable or adjustable Interest Rates, which may or may not be based
upon the interest rates borne by the Assets in the related trust fund. The
prospectus supplement for any series will specify the Interest Rate for each
class of Notes or Certificates, as applicable, or, in the case of a variable or
adjustable Interest Rate, the method of determining the Interest Rate; the
effect, if any, of the prepayment of any Asset on the Interest Rate of one or
more classes of Notes or Certificates, as applicable; and whether the
distributions of interest on the Notes or Certificates, as applicable, of any
class will be dependent, in whole or in part, on the performance of any borrower
under a Cash Flow Agreement.
If specified in the prospectus supplement, the effective yield to
maturity to each holder of Notes or Certificates, as applicable, entitled to
payments of interest will be below that otherwise produced by the applicable
Interest Rate and purchase price of that Security because, while interest may
accrue on each Asset during a period (each, an "Accrual Period"), the
distribution of that interest will be made on a day that may be several days,
weeks or months following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Notes or Certificates, as applicable,
entitled to distributions of interest (or addition to the Security Balance of a
class of Accrual Securities) will be made by or on behalf of the trustee each
month on the date specified in the related prospectus supplement (each date, a
"Distribution Date"), and will include interest accrued during the Accrual
Period for that Distribution Date. As indicated above under "--Interest Rate,"
if the Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of those Notes or
Certificates, as applicable, may be lower than the yield that would result if
the Accrual Period ended on the day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Notes or Certificates, as applicable, will
be affected by the rate of principal payments on the Assets (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities), including principal prepayments
resulting from both voluntary prepayments by the borrowers and involuntary
liquidations. The rate at which principal prepayments occur will be affected by
a variety of factors, including the terms of the Assets (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities), the level of prevailing interest
rates, the availability of mortgage credit and economic, demographic,
geographic, tax, legal and other factors.
In general, however, if prevailing interest rates fall significantly
below the interest rates on the Assets in a particular trust fund (or, in the
case of Mortgage Securities and Agency Securities, the underlying assets related
to the Mortgage Securities and Agency Securities), those assets are likely to be
the subject of higher principal prepayments than if prevailing rates remain at
or above the rates borne by those assets. However, you should note that some
Assets (or, in the case of Mortgage Securities and Agency Securities, the
underlying assets related to the Mortgage Securities and Agency Securities) may
consist of loans with different interest rates. The rate of principal payment on
Mortgage Securities will also be affected by the allocation of principal
payments on the underlying assets among the Mortgage Securities or Agency
Securities and other Mortgage Securities or Agency Securities of the same
series. The rate of principal payments on the Assets in the related trust fund
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related to the Mortgage Securities and Agency Securities) is likely to be
affected by the existence of any Lock-out Periods and Prepayment Premium
provisions of the mortgage loans underlying or comprising those Assets, and by
the extent to which the servicer of any of these mortgage loans is able to
enforce these
18
provisions. Mortgage loans with a Lock-out Period or a Prepayment Premium
provision, to the extent enforceable, generally would be expected to experience
a lower rate of principal prepayments than otherwise identical mortgage loans
without those provisions, with shorter Lock-out Periods or with lower Prepayment
Premiums.
Because of the depreciating nature of manufactured housing, which
limits the possibilities for refinancing, and because the terms and principal
amounts of manufactured housing contracts are generally shorter and smaller than
the terms and principal amounts of mortgage loans secured by site-built homes,
changes in interest rates have a correspondingly small effect on the amount of
the monthly payments on mortgage loans secured by site-built homes.
Consequently, changes in interest rates may play a smaller role in prepayment
behavior of manufactured housing contracts than they do in the prepayment
behavior of loans secured by mortgage on site-built homes. Conversely, local
economic conditions and some of the other factors mentioned above may play a
larger role in the prepayment behavior of manufactured housing contracts than
they do in the prepayment behavior of loans secured by mortgages on site-built
homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related to the Mortgage Securities and Agency Securities), the actual yield to
maturity will be lower than that so calculated. Conversely, if the purchaser of
a Security offered at a premium calculates its anticipated yield to maturity
based on an assumed rate of distributions of principal that is slower than that
actually experienced on the Assets (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related to the Mortgage Securities and
Agency Securities), the actual yield to maturity will be lower than that so
calculated. In either case, if so provided in the prospectus supplement for a
series of Notes or Certificates, as applicable, the effect on yield on one or
more classes of the Notes or Certificates, as applicable, of that series of
prepayments of the Assets in the related trust fund may be mitigated or
exacerbated by any provisions for sequential or selective distribution of
principal to those classes.
When a full prepayment is made on a mortgage loan or a contract, the
borrower is charged interest on the principal amount of the mortgage loan or a
contract so prepaid for the number of days in the month actually elapsed up to
the date of the prepayment or some other period specified in the prospectus
supplement. Generally, the effect of prepayments in full will be to reduce the
amount of interest paid in the following month to holders of Notes or
Certificates, as applicable, entitled to payments of interest because interest
on the principal amount of any mortgage loan or a contract so prepaid will be
paid only to the date of prepayment rather than for a full month. A partial
prepayment of principal is applied so as to reduce the outstanding principal
balance of the related mortgage loan or a contract as of its due date in the
month in which the partial prepayment is received or some other date as is
specified in the prospectus supplement.
The timing of changes in the rate of principal payments on the Assets
(or, in the case of Mortgage Securities and Agency Securities, the underlying
assets related to the Mortgage Securities and Agency Securities) may
significantly affect an investor's actual yield to maturity, even if the average
rate of distributions of principal is consistent with an investor's expectation.
In general, the earlier a principal payment is received on the mortgage loans
and distributed on a Security, the greater the effect on that investor's yield
to maturity. The effect on an investor's yield of principal payments occurring
at a rate higher (or lower) than the rate anticipated by the investor during a
particular period may not be offset by a similar decrease (or increase) in the
rate of principal payments at a later time.
The securityholder will bear the risk of not being able to reinvest
principal received from a Security at a yield at least equal to the yield on
that Security.
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PREPAYMENTS -- MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets
included in or comprising a trust fund and the rate at which payments are made
from any credit support or Cash Flow Agreement for the related series of Notes
or Certificates, as applicable, may affect the ultimate maturity and the
weighted average life of each class of that series. Prepayments on the mortgage
loans or contracts comprising or underlying the Assets in a particular trust
fund will generally accelerate the rate at which principal is paid on some or
all of the classes of the Notes or Certificates, as applicable, of the related
series.
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, one or more classes of Notes or Certificates, as
applicable, may have a final scheduled Distribution Date, which is the date on
or before which the Security Balance of the class of Notes or Certificates, as
applicable, is scheduled to be reduced to zero, calculated on the basis of the
assumptions applicable to that series. Weighted average life refers to the
average amount of time that will elapse from the date of issue of a security
until each dollar of principal of that security will be repaid to the investor.
The weighted average life of a class of Notes or Certificates, as applicable, of
a series will be influenced by the rate at which principal on the Assets is paid
to that class, which may be in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes prepayments, in whole or in
part, and liquidations due to default).
In addition, the weighted average life of the Notes or Certificates, as
applicable, may be affected by the varying maturities of the Assets in a trust
fund. If any Assets in a particular trust fund have actual terms to maturity
less than those assumed in calculating final scheduled Distribution Dates for
the classes of Notes or Certificates, as applicable, of the related series, one
or more classes of these Notes or Certificates, as applicable, may be fully paid
before their respective final scheduled Distribution Dates, even in the absence
of prepayments. Accordingly, the prepayment experience of the Assets will, to
some extent, be a function of the mix of mortgage rates or contract rates and
maturities of the mortgage loans or contracts comprising or underlying those
Assets. See "Description of the Trust Funds."
Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment model.
CPR represents a constant assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of loans for the life of those
loans. SPA represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of loans. A prepayment assumption
of 100% of SPA assumes prepayment rates of 0.2% per annum of the then
outstanding principal balance of those loans in the first month of the life of
the loans and an additional 0.2% per annum in each month thereafter until the
thirtieth month. Starting in the thirtieth month and in each month thereafter
during the life of the loans, 100% of SPA assumes a constant prepayment rate of
6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption
purports to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of loans, including the
mortgage loans or contracts underlying or comprising the Assets.
The prospectus supplement for each series of Notes or Certificates, as
applicable, may contain tables, if applicable, setting forth the projected
weighted average life of each class of Offered Notes or Offered Certificates, as
applicable, of that series and the percentage of the initial Security Balance of
each class that would be outstanding on specified Distribution Dates based on
the assumptions stated in the prospectus supplement, including assumptions that
prepayments on the mortgage loans comprising or underlying the related Assets
are made at rates corresponding to various percentages of CPR, SPA or some other
standard specified in the prospectus supplement. These tables and assumptions
are intended to illustrate the sensitivity of the weighted average life of the
Notes or
20
Certificates, as applicable, to various prepayment rates and will not be
intended to predict or to provide information that will enable investors to
predict the actual weighted average life of the Notes or Certificates, as
applicable. It is unlikely that prepayment of any mortgage loans or contracts
comprising or underlying the Assets for any series will conform to any
particular level of CPR, SPA or any other rate specified in the prospectus
supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF ASSET
If specified in the prospectus supplement, a number of mortgage loans
may have balloon payments due at maturity (which, based on the amortization
schedule of those mortgage loans, may be a substantial amount), and because the
ability of a borrower to make a balloon payment typically will depend on its
ability either to refinance the loan or to sell the related Mortgaged Property,
there is a risk that a number of Balloon Payment Assets may default at maturity.
The ability to obtain refinancing will depend on a number of factors prevailing
at the time refinancing or sale is required, including real estate values, the
borrower's financial situation, prevailing mortgage loan interest rates, the
borrower's equity in the related Mortgaged Property, tax laws and prevailing
general economic conditions. Neither the depositor, the servicer, the master
servicer, nor any of their affiliates will be obligated to refinance or
repurchase any mortgage loan or to sell the Mortgaged Property except to the
extent provided in the prospectus supplement. In the case of defaults, recovery
of proceeds may be delayed by, among other things, bankruptcy of the borrower or
adverse conditions in the market where the property is located. To minimize
losses on defaulted mortgage loans, the servicer may modify mortgage loans that
are in default or as to which a payment default is reasonably foreseeable. Any
defaulted balloon payment or modification that extends the maturity of a
mortgage loan will tend to extend the weighted average life of the Notes or
Certificates, as applicable, and may thus lengthen the period of time elapsed
from the date of issuance of a Security until it is retired.
For some mortgage loans, including ARM Loans, the mortgage rate at
origination may be below the rate that would result if the index and margin
relating to the mortgage loan were applied at origination. For some contracts,
the contract rate may be stepped up during its terms or may otherwise vary or be
adjusted. Under the applicable underwriting standards, the borrower under each
mortgage loan or contract generally will be qualified on the basis of the
mortgage rate or contract rate or contract rate in effect at origination. The
repayment of any of these mortgage loans or contracts may therefore be dependent
on the ability of the borrower to make larger level monthly payments following
the adjustment of the mortgage rate or contract rate. In addition, some mortgage
loans may be subject to temporary buydown plans ("Buydown Mortgage Loans")
pursuant to which the monthly payments made by the borrower during the early
years of the mortgage loan will be less than the scheduled monthly payments on
the mortgage loan (the "Buydown Period"). The periodic increase in the amount
paid by the borrower of a Buydown Mortgage Loan during or at the end of the
applicable Buydown Period may create a greater financial burden for the
borrower, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default for the related mortgage loan.
The mortgage rates on some ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial mortgage rates are generally lower than the sum of
the applicable index at origination and the related margin over that index at
which interest accrues), the amount of interest accruing on the principal
balance of those mortgage loans may exceed the amount of the minimum scheduled
monthly payment on the mortgage loans. As a result, a portion of the accrued
interest on negatively amortizing mortgage loans may be added to the principal
balance of those mortgage loans and will bear interest at the applicable
mortgage rate. The addition of any deferred interest to the principal balance of
any related class or classes of Notes or Certificates, as applicable, will
lengthen the weighted average life of those Notes or Certificates, as
applicable, and
21
may adversely affect yield to holders of those Notes or Certificates, as
applicable, depending on the price at which those Notes or Certificates, as
applicable, were purchased. In addition, for some ARM Loans subject to negative
amortization, during a period of declining interest rates, it might be expected
that each minimum scheduled monthly payment on this type of mortgage loan would
exceed the amount of scheduled principal and accrued interest on the principal
balance of that mortgage loan, and since that excess will be applied to reduce
the principal balance of the related class or classes of Notes or Certificates,
as applicable, the weighted average life of those Notes or Certificates, as
applicable, will be reduced and may adversely affect yield to holders of those
Notes or Certificates, as applicable, depending on the price at which those
Notes or Certificates, as applicable, were purchased.
As may be described in the prospectus supplement, the related Agreement
may provide that all or a portion of the principal collected on or with respect
to the related mortgage loans may be applied by the related trustee to the
acquisition of additional Revolving Credit Line Loans during a specified period
(rather than used to fund payments of principal to securityholders during that
period) with the result that the related Notes or Certificates, as applicable,
possess an interest-only period, also commonly referred to as a revolving
period, which will be followed by an amortization period. Any of these
interest-only or revolving periods may, upon the occurrence of particular events
to be described in the prospectus supplement, terminate before the end of the
specified period and result in the earlier than expected amortization of the
related Notes or Certificates, as applicable.
In addition, and as may be described in the prospectus supplement, the
related Agreement may provide that all or some of this collected principal may
be retained by the trustee (and held in specific temporary investments,
including mortgage loans) for a specified period before being used to fund
payments of principal to securityholders.
The result of the retention and temporary investment by the trustee of
this principal would be to slow the amortization rate of the related Notes or
Certificates, as applicable, relative to the amortization rate of the related
mortgage loans, or to attempt to match the amortization rate of the related
Notes or Certificates, as applicable, to an amortization schedule established at
the time the Notes or Certificates, as applicable, are issued. Any similar
feature applicable to any Notes or Certificates, as applicable, may end on the
occurrence of events to be described in the prospectus supplement, resulting in
the current funding of principal payments to the related securityholders and an
acceleration of the amortization of these Notes or Certificates, as applicable.
TERMINATION
If specified in the prospectus supplement, a series of Notes or
Certificates, as applicable, may be subject to optional early termination
through the repurchase of the Assets in the related trust fund by the party
specified in the prospectus supplement, on any date on which the total Security
Balance of the Notes or Certificates, as applicable, of that series declines to
a percentage specified in the prospectus supplement (generally not to exceed
10%) of the Initial Security Balance, under the circumstances and in the manner
set forth therein. In addition, if so provided in the prospectus supplement,
some classes of Notes or Certificates, as applicable, may be purchased or
redeemed in the manner set forth therein. See "Description of the Securities
- --Termination."
DEFAULTS
The rate of defaults on the Assets will also affect the rate, timing
and amount of principal payments on the Assets and thus the yield on the Notes
or Certificates, as applicable. In general, defaults on mortgage loans or
contracts are expected to occur with greater frequency in their early years. The
rate of default on mortgage loans that are refinance or limited documentation
mortgage loans, and on mortgage loans with high Loan-to-Value Ratios, may be
higher than for other types of mortgage loans. Furthermore, the rate and timing
of prepayments, defaults and liquidations on the mortgage loans or contracts
will be affected by the general economic condition of the region of the
22
country in which the related Mortgaged Properties or manufactured homes are
located. The risk of delinquencies and loss is greater and prepayments are less
likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
FORECLOSURES
The number of foreclosures or repossessions and the principal amount of
the mortgage loans or contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
mortgage loans or contracts that are repaid in accordance with their terms will
affect the weighted average life of the mortgage loans or contracts comprising
or underlying the Assets and that of the related series of Notes or
Certificates, as applicable.
REFINANCING
At the request of a borrower, the servicer may allow the refinancing of
a mortgage loan or contract in any trust fund by accepting prepayments on the
mortgage loan and permitting a new loan secured by a mortgage on the same
property. In the event of that refinancing, the new loan would not be included
in the related trust fund and, therefore, that refinancing would have the same
effect as a prepayment in full of the related mortgage loan or contract. A
servicer may, from time to time, implement programs designed to encourage
refinancing. These programs may include modifications of existing loans, general
or targeted solicitations, the offering of pre-approved applications, reduced
origination fees or closing costs, or other financial incentives. In addition,
servicers may encourage the refinancing of mortgage loans or contracts,
including defaulted mortgage loans or contracts, that would permit creditworthy
borrowers to assume the outstanding indebtedness of those mortgage loans or
contracts.
DUE-ON-SALE CLAUSES
Acceleration of mortgage payments as a result of transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
prospectus supplement. A number of the mortgage loans comprising or underlying
the Assets, other than FHA loans and VA loans, may include "due-on-sale clauses"
that allow the holder of the mortgage loans to demand payment in full of the
remaining principal balance of the mortgage loans upon sale, transfer or
conveyance of the related Mortgaged Property.
For any mortgage loans, except as set forth in the prospectus
supplement, the servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the servicer will not take any action in relation to the
enforcement of any due-on-sale provision that would adversely affect or
jeopardize coverage under any applicable insurance policy. See "Certain Legal
Aspects of Mortgage Loans--Due-on-Sale Clauses" and "Description of the
Agreements--Material Terms of the Pooling and Servicing Agreements" and
"Underlying Servicing Agreements--Due-on-Sale Provisions."
The contracts, in general, prohibit the sale or transfer of the related
manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to. It is expected that the servicer will permit
most transfers of manufactured homes and not accelerate the maturity of the
related contracts. In some cases, the transfer may be made by a delinquent
borrower to avoid a repossession of the manufactured home. In the case of a
transfer of a manufactured home after which the servicer desires to accelerate
the maturity of related contract, the servicer's ability to do so will depend on
the enforceability under state law of the due-on-sale clause.
23
THE DEPOSITOR
ACE Securities Corp., the depositor, is a special purpose corporation
incorporated in the State of Delaware on June 3, 1998. The principal executive
offices of the depositor are located at 6525 Morrison Boulevard, Suite 318,
Charlotte, North Carolina 28211. Its telephone number is (704) 365-0569. The
depositor does not have, nor is it expected in the future to have, any
significant assets.
The limited purposes of the depositor are, in general, to acquire, own
and sell mortgage loans and financial assets; to issue, acquire, own, hold and
sell securities and notes secured by or representing ownership interests in
mortgage loans and other financial assets, collections on the mortgage loans and
related assets; and to engage in any acts that are incidental to, or necessary,
suitable or convenient to accomplish, these purposes.
All of the shares of capital stock of the depositor are held by
Altamont Holdings Corp., a Delaware corporation.
DESCRIPTION OF THE SECURITIES
GENERAL
The Asset-backed certificates (the "Certificates") of each series
(including any class of Certificates not offered by this prospectus) will
represent the entire beneficial ownership interest in the trust fund created
pursuant to the related Agreement. The Asset-backed notes (the "Notes," and
together with the Certificates, the "Securities"), will represent indebtedness
of the related trust fund and will be issued and secured pursuant to an
indenture. Each series of Notes or Certificates, as applicable, will consist of
one or more classes of Notes or Certificates, as applicable, that may:
o provide for the accrual of interest on the series of Notes or
Certificates, as applicable, based on fixed, variable or
adjustable rates;
o be senior ("Senior Notes" or "Senior Certificates," and
collectively, "Senior Securities") or subordinate ("Subordinate
Notes" or "Subordinate Certificates," and collectively,
"Subordinate Securities") to one or more other classes of Notes or
Certificates, as applicable, in respect of distributions on the
Notes or Certificates, as applicable;
o be entitled either to (A) principal distributions, with
disproportionately low, nominal or no interest distributions or
(B) interest distributions, with disproportionately low, nominal
or no principal distributions (collectively, "Strip Securities");
o provide for distributions of accrued interest on the series of
Notes or Certificates, as applicable, which begin only following
the occurrence of specific events, that as the retirement of one
or more other classes of Notes or Certificates, as applicable, of
that series (collectively, "Accrual Securities");
o provide for payments of principal as described in the prospectus
supplement, from all or only a portion of the Assets in that trust
fund, to the extent of available funds, in each case as described
in the prospectus supplement; and/or
o provide for distributions based on a combination of two or more
components of the Notes or Certificates, as applicable, with one
or more of the characteristics described in this paragraph
including a Strip Security component.
24
If specified in the prospectus supplement, distributions on one or more
classes of a series of Notes or Certificates, as applicable, may be limited to
collections from a designated portion of the Assets in the related trust fund
(each portion of the Assets, an "Asset Group"). Any of these classes may include
classes of Offered Notes or Offered Certificates, as applicable.
Each class of Notes or Certificates, as applicable, offered by this
prospectus and the related prospectus supplement (the "Offered Notes" and the
"Offered Certificates," respectively, and together, the "Offered Securities")
will be issued in minimum denominations corresponding to the Security Balances
or, in the case of some classes of Strip Securities, notional amounts or
percentage interests specified in the prospectus supplement. The transfer of any
Offered Notes or Offered Certificates, as applicable, may be registered and
those Notes or Certificates, as applicable, may be exchanged without the payment
of any service charge payable in connection with that registration of transfer
or exchange, but the depositor or the trustee or any agent of the depositor or
the trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. One or more classes of Notes or Certificates, as
applicable, of a series may be issued in fully registered, certificated form
("Definitive Notes" or "Definitive Certificates," and collectively, "Definitive
Securities") or in book-entry form ("Book-Entry Notes" or "Book-Entry
Certificates," and collectively, "Book-Entry Securities"), as provided in the
prospectus supplement. See "Description of the Securities--Book- Entry
Registration and Definitive Securities." Definitive Notes or Definitive
Certificates, as applicable, will be exchangeable for other Notes or
Certificates, as applicable, of the same class and series of a similar total
Security Balance, notional amount or percentage interest but of different
authorized denominations.
DISTRIBUTIONS
Distributions on the Notes or Certificates, as applicable, of each
series will be made by or on behalf of the trustee on each Distribution Date as
specified in the prospectus supplement from the Available Distribution Amount
for that series and that Distribution Date. Distributions (other than the final
distribution) will be made to the persons in whose names the Notes or
Certificates, as applicable, are registered at the close of business on, unless
a different date is specified in the prospectus supplement, the last business
day of the month preceding the month in which the Distribution Date occurs (the
"Record Date"), and the amount of each distribution will be determined as of the
close of business on the date specified in the prospectus supplement (the
"Determination Date"). All distributions for each class of Notes or
Certificates, as applicable, on each Distribution Date will be allocated pro
rata among the outstanding securityholders in that class or by random selection
or as described in the prospectus supplement. Payments will be made either by
wire transfer in immediately available funds to the account of a securityholder
at a bank or other entity having appropriate facilities for these payments, if
that securityholder has so notified the trustee or other person required to make
those payments no later than the date specified in the prospectus supplement
(and, if so provided in the prospectus supplement, holds Notes or Certificates,
as applicable, in the requisite amount specified in the prospectus supplement),
or by check mailed to the address of the person entitled to the payment as it
appears on the Security Register; provided, however, that the final distribution
in retirement of the Notes or Certificates, as applicable, will be made only
upon presentation and surrender of the Notes or Certificates, as applicable, at
the location specified in the notice to securityholders of that final
distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Notes or Certificates, as applicable, of each
series on each Distribution Date will be made from the Available Distribution
Amount described below, subject to the terms described in the prospectus
supplement. Generally, the "Available Distribution Amount" for each Distribution
Date equals the sum of the following amounts:
25
(1) the total amount of all cash on deposit in the related
Collection Account as of the corresponding Determination Date,
exclusive, unless otherwise specified in the prospectus supplement, of:
(a) all scheduled payments of principal and interest
collected but due on a date after the related Due Period
(unless a different period is specified in the prospectus
supplement, a "Due Period" for any Distribution Date will
begin on the second day of the month in which the immediately
preceding Distribution Date occurs, or the Cut-off Date in the
case of the first Due Period, and will end on the first day of
the month of the related Distribution Date),
(b) all prepayments, together with related payments
of the interest thereon and related Prepayment Premiums, all
proceeds of any FHA insurance, VA Guaranty Policy or insurance
policies to be maintained for each Asset (to the extent that
proceeds are not applied to the restoration of the Asset or
released in accordance with the normal servicing procedures of
a servicer, subject to the terms and conditions applicable to
the related Asset) (collectively, "Insurance Proceeds"), all
other amounts received and retained in connection with the
liquidation of Assets in default in the trust fund
("Liquidation Proceeds"), and other unscheduled recoveries
received after the related Due Period, or other period
specified in the prospectus supplement,
(c) all amounts in the Collection Account that are
due or reimbursable to the depositor, the trustee, an Asset
Seller, a servicer, the master servicer or any other entity as
specified in the prospectus supplement or that are payable in
respect of particular expenses of the related trust fund, and
(d) all amounts received for a repurchase of an Asset
from the trust fund for defective documentation or a breach of
representation or warranty received after the related Due
Period, or other period specified in the prospectus
supplement;
(2) if the prospectus supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(3) all advances made by a servicer or the master servicer or
any other entity as specified in the prospectus supplement for that
Distribution Date;
(4) if and to the extent the prospectus supplement so
provides, amounts paid by a servicer or any other entity as specified
in the prospectus supplement with respect to interest shortfalls
resulting from prepayments during the related Prepayment Period; and
(5) to the extent not on deposit in the related Collection
Account as of the corresponding Determination Date, any amounts
collected under, from or in respect of any credit support for that
Distribution Date.
As described below, unless otherwise specified in the prospectus
supplement, the entire Available Distribution Amount will be distributed among
the related Notes or Certificates, as applicable, (including any Notes or
Certificates, as applicable, not offered by this prospectus) on each
Distribution Date, and accordingly will be released from the trust fund and will
not be available for any future distributions.
The prospectus supplement for a series of Notes or Certificates, as
applicable, will describe any variation in the calculation or distribution of
the Available Distribution Amount for that series.
26
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Notes or Certificates, as applicable, (other than classes
of Strip Securities which have no Interest Rate) may have a different Interest
Rate, which will be a fixed, variable or adjustable rate at which interest will
accrue on that class or a component of that class (the "Interest Rate" in the
case of Certificates). The prospectus supplement will specify the Interest Rate
for each class or component or, in the case of a variable or adjustable Interest
Rate, the method for determining the Interest Rate. Interest on the Notes or
Certificates, as applicable, will be calculated on the basis of a 360-day year
consisting of twelve 30-day months unless the prospectus supplement specifies a
different basis.
Distributions of interest on the Notes or Certificates, as applicable,
of any class will be made on each Distribution Date (other than any class of
Accrual Securities, which will be entitled to distributions of accrued interest
starting only on the Distribution Date, or under the circumstances, specified in
the prospectus supplement, and any class of Strip Securities that are not
entitled to any distributions of interest) based on the Accrued Security
Interest for that class and that Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to that class on
that Distribution Date. Before any interest is distributed on any class of
Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on that class will instead be added to the Security Balance of
that class on each Distribution Date.
For each class of Notes or Certificates, as applicable, and each
Distribution Date (other than some classes of Strip Securities), "Accrued
Security Interest" will be equal to interest accrued during the related Accrual
Period on the outstanding Security Balance of the class of Notes or
Certificates, as applicable, immediately before the Distribution Date, at the
applicable Interest Rate, reduced as described below. Accrued Security Interest
on some classes of Strip Securities will be equal to interest accrued during the
related Accrual Period on the outstanding notional amount of the Strip Security
immediately before each Distribution Date, at the applicable Interest Rate,
reduced as described below, or interest accrual in the manner described in the
prospectus supplement. The method of determining the notional amount for a
particular class of Strip Securities will be described in the prospectus
supplement. Reference to notional amount is solely for convenience in some of
the calculations and does not represent the right to receive any distributions
of principal. Unless otherwise provided in the prospectus supplement, the
Accrued Security Interest on a series of Notes or Certificates, as applicable,
will be reduced in the event of prepayment interest shortfalls, which are
shortfalls in collections of interest for a full accrual period resulting from
prepayments before the due date in that accrual period on the mortgage loans or
contracts comprising or underlying the Assets in the trust fund for that series.
The particular manner in which these shortfalls are to be allocated among some
or all of the classes of Notes or Certificates, as applicable, of that series
will be specified in the prospectus supplement. The prospectus supplement will
also describe the extent to which the amount of Accrued Security Interest that
is otherwise distributable on (or, in the case of Accrual Securities, that may
otherwise be added to the Security Balance of) a class of Offered Notes or
Offered Certificates, as applicable, may be reduced as a result of any other
contingencies, including delinquencies, losses and deferred interest on the
mortgage loans or contracts comprising or underlying the Assets in the related
trust fund. Unless otherwise provided in the prospectus supplement, any
reduction in the amount of Accrued Security Interest otherwise distributable on
a class of Notes or Certificates, as applicable, by reason of the allocation to
that class of a portion of any deferred interest on the mortgage loans or
contracts comprising or underlying the Assets in the related trust fund will
result in a corresponding increase in the Security Balance of that class. See
"Yield Considerations."
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Notes or Certificates, as applicable, of each series, other than
some classes of Strip Securities, will have a "Security Balance" which, at any
time, will equal the then maximum amount that the holder will be entitled to
receive on principal out of the future cash flow on the Assets and
27
other assets included in the related trust fund. The outstanding Security
Balance of a Security will be reduced:
o to the extent of distributions of principal on that Security from
time to time and
o if and to the extent provided in the prospectus supplement, by the
amount of losses incurred on the related Assets.
The outstanding Security Balance of a Security:
o may be increased in respect of deferred interest on the related
mortgage loans, to the extent provided in the prospectus
supplement and
o in the case of Accrual Securities, will be increased by any
related Accrued Security Interest up until the Distribution Date
on which distributions of interest are required to begin.
If specified in the prospectus supplement, the initial total Security
Balance of all classes of Notes or Certificates, as applicable, of a series will
be greater than the outstanding total principal balance of the related Assets as
of the applicable Cut-off Date. The initial total Security Balance of a series
and each class of the series will be specified in the prospectus supplement.
Distributions of principal will be made on each Distribution Date to the class
or classes of Notes or Certificates, as applicable, in the amounts and in
accordance with the priorities specified in the prospectus supplement. Some
classes of Strip Securities with no Security Balance are not entitled to any
distributions of principal.
If specified in the related prospectus supplement, the trust fund may
issue notes or certificates, as applicable, from time to time and use proceeds
of this issuance to make principal payments with respect to a series.
REVOLVING PERIOD
The applicable prospectus supplement may provide that all or a portion
of the principal collections may be applied by the trustee to the acquisition of
subsequent Revolving Credit Line Loans during a specified period rather than
used to distribute payments of principal to securityholders during that period.
These notes or certificates, as applicable, would then possess an interest only
period, also commonly referred to as a "Revolving Period", which will be
followed by an "Amortization Period", during which principal will be paid. Any
interest only revolving period may terminate prior to the end of the specified
period and result in the earlier than expected principal repayment of the notes
or certificates, as applicable.
COMPONENTS
To the extent specified in the prospectus supplement, distribution on a
class of Notes or Certificates, as applicable, may be based on a combination of
two or more different components as described under "--General" above. To that
extent, the descriptions set forth under "Distributions of Interest on the
Securities" and "--Distributions of Principal of the Securities" above also
relate to components of the component class of Notes or Certificates, as
applicable. References in those sections to Security Balance may refer to the
principal balance, if any, of these components and reference to the Interest
Rate may refer to the Interest Rate, if any, on these components.
28
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the prospectus supplement, Prepayment Premiums that
are collected on the mortgage loans in the related trust fund will be
distributed on each Distribution Date to the class or classes of Notes or
Certificates, as applicable, entitled to the distribution as described in the
prospectus supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, consisting of one or more classes of Subordinate
Notes or Subordinate Certificates, as applicable, on any Distribution Date in
respect of which losses or shortfalls in collections on the Assets have been
incurred, the amount of those losses or shortfalls will be borne first by a
class of Subordinate Notes or Subordinate Certificates, as applicable, in the
priority and manner and subject to the limitations specified in the prospectus
supplement. See "Description of Credit Support" for a description of the types
of protection that may be included in a trust fund against losses and shortfalls
on Assets comprising that trust fund. The prospectus supplement for a series of
Notes or Certificates, as applicable, will describe the entitlement, if any, of
a class of Notes or Certificates, as applicable, whose Security Balance has been
reduced to zero as a result of distributions or the allocation of losses on the
related Assets to recover any losses previously allocated to that class from
amounts received on the Assets. However, if the Security Balance of a class of
Notes or Certificates, as applicable, has been reduced to zero as the result of
principal distributions, the allocation of losses on the Assets, an optional
termination or an optional purchase or redemption, that class will no longer be
entitled to receive principal distributions from amounts received on the assets
of the related trust fund, including distributions in respect of principal
losses previously allocated to that class.
ADVANCES IN RESPECT OF DELINQUENCIES
If so provided in the prospectus supplement, the servicer or another
entity described in the prospectus supplement will be required as part of its
servicing responsibilities to advance on or before each Distribution Date its
own funds or funds held in the related Collection Account that are not included
in the Available Distribution Amount for that Distribution Date, in an amount
equal to the total of payments of (1) principal (other than any balloon
payments) and (2) interest (net of related servicing fees and Retained Interest)
that were due on the Assets in that trust fund during the related Due Period and
were delinquent on the related Determination Date, subject to a good faith
determination that the advances will be reimbursable from Related Proceeds (as
defined below). In the case of a series of Notes or Certificates, as applicable,
that includes one or more classes of Subordinate Notes or Subordinate
Certificates, as applicable, and if so provided in the prospectus supplement,
the servicer's (or another entity's) advance obligation may be limited only to
the portion of those delinquencies necessary to make the required distributions
on one or more classes of Senior Notes or Senior Certificates, as applicable,
and/or may be subject to a good faith determination that advances will be
reimbursable not only from Related Proceeds but also from collections on other
Assets otherwise distributable on one or more classes of those Subordinate Notes
or Subordinate Certificates, as applicable. See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Notes or
Certificates, as applicable, entitled to the payments, rather than to guarantee
or insure against losses. Advances of the servicer's (or another entity's) funds
will be reimbursable only out of related recoveries on the Assets (including
amounts received under any form of credit support) respecting which those
advances were made (as to any Assets, "Related Proceeds") and from any other
amounts specified in the prospectus supplement, including out of any amounts
otherwise distributable on one or more classes of Subordinate Notes or
Subordinate Certificates, as applicable, of that series; provided, however, that
any advance will be reimbursable from any amounts in the related Collection
Account before any distributions being made on the Notes
29
or Certificates, as applicable, to the extent that the servicer (or some other
entity) determines in good faith that that advance (a "Nonrecoverable Advance")
is not ultimately recoverable from Related Proceeds or, if applicable, from
collections on other Assets otherwise distributable on the Subordinate Notes or
Subordinate Certificates, as applicable. If advances have been made by the
servicer from excess funds in the related Collection Account, the servicer is
required to replace these funds in that Collection Account on any future
Distribution Date to the extent that funds in that Collection Account on that
Distribution Date are less than payments required to be made to securityholders
on that date. If specified in the prospectus supplement, the obligations of the
servicer (or another entity) to make advances may be secured by a cash advance
reserve fund, a surety bond, a letter of credit or another form of limited
guaranty. If applicable, information regarding the characteristics of and the
identity of any borrower on any surety bond will be set forth in the prospectus
supplement.
If and to the extent so provided in the prospectus supplement, the
servicer (or another entity) will be entitled to receive interest at the rate
specified in the prospectus supplement on its outstanding advances and will be
entitled to pay itself this interest periodically from general collections on
the Assets before any payment to securityholders or as otherwise provided in the
related Agreement and described in the prospectus supplement.
If specified in the prospectus supplement, the master servicer or the
trustee will be required to make advances, subject to specific conditions
described in the prospectus supplement, in the event of a servicer default.
REPORTS TO SECURITYHOLDERS
With each distribution to holders of any class of Notes or
Certificates, as applicable, of a series, the servicer, the master servicer or
the trustee, as provided in the prospectus supplement, will forward or cause to
be forwarded to each holder, to the depositor and to any other parties as may be
specified in the related Agreement, a statement containing the information
specified in the prospectus supplement, or if no information is specified in the
prospectus supplement, generally setting forth, in each case to the extent
applicable and available:
(1) the amount of that distribution to holders of Notes or
Certificates, as applicable, of that class applied to reduce the
Security Balance of the Notes or Certificates, as applicable;
(2) the amount of that distribution to holders of Notes or
Certificates, as applicable, of that class allocable to Accrued
Security Interest;
(3) the amount of that distribution allocable to Prepayment
Premiums;
(4) the amount of related servicing compensation and any other
customary information as is required to enable securityholders to
prepare their tax returns;
(5) the total amount of advances included in that
distribution, and the total amount of unreimbursed advances at the
close of business on that Distribution Date;
(6) the total principal balance of the Assets at the close of
business on that Distribution Date;
(7) the number and total principal balance of mortgage loans
in respect of which
(a) one scheduled payment is delinquent,
(b) two scheduled payments are delinquent,
30
(c) three or more scheduled payments are delinquent
and
(d) foreclosure proceedings have begun;
(8) for any mortgage loan or contract liquidated during the
related Due Period, (a) the portion of the related liquidation proceeds
payable or reimbursable to a servicer (or any other entity) in respect
of that mortgage loan and (b) the amount of any loss to
securityholders;
(9) with respect to collateral acquired by the trust fund
through foreclosure or otherwise (an "REO Property") relating to a
mortgage loan or contract and included in the trust fund as of the end
of the related Due Period, the date of acquisition;
(10) for each REO Property relating to a mortgage loan or
contract and included in the trust fund as of the end of the related
Due Period,
(a) the book value,
(b) the principal balance of the related
mortgage loan or contract immediately
following that Distribution Date (calculated
as if that mortgage loan or contract were
still outstanding taking into account
limited modifications to the terms of the
mortgage loan specified in the Agreement),
(c) the total amount of unreimbursed servicing
expenses and unreimbursed advances in
respect of the REO Property and
(d) if applicable, the total amount of interest
accrued and payable on related servicing
expenses and related advances;
(11) for any REO Property sold during the related Due Period
(a) the total amount of sale proceeds,
(b) the portion of those sales proceeds payable
or reimbursable to the master servicer in
respect of that REO Property or the related
mortgage loan or contract and
(c) the amount of any loss to securityholders in
respect of the related mortgage loan;
(12) the total Security Balance or notional amount, as the
case may be, of each class of Notes or Certificates, as applicable,
(including any class of Notes or Certificates, as applicable, not
offered by this prospectus) at the close of business on that
Distribution Date, separately identifying any reduction in that
Security Balance due to the allocation of any loss and increase in the
Security Balance of a class of Accrual Securities if any Accrued
Security Interest has been added to that balance;
(13) the total amount of principal prepayments made during the
related Due Period;
(14) the amount deposited in the reserve fund, if any, on that
Distribution Date;
(15) the amount remaining in the reserve fund, if any, as of
the close of business on that Distribution Date;
31
(16) the total unpaid Accrued Security Interest, if any, on
each class of Notes or Certificates, as applicable, at the close of
business on that Distribution Date;
(17) in the case of Notes or Certificates, as applicable, with
a variable Interest Rate, the Interest Rate applicable to that
Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method
specified in the prospectus supplement;
(18) in the case of Notes or Certificates, as applicable, with
an adjustable Interest Rate, for statements to be distributed in any
month in which an adjustment date occurs, the adjustable Interest Rate
applicable to that Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the
method specified in the prospectus supplement;
(19) as to any series that includes credit support, the amount
of coverage of each instrument of credit support included as of the
close of business on that Distribution Date;
(20) during the Pre-Funding Period, the remaining Pre-Funded
Amount and the portion of the Pre-Funding Amount used to acquire
Subsequent Assets since the preceding Distribution Date;
(21) during the Pre-Funding Period, the amount remaining in
the Capitalized Interest Account; and
(22) the total amount of payments by the borrowers of
(a) default interest,
(b) late charges and
(c) assumption and modification fees collected
during the related Due Period.
Within a reasonable period of time after the end of each calendar year,
the servicer, the master servicer or the trustee, as provided in the prospectus
supplement, will furnish to each securityholder of record at any time during the
calendar year the information required by the Code and applicable regulations
under the Code to enable securityholders to prepare their tax returns. See
"Description of the Securities--Book-Entry Registration and Definitive
Securities."
TERMINATION
The obligations created by the related Agreement for each series of
Notes or Certificates, as applicable, will terminate upon the payment to
securityholders of that series of all amounts held in the Collection Accounts or
by a servicer, the master servicer, if any, or the trustee and required to be
paid to them pursuant to that Agreement following the earlier of (1) the final
payment or other liquidation of the last Asset subject to the related Agreement
or the disposition of all property acquired upon foreclosure of any mortgage
loan or contract subject to the Agreement and (2) the purchase of all of the
assets of the trust fund by the party entitled to effect that termination, under
the circumstances and in the manner set forth in the prospectus supplement. In
no event, however, will the trust fund continue beyond the date specified in the
prospectus supplement. Written notice of termination of the Agreement will be
given to each securityholder, and the final distribution will be made only upon
presentation and surrender of the Notes or Certificates, as applicable, at the
location to be specified in the notice of termination.
32
If specified in the prospectus supplement, a series of Notes or
Certificates, as applicable, may be subject to optional early termination
through the purchase of the Assets in the related trust fund by the party
specified in the prospectus supplement, under the circumstances and in the
manner set forth in the prospectus supplement. If so provided in the prospectus
supplement, upon the reduction of the Security Balance of a specified class or
classes of Notes or Certificates, as applicable, by a specified percentage, the
party specified in the prospectus supplement will solicit bids for the purchase
of all assets of the trust fund, or of a sufficient portion of those assets to
retire that class or classes or purchase that class or classes at a price set
forth in the prospectus supplement, in each case, under the circumstances and in
the manner set forth in the prospectus supplement. That price will at least
equal the outstanding Security Balances and any accrued and unpaid interest on
the Security Balances (including any unpaid interest shortfalls for prior
Distribution Dates). Any sale of the Assets of the trust fund will be without
recourse to the trust fund or the securityholders. Any purchase or solicitation
of bids may be made only when the total Security Balance of that class or
classes declines to a percentage of the Initial Security Balance of those Notes
or Certificates, as applicable, (not to exceed 10%) specified in the prospectus
supplement. In addition, if so provided in the prospectus supplement, some
classes of Notes or Certificates, as applicable, may be purchased or redeemed in
the manner set forth in the prospectus supplement at a price at least equal to
the outstanding Security Balance of each class so purchased or redeemed and any
accrued and unpaid interest on the Security Balance (including any unpaid
interest shortfalls for prior Distribution Dates).
OPTIONAL PURCHASES
Subject to the provisions of the applicable Agreement, the depositor,
the servicer or any other party specified in the prospectus supplement may, at
that party's option, repurchase any mortgage loan that is in default or as to
which default is reasonably foreseeable if, in the depositor's, the servicer's
or any other party's judgment, the related default is not likely to be cured by
the borrower or default is not likely to be averted, at a price equal to the
unpaid principal balance of the mortgage loan plus accrued interest on the
mortgage loan and under the conditions set forth in the prospectus supplement.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
GENERAL
If provided for in the prospectus supplement, one or more classes of
the Offered Notes or Offered Certificates, as applicable, of any series will be
issued as Book-Entry Notes or Book-Entry Certificates, as applicable, and each
of these classes will be represented by one or more single Notes or
Certificates, as applicable, registered in the name of a nominee for the
depository, The Depository Trust Company ("DTC") and, if provided in the
prospectus supplement, additionally through Clearstream Luxembourg, societe
anonyme ("Clearstream Luxembourg") or the Euroclear System ("Euroclear"). Each
class of Book-Entry Notes or Book-Entry Certificates, as applicable, will be
issued in one or more certificates or notes, as the case may be, that equal the
initial principal amount of the related class of Offered Notes or Offered
Certificates, as applicable, and will initially be registered in the name of
Cede & Co.
No person acquiring an interest in a Book-Entry Security (each, a
"Beneficial Owner") will be entitled to receive a Definitive Security, except as
set forth below under "-Definitive Securities." Unless and until Definitive
Notes or Definitive Certificates, as applicable, are issued for the Book-Entry
Notes or Book-Entry Certificates, as applicable, under the limited circumstances
described in the applicable prospectus supplement or this prospectus, all
references to actions by securityholders with respect to the Book-Entry Notes or
Book-Entry Certificates, as applicable, will refer to actions taken by DTC,
Clearstream Luxembourg or Euroclear upon instructions from their Participants
(as defined below), and all references in this prospectus to distributions,
notices, reports and statements to securityholders with respect to the
Book-Entry Notes or Book-Entry Certificates, as applicable, will refer
33
to distributions, notices, reports and statements to DTC, Clearstream Luxembourg
or Euroclear, as applicable, for distribution to Beneficial Owners by DTC in
accordance with the procedures of DTC and if applicable, Clearstream Luxembourg
and Euroclear.
Beneficial Owners will hold their Book-Entry Notes or Book-Entry
Certificates, as applicable, through DTC in the United States, or, if the
Offered Notes or Offered Certificates, as applicable, are offered for sale
globally, through Clearstream Luxembourg or Euroclear in Europe if they are
participating organizations ("Participants") of those systems. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include some other organizations. Indirect access to the
DTC, Clearstream Luxembourg and Euroclear systems also is available to others,
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants").
DTC
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code ("UCC") and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). DTC was
created to hold securities for its Participants, some of which (and/or their
representatives) own DTC, and facilitate the clearance and settlement of
securities transactions between its Participants through electronic book-entry
changes in their accounts, thus eliminating the need for physical movement of
securities. In accordance with its normal procedures, DTC is expected to record
the positions held by each of its Participants in the Book-Entry Notes or
Book-Entry Certificates, as applicable, whether held for its own account or as a
nominee for another person. In general, beneficial ownership of Book-Entry Notes
or Book-Entry Certificates, as applicable, will be subject to the rules,
regulations and procedures governing DTC and its Participants as in effect from
time to time.
CLEARSTREAM LUXEMBOURG
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On January 10,
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche 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.
Further to the merger, the Board of Directors of New Cedel
International decided to rename the companies in the group in order to give them
a cohesive brand name. The new brand name that was chosen is "Clearstream". With
effect from January 14, 2000 New CI has been renamed "Clearstream International,
societe anonyme". On January 18, 2000, Cedelbank was renamed "Clearstream
Banking, societe anonyme", and Cedel Global Services was renamed "Clearstream
Services, societe anonyme".
On January 17, 2000 DBC was renamed "Clearstream Banking AG". This
means that there are now two entities in the corporate group headed by
Clearstream International which share the name "Clearstream Banking", the entity
previously named "Cedelbank" and the entity previously named "Deutsche Borse
Clearing AG".
34
Clearstream, Luxembourg holds securities for its customers
("Clearstream, Luxembourg Participants") and facilitates the clearance and
settlement of securities transactions between Clearstream, Luxembourg customers
through electronic book-entry changes in accounts of Clearstream, Luxembourg
customers, thereby eliminating the need for physical movement of certificates.
Transactions may be settled by Clearstream, Luxembourg in any of 36 currencies,
including United States Dollars. Clearstream, Luxembourg provides to its
customers, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Clearstream, Luxembourg also deals with domestic
securities markets in over 30 countries through established depository and
custodial relationships. Clearstream, Luxembourg is registered as a bank in
Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, "CSSF", which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of the Euroclear
System (MGT/EOC) in Brussels to facilitate settlement of trades between
Clearstream, Luxembourg and MGT/EOC.
EUROCLEAR
Euroclear was created in 1968 to hold securities for its Participants
and to clear and settle transactions between its Participants through
simultaneous electronic book-entry delivery against payment, thus eliminating
the need for physical movement of securities and any risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
any of 32 currencies, including United States dollars. Euroclear includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York (the "Euroclear Operator"), under contract with Euroclear Clearance Systems
S.C., a Belgian cooperative corporation (the "Cooperative Corporation"). All
operations are conducted by the Euroclear Operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
Operator, not the Cooperative Corporation. The Cooperative Corporation
establishes policy for Euroclear on behalf of its Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries. Indirect access to
Euroclear is also available to other firms that clear through or maintain a
custodial relationship with a Participant of Euroclear, either directly or
indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System, and is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific securities to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
35
its Participants, and has no record of or relationship with persons holding
through Participants of Euroclear.
Clearstream Luxembourg and Euroclear will hold omnibus positions on
behalf of their Participants through customers' securities accounts in
Clearstream Luxembourg's and Euroclear's names on the books of their respective
depositaries which in turn will hold positions in customers' securities accounts
in the depositaries' names on the books of DTC. Citibank will act as depositary
for Clearstream Luxembourg and JPMorgan Chase Bank will act as depositary for
Euroclear (individually the "Relevant Depositary" and collectively, the
"European Depositaries").
BENEFICIAL OWNERSHIP OF BOOK-ENTRY SECURITIES
Except as described below, no Beneficial Owner will be entitled to
receive a physical certificate representing a Certificate, or note representing
a Note. Unless and until Definitive Notes or Definitive Certificates, as
applicable, are issued, it is anticipated that the only "securityholder" of the
Offered Notes or Offered Certificates, as applicable, will be Cede & Co., as
nominee of DTC. Beneficial Owners will not be "Certificateholders" as that term
is used in any Agreement, nor "Noteholders" as that term is used in any
indenture. Beneficial Owners are only permitted to exercise their rights
indirectly through Participants, DTC, Clearstream Luxembourg or Euroclear, as
applicable.
The Beneficial Owner's ownership of a Book-Entry Security will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for that purpose. In turn, the Financial
Intermediary's ownership of a Book-Entry Security will be recorded on the
records of DTC (or of a Participant that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a Participant of DTC and on
the records of Clearstream Luxembourg or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Offered Notes or Offered Certificates, as applicable, from the
trustee through DTC and its Participants. While the Offered Notes or Offered
Certificates, as applicable, are outstanding (except under the circumstances
described below), under the rules, regulations and procedures creating and
affecting DTC and its operations (the "Rules"), DTC is required to make
book-entry transfers among Participants on whose behalf it acts with respect to
the Offered Notes or Offered Certificates, as applicable, and is required to
receive and transmit distributions of principal of, and interest on, the Offered
Notes or Offered Certificates, as applicable. Participants and Indirect
Participants with whom Beneficial Owners have accounts with respect to Offered
Notes or Offered Certificates, as applicable, are similarly required to make
book-entry transfers and receive and transmit distributions on behalf of their
respective Beneficial Owners. Accordingly, although Beneficial Owners will not
possess certificates or notes, the Rules provide a mechanism by which Beneficial
Owners will receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive
certificates or notes representing their respective interests in the Offered
Notes or Offered Certificates, as applicable, except under the limited
circumstances described below. Unless and until Definitive Notes or Definitive
Certificates, as applicable, are issued, Beneficial Owners who are not
Participants may transfer ownership of Offered Notes or Offered Certificates, as
applicable, only through Participants and Indirect Participants by instructing
the Participants and Indirect Participants to transfer Offered Notes or Offered
Certificates, as applicable, by book-entry transfer, through DTC for the account
of the purchasers of the Offered Notes or Offered Certificates, as applicable,
which account is maintained with their respective Participants. Under the Rules
and in accordance with DTC's normal procedures, transfer of ownership of
Book-Entry Notes or Book-Entry Certificates, as applicable, will be executed
through DTC and the accounts of the respective Participants at DTC will be
debited and credited. Similarly, the Participants
36
and Indirect Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Beneficial Owners.
Because of time zone differences, any credits of securities received in
Clearstream Luxembourg or Euroclear as a result of a transaction with a
Participant will be made during subsequent securities settlement processing and
dated the business day following the DTC settlement date. These credits or any
transactions in securities settled during this processing will be reported to
the relevant Participants of Clearstream Luxembourg or Euroclear on that
business day. Cash received in Clearstream Luxembourg or Euroclear as a result
of sales of securities by or through a Participant of Clearstream Luxembourg or
Euroclear to a Participant of DTC will be received with value on the DTC
settlement date but will be available in the relevant Clearstream Luxembourg or
Euroclear cash account only as of the business day following settlement in DTC.
For information with respect to tax documentation procedures relating to the
Notes or Certificates, as applicable, see "Material Federal Income Tax
Considerations--Tax Treatment of Foreign Investors" in this prospectus and, if
the Book-Entry Notes or Book-Entry Certificates, as applicable, are globally
offered and the prospectus supplement so provides, see "Global Clearance,
Settlement and Tax Documentation Procedures--Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I to the prospectus supplement.
Transfers between Participants of DTC will occur in accordance with DTC
Rules. Transfers between Participants of Clearstream Luxembourg or Euroclear
will occur in accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Participants of
Clearstream Luxembourg or Euroclear, on the other, will be effected in DTC in
accordance with the DTC Rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, cross-market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in that system in accordance with its rules
and procedures and within its established deadlines (European time). The
relevant European international clearing system will, if the transaction meets
its settlement requirements, deliver instructions to the Relevant Depositary to
take action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment in accordance with normal
procedures for same day funds settlement applicable to DTC. Participants of
Clearstream Luxembourg or Euroclear may not deliver instructions directly to the
European Depositaries.
Distributions on the Book-Entry Notes or Book-Entry Certificates, as
applicable, will be made on each Distribution Date by the Trustee to DTC. DTC
will be responsible for crediting the amount of each distribution to the
accounts of the applicable Participants of DTC in accordance with DTC's normal
procedures. Each Participant of DTC will be responsible for disbursing the
distribution to the Beneficial Owners of the Book-Entry Notes or Book-Entry
Certificates, as applicable, that it represents and to each Financial
Intermediary for which it acts as agent. Each Financial Intermediary will be
responsible for disbursing funds to the Beneficial Owners of the Book-Entry
Notes or Book-Entry Certificates, as applicable, that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes or
Book-Entry Certificates, as applicable, may experience some delay in their
receipt of payments, because the distributions will be forwarded by the Trustee
to Cede & Co. Any distributions on Notes or Certificates, as applicable, held
through Clearstream Luxembourg or Euroclear will be credited to the cash
accounts of Participants of Clearstream Luxembourg or Euroclear in accordance
with the relevant system's rules and procedures, to the extent received by the
Relevant Depositary. These distributions will be subject to tax reporting in
accordance with relevant United States tax laws and regulations. See "Material
Federal Income Tax Considerations--REMICs--Taxation of Certain Foreign
Investors" in this prospectus. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a Beneficial
37
Owner to pledge Book-Entry Notes or Book-Entry Certificates, as applicable, to
persons or entities that do not participate in the depository system, or
otherwise take actions in respect of Book-Entry Notes or Book-Entry
Certificates, as applicable, may be limited due to the lack of physical
securities for the Book-Entry Notes or Book-Entry Certificates, as applicable.
In addition, issuance of the Book-Entry Notes or Book-Entry Certificates, as
applicable, in book-entry form may reduce the liquidity of the securities in the
secondary market since potential investors may be unwilling to purchase Notes or
Certificates, as applicable, for which they cannot obtain physical securities.
Monthly and annual reports will be provided to Cede & Co., as nominee
of DTC, and may be made available by Cede & Co. to Beneficial Owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Notes or Book-Entry Certificates, as applicable, of
Beneficial Owners are credited.
Generally, DTC will advise the applicable trustee that unless and until
Definitive Notes or Definitive Certificates, as applicable, are issued, DTC will
take any action permitted to be taken by the holders of the Book-Entry Notes or
Book-Entry Certificates, as applicable, under the Agreement or indenture, as
applicable, only at the direction of one or more Financial Intermediaries to
whose DTC accounts the Book-Entry Notes or Book-Entry Certificates, as
applicable, are credited, to the extent that actions are taken on behalf of
Financial Intermediaries whose holdings include the Book-Entry Notes or
Book-Entry Certificates, as applicable. If the Book-Entry Notes or Book-Entry
Certificates, as applicable, are globally offered, Clearstream Luxembourg or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a securityholder under the Agreement or indenture, as applicable, on
behalf of a Participant of Clearstream Luxembourg or Euroclear only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect those actions on its behalf through DTC. DTC
may take actions, at the direction of the related Participants, with respect to
some Offered Notes or Offered Certificates, as applicable, that conflict with
actions taken with respect to other Offered Notes or Offered Certificates, as
applicable.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry Notes or
Book-Entry Certificates, as applicable, among Participants of DTC, Clearstream
Luxembourg and Euroclear, they are under no obligation to perform or continue to
perform these procedures and the procedures may be discontinued at any time.
None of the depositor, any master servicer, any servicer, the trustee,
any securities registrar or paying agent or any of their affiliates will have
any responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Notes or Book-Entry
Certificates, as applicable, or for maintaining, supervising or reviewing any
records relating to those beneficial ownership interests.
DEFINITIVE SECURITIES
Notes or Certificates, as applicable, initially issued in book-entry
form will be issued as Definitive Notes or Definitive Certificates, as
applicable, to Beneficial Owners or their nominees, rather than to DTC or its
nominee only
(1) if the depositor advises the trustee in writing that DTC is no
longer willing or able to properly discharge its
responsibilities as depository for the Notes or Certificates,
as applicable, and the depositor is unable to locate a
qualified successor,
(2) if the depositor, at its option, elects to end the book-entry
system through DTC or
(3) in accordance with any other provisions described in the
prospectus supplement.
38
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Notes or Definitive Certificates, as
applicable, for the Beneficial Owners. Upon surrender by DTC of the security or
securities representing the Book-Entry Notes or Book-Entry Certificates, as
applicable, together with instructions for registration, the trustee will issue
(or cause to be issued) to the Beneficial Owners identified in those
instructions the Definitive Notes or Definitive Certificates, as applicable, to
which they are entitled, and thereafter the trustee will recognize the holders
of those Definitive Notes or Definitive Certificates, as applicable, as
securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC SECURITIES, FASIT SECURITIES, GRANTOR TRUST SECURITIES
Notes or Certificates, as applicable, representing interests in a trust
fund, or a portion of a trust fund, that the trustee will elect to have treated
as a real estate mortgage investment conduit under Sections 860A through 860G of
the Code ("REMIC Securities"), FASIT Securities (as defined in this prospectus),
or Grantor Trust Securities (as defined in this prospectus) will be issued, and
the related trust fund will be created, pursuant to a pooling and servicing
agreement or trust agreement (in either case, generally referred to in this
prospectus as the "pooling and servicing agreement") among the depositor, the
trustee and the sole servicer or master servicer, as applicable. The Assets of
that trust fund will be transferred to the trust fund and thereafter serviced in
accordance with the terms of the pooling and servicing agreement. In the event
there are multiple servicers of the Assets of that trust fund, or in the event
the Securities consist of Notes, each servicer will perform its servicing
functions pursuant to a related underlying servicing agreement.
SECURITIES THAT ARE PARTNERSHIP INTERESTS FOR TAX PURPOSES AND NOTES
Certificates, as applicable, that are intended to be treated as
partnership interests for tax purposes will be issued, and the related trust
fund will be created, pursuant to the pooling and servicing agreement or trust
agreement.
A series of Notes issued by a trust fund that is intended to be treated
as a partnership or disregarded entity for tax purposes will be issued pursuant
to an indenture between the related trust fund and an indenture trustee named in
the prospectus supplement. The trust fund will be established either as a
statutory business trust under the law of the State of Delaware or as a common
law trust under the law of the State of New York pursuant to a trust agreement
between the depositor and an owner trustee specified in the prospectus
supplement relating to that series of Notes. The Assets securing payment on the
Notes will be serviced in accordance with a sale and servicing agreement or
servicing agreement.
MATERIAL TERMS OF THE POOLING AND SERVICING AGREEMENTS AND UNDERLYING SERVICING
AGREEMENTS
GENERAL
The following summaries describe the material provisions that may
appear in each pooling and servicing agreement, sale and servicing agreement or
servicing agreement (each an "Agreement"). The prospectus supplement for a
series of Notes or Certificates, as applicable, will describe any provision of
the Agreement relating to that series that materially differs from the
description of those provisions contained in this prospectus. The summaries do
not purport to be complete and are subject to, and are qualified by reference
to, all of the provisions of the Agreement for each trust fund and the
description of those provisions in the prospectus supplement. The
39
provisions of each Agreement will vary depending on the nature of the Notes or
Certificates, as applicable, to be issued under the Agreement and the nature of
the related trust fund. As used in this prospectus for any series, the term
"Security" refers to all of the Notes or Certificates, as applicable, of that
series, whether or not offered by this prospectus and by the prospectus
supplement, unless the context otherwise requires. A form of a pooling and
servicing agreement has been filed as an exhibit to the Registration Statement
of which this prospectus is a part. The depositor will provide a copy of the
pooling and servicing agreement (without exhibits) relating to any series of
Notes or Certificates, as applicable, without charge upon written request of a
securityholder of that series addressed to ACE Securities Corp., 6525 Morrison
Boulevard, Suite 318, Charlotte, North Carolina 28211, Attention: Elizabeth S.
Eldridge.
The servicer or master servicer and the trustee for any series of Notes
or Certificates, as applicable, will be named in the prospectus supplement. In
the event there are multiple servicers for the Assets in a trust fund, a master
servicer will perform some of the administration, calculation and reporting
functions for that trust fund and will supervise the related servicers pursuant
to a pooling and servicing agreement. For a series involving a master servicer,
references in this prospectus to the servicer will apply to the master servicer
where non-servicing obligations are described. If specified in the prospectus
supplement, a manager or administrator may be appointed pursuant to the pooling
and servicing agreement for any trust fund to administer that trust fund.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Notes or Certificates, as
applicable, the depositor will assign (or cause to be assigned) to the
designated trustee the Assets to be included in the related trust fund, together
with all principal and interest to be received on or with respect to those
Assets after the Cut-off Date, other than principal and interest due on or
before the Cut-off Date and other than any Retained Interest. The trustee will,
concurrently with that assignment, deliver the Notes or Certificates, as
applicable, to the depositor in exchange for the Assets and the other assets
comprising the trust fund for that series. Each Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. That schedule will
include detailed information to the extent available and relevant
(1) in respect of each mortgage loan included in the related
trust fund, including the city and state of the related Mortgaged
Property and type of that property, the mortgage rate and, if
applicable, the applicable index, margin, adjustment date and any rate
cap information, the original and remaining term to maturity, the
original and outstanding principal balance and balloon payment, if any,
the Loan-to-Value Ratio as of the date indicated and payment and
prepayment provisions, if applicable, and
(2) in respect of each Contract included in the related trust
fund, including the outstanding principal amount and the Contract Rate;
and
(3) in respect of each Mortgage Security and Agency Security,
the original and outstanding principal amount, if any, and the interest
rate on the Mortgage Security or Agency Security.
For each mortgage loan, except as otherwise specified in the prospectus
supplement, the depositor will deliver or cause to be delivered to the trustee
(or to the custodian hereinafter referred to) particular loan documents, which
will generally include the original mortgage note endorsed, without recourse, in
blank or to the order of the trustee, the original Mortgage (or a certified copy
of the original Mortgage) with evidence of recording indicated on the original
Mortgage and an assignment of the Mortgage to the trustee in recordable form.
However, a trust fund may include mortgage loans where the original mortgage
note is not delivered to the trustee if the depositor delivers to the trustee or
the custodian a copy or a duplicate original of the mortgage note, together with
an affidavit certifying that the original of the mortgage note has been lost or
destroyed. For those
40
mortgage loans, the trustee (or its nominee) may not be able to enforce the
mortgage note against the related borrower. The Asset Seller or other entity
specified in the prospectus supplement will be required to agree to repurchase,
or substitute for, each of these mortgage loans that is subsequentlyin default
if the enforcement thereof or of the related Mortgage is materially adversely
affected by the absence of the original mortgage note. The related Agreement
will generally require the depositor or another party specified in the
prospectus supplement to promptly cause each of these assignments of Mortgage to
be recorded in the appropriate public office for real property records, except
in the State of California or in other states where, in the opinion of counsel
acceptable to the trustee, recording is not required to protect the trustee's
interest in the related mortgage loan against the claim of any subsequent
transferee or any successor to or creditor of the depositor, the servicer, the
relevant Asset Seller or any other prior holder of the mortgage loan.
The trustee (or a custodian) will review the mortgage loan documents
within a specified period of days after receipt of the mortgage loan documents,
and the trustee (or a custodian) will hold those documents in trust for the
benefit of the securityholders. If any of these documents are found to be
missing or defective in any material respect, the trustee (or that custodian)
will immediately notify the servicer and the depositor, and the servicer will
immediately notify the relevant Asset Seller or other entity specified in the
prospectus supplement. If the Asset Seller cannot cure the omission or defect
within a specified number of days after receipt of that notice, then the Asset
Seller or other entity specified in the prospectus supplement will be obligated,
within a specified number of days of receipt of that notice, to either (1)
repurchase the related mortgage loan from the trustee at a price equal to the
sum of the unpaid principal balance of the mortgage loan, plus unpaid accrued
interest at the interest rate for that Asset from the date as to which interest
was last paid to the due date in the Due Period in which the relevant purchase
is to occur, plus servicing expenses that are payable to the servicer, or
another price as specified in the prospectus supplement (the "Purchase Price")
or (2) substitute a new mortgage loan. There can be no assurance that an Asset
Seller or other named entity will fulfill this repurchase or substitution
obligation, and neither the servicer nor the depositor will be obligated to
repurchase or substitute for that mortgage loan if the Asset Seller or other
named entity defaults on its obligation.
This repurchase or substitution obligation constitutes the sole remedy
available to the securityholders or the trustee for omission of, or a material
defect in, a constituent document. To the extent specified in the prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for that Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the trust fund as a result of
that breach or defect.
Notwithstanding the preceding three paragraphs, the documents for Home
Equity Loans, home improvement contracts and unsecured home improvements loans
will be delivered to the trustee (or a custodian) only to the extent specified
in the prospectus supplement. Generally these documents will be retained by the
servicer, which may also be the Asset Seller. In addition, assignments of the
related Mortgages to the trustee will be recorded only to the extent specified
in the prospectus supplement.
For each contract, the servicer, which may also be the asset seller,
generally will maintain custody of the original contract and copies of documents
and instruments related to each contract and the security interest in the
manufactured home securing each contract. To give notice of the right, title and
interest of the trustee in the contracts, the depositor will cause UCC-1
financing statements to be executed by the related asset seller identifying the
depositor as secured party and by the depositor identifying the trustee as the
secured party and, in each case, identifying all contracts as collateral. The
contracts will be stamped or otherwise marked to reflect their assignment from
the depositor to the trust fund only to the extent specified in the prospectus
supplement. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of that assignment, the interest of the trustee in the contracts could be
defeated.
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While the contract documents will not be reviewed by the trustee or
the servicer, if the servicer finds that any document is missing or defective in
any material respect, the servicer will be required to immediately notify the
depositor and the relevant asset seller or other entity specified in the
prospectus supplement. If the asset seller or some other entity cannot cure the
omission or defect within a specified number of days after receipt of this
notice, then the asset seller or that other entity will be obligated, within a
specified number of days of receipt of this notice, to repurchase the related
contract from the trustee at the purchase price or substitute for that contract.
There can be no assurance that an asset seller or any other entity will fulfill
this repurchase or substitution obligation, and neither the servicer nor the
depositor will be obligated to repurchase or substitute for that contract if the
asset seller or any other entity defaults on its obligation. This repurchase or
substitution obligation constitutes the sole remedy available to the
securityholders or the trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the prospectus supplement, in
lieu of curing any omission or defect in the asset or repurchasing or
substituting for that asset, the asset seller may agree to cover any losses
suffered by the trust fund as a result of that breach or defect.
Mortgage Securities and Agency Securities will be registered in the
name of the trustee or its nominee on the books of the issuer or guarantor or
its agent or, in the case of Mortgage Securities and Agency Securities issued
only in book-entry form, through the depository with respect to the Mortgage
Securities and Agency Securities, in accordance with the procedures established
by the issuer or guarantor for registration of those certificates, and
distributions on those securities to which the trust fund is entitled will be
made directly to the trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
To the extent provided in the prospectus supplement the depositor will,
for each Asset, assign representations and warranties, as of a specified date
(the person making those representations and warranties, the "Warranting Party")
covering, by way of example, the following types of matters:
o the accuracy of the information set forth for that Asset on the
schedule of Assets appearing as an exhibit to the related
Agreement;
o in the case of a mortgage loan, the existence of title insurance
insuring the lien priority of the mortgage loan and, in the case
of a contract, that the contract creates a valid first security
interest in or lien on the related manufactured home;
o the authority of the Warranting Party to sell the Asset;
o the payment status of the Asset;
o in the case of a mortgage loan, the existence of customary
provisions in the related mortgage note and Mortgage to permit
realization against the Mortgaged Property of the benefit of the
security of the Mortgage; and
o the existence of hazard and extended perils insurance coverage on
the Mortgaged Property or manufactured home.
Any Warranting Party shall be an Asset Seller or an affiliate of the
Asset Seller or any other person acceptable to the depositor and will be
identified in the prospectus supplement.
Representations and warranties made in respect of an Asset may have
been made as of a date before the applicable Cut-off Date. A substantial period
of time may have elapsed between that date and the date of initial issuance of
the related series of Notes or Certificates, as applicable, evidencing an
interest in that Asset. In the event of a breach of any of these representations
or warranties, the
42
Warranting Party will be obligated to reimburse the trust fund for losses caused
by that breach or either cure that breach or repurchase or replace the affected
Asset as described below. Since the representations and warranties may not
address events that may occur following the date as of which they were made, the
Warranting Party will have a reimbursement, cure, repurchase or substitution
obligation in connection with a breach of that representation and warranty only
if the relevant event that causes that breach occurs before that date. That
party would have no obligations if the relevant event that causes that breach
occurs after that date.
Each Agreement will provide that the servicer and/or trustee or another
entity identified in the prospectus supplement will be required to notify
promptly the relevant Warranting Party of any breach of any representation or
warranty made by it in respect of an Asset that materially and adversely affects
the value of that Asset or the interests in the prospectus supplement of the
securityholders. If the Warranting Party cannot cure that breach within a
specified period following the date on which that party was notified of that
breach, then the Warranting Party will be obligated to repurchase that Asset
from the trustee within a specified period from the date on which the Warranting
Party was notified of that breach, at the Purchase Price therefor. If so
provided in the prospectus supplement for a series, a Warranting Party, rather
than repurchase an Asset as to which a breach has occurred, will have the
option, within a specified period after initial issuance of that series of Notes
or Certificates, as applicable, to cause the removal of that Asset from the
trust fund and substitute in its place one or more other Assets, as applicable,
in accordance with the standards described in the prospectus supplement. If so
provided in the prospectus supplement for a series, a Warranting Party, rather
than repurchase or substitute an Asset as to which a breach has occurred, will
have the option to reimburse the trust fund or the securityholders for any
losses caused by that breach. This reimbursement, repurchase or substitution
obligation will constitute the sole remedy available to securityholders or the
trustee for a breach of representation by a Warranting Party.
Neither the depositor (except to the extent that it is the Warranting
Party) nor the servicer will be obligated to purchase or substitute for an Asset
if a Warranting Party defaults on its obligation to do so, and no assurance can
be given that the Warranting Parties will carry out those obligations with
respect to the Assets.
A servicer will make representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
related Agreement. A breach of any representation of the servicer that
materially and adversely affects the interests of the securityholders and which
continues unremedied for the number of days specified in the Agreement after the
discovery of the breach by the servicer or the receipt of written notice of that
breach by the servicer from the trustee, the depositor or the holders of Notes
or Certificates, as applicable, evidencing not less than 25% of the voting
rights or other percentage specified in the related Agreement, will constitute
an Event of Default under that Agreement. See "Events of Default" and "Rights
Upon Event of Default."
COLLECTION ACCOUNT AND RELATED ACCOUNTS
GENERAL. The servicer and/or the trustee will, as to each trust fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the "Collection Account"), which must be an account or accounts
that either:
o are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation
("FDIC") (to the limits established by the FDIC) and the uninsured
deposits in which are otherwise secured so that the
securityholders have a claim with respect to the funds in the
Collection Account or a perfected first priority security interest
against any collateral securing those funds that is superior to
the claims of any other depositors or general creditors of the
institution with which the Collection Account is maintained, or
43
o are maintained with a bank or trust company, and in a manner
satisfactory to the rating agency or agencies rating any class of
Notes or Certificates, as applicable, of that series.
Investment of amounts in the Collection Account is limited to United
States government securities and other investment grade obligations specified in
the Agreement ("Permitted Investments"). A Collection Account may be maintained
as an interest bearing or a non-interest bearing account and the funds held in
the Collection Account may be invested pending each succeeding Distribution Date
in short-term Permitted Investments. Any interest or other income earned on
funds in the Collection Account will, unless otherwise specified in the
prospectus supplement, be paid to the servicer or its designee as additional
servicing compensation. The Collection Account may be maintained with an
institution that is an affiliate of the servicer, if applicable, provided that
that institution meets the standards imposed by the rating agency or agencies.
If permitted by the rating agency or agencies, a Collection Account may contain
funds relating to more than one series of mortgage pass-through certificates and
may contain other funds respecting payments on mortgage loans belonging to the
servicer or serviced or master serviced by it on behalf of others.
DEPOSITS. A servicer or the trustee will deposit or cause to be
deposited in the Collection Account for one or more trust funds on a daily
basis, or any other period provided in the related Agreement, the following
payments and collections received, or advances made, by the servicer or the
trustee or on its behalf after the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest), except as otherwise provided in the Agreement:
(1) all payments on account of principal, including principal
prepayments, on the Assets;
(2) all payments on account of interest on the Assets,
including any default interest collected, in each case net of any
portion retained by a servicer as its servicing compensation and net of
any Retained Interest;
(3) Liquidation Proceeds and Insurance Proceeds, together with
the net proceeds on a monthly basis with respect to any Assets acquired
for the benefit of securityholders;
(4) any amounts paid under any instrument or drawn from any
fund that constitutes credit support for the related series of Notes or
Certificates, as applicable, as described under "Description of Credit
Support;"
(5) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies;"
(6) any amounts paid under any Cash Flow Agreement, as
described under "Description of the Trust Funds--Cash Flow Agreements;"
(7) all proceeds of any Asset or, with respect to a mortgage
loan, property acquired in respect of the mortgage loan purchased by
the depositor, any Asset Seller or any other specified person as
described above under "--Assignment of Assets; Repurchases" and
"--Representations and Warranties; Repurchases," all proceeds of any
defaulted mortgage loan purchased as described below under
"--Realization Upon Defaulted Assets," and all proceeds of any Asset
purchased as described under "Description of the Securities--
Termination;"
44
(8) any amounts paid by a servicer to cover interest
shortfalls arising out of the prepayment of Assets in the trust fund as
described below under "--Retained Interest; Servicing Compensation and
Payment of Expenses;"
(9) to the extent that any of these items do not constitute
additional servicing compensation to a servicer, any payments on
account of modification or assumption fees, late payment charges or
Prepayment Premiums on the Assets;
(10) all payments required to be deposited in the Collection
Account with respect to any deductible clause in any blanket insurance
policy described below under "--Hazard Insurance Policies;"
(11) any amount required to be deposited by a servicer or the
trustee in connection with losses realized on investments for the
benefit of the servicer or the trustee, as the case may be, of funds
held in the Collection Account; and
(12) any other amounts required to be deposited in the
Collection Account as provided in the related Agreement and described
in the prospectus supplement.
WITHDRAWALS. A servicer or the trustee may, from time to time as
provided in the related Agreement, make withdrawals from the Collection Account
for each trust fund for any of the following purposes, except as otherwise
provided in the Agreement:
(1) to make distributions to the securityholders on each
Distribution Date;
(2) to reimburse a servicer for unreimbursed amounts advanced
as described under "Description of the Securities--Advances in Respect
of Delinquencies," which reimbursement is to be made out of amounts
received that were identified and applied by the servicer as late
collections of interest (net of related servicing fees and Retained
Interest) on and principal of the particular Assets for which the
advances were made or out of amounts drawn under any form of credit
support with respect to those Assets;
(3) to reimburse a servicer for unpaid servicing fees earned
and unreimbursed servicing expenses incurred with respect to Assets and
properties acquired in respect of the Assets, which reimbursement is to
be made out of amounts that represent Liquidation Proceeds and
Insurance Proceeds collected on the particular Assets and properties,
and net income collected on the particular properties, which fees were
earned or expenses were incurred or out of amounts drawn under any form
of credit support for those Assets and properties;
(4) to reimburse a servicer for any advances described in
clause (2) above and any servicing expenses described in clause (3)
above which, in the servicer's good faith judgment, will not be
recoverable from the amounts described in those clauses, which
reimbursement is to be made from amounts collected on other Assets or,
if and to the extent so provided by the related Agreement and described
in the prospectus supplement, just from that portion of amounts
collected on other Assets that is otherwise distributable on one or
more classes of Subordinate Notes or Subordinate Certificates, as
applicable, if any, remain outstanding, and otherwise any outstanding
class of Notes or Certificates, as applicable, of the related series;
(5) if and to the extent described in the prospectus
supplement, to pay a servicer interest accrued on the advances
described in clause (2) above and the servicing expenses described in
clause (3) above while those advances and servicing expenses remain
outstanding and unreimbursed;
45
(6) to reimburse a servicer, the depositor, or any of their
respective directors, officers, employees and agents, as the case may
be, for expenses, costs and liabilities incurred by these parties, as
and to the extent described below under "--Certain Matters Regarding
Servicers, the Master Servicer and the Depositor;"
(7) if and to the extent described in the prospectus
supplement, to pay (or to transfer to a separate account for purposes
of escrowing for the payment of) the trustee's fees;
(8) to reimburse the trustee or any of its directors,
officers, employees and agents, as the case may be, for expenses, costs
and liabilities incurred by these parties, as and to the extent
described below under "--Certain Matters Regarding the Trustee;"
(9) to pay a servicer, as additional servicing compensation,
interest and investment income earned in respect of amounts held in the
Collection Account;
(10) to pay the person so entitled any amounts deposited in
the Collection Account that were identified and applied by the servicer
as recoveries of Retained Interest;
(11) to pay for costs reasonably incurred in connection with
the proper management and maintenance of any Mortgaged Property
acquired for the benefit of securityholders by foreclosure or by deed
in lieu of foreclosure or otherwise, which payments are to be made out
of income received on that property;
(12) if one or more elections have been made to treat the
trust fund or designated portions of the trust fund as a REMIC, to pay
any federal, state or local taxes imposed on the trust fund or its
assets or transactions, as and to the extent described under "Material
Federal Income Tax Considerations--REMICs--Taxes That May Be Imposed on
the REMIC Pool" or in the prospectus supplement, respectively;
(13) to pay for the cost of an independent appraiser or other
expert in real estate matters retained to determine a fair sale price
for a defaulted mortgage loan or a property acquired in respect of a
mortgage loan in connection with the liquidation of that mortgage loan
or property;
(14) to pay for the cost of various opinions of counsel
obtained pursuant to the related Agreement for the benefit of
securityholders;
(15) to pay for the costs of recording the related Agreement
if that recordation materially and beneficially affects the interests
of securityholders, provided that the payment shall not constitute a
waiver with respect to the obligation of the Warranting Party to remedy
any breach of representation or warranty under the Agreement;
(16) to pay the person so entitled any amounts deposited in
the Collection Account in error, including amounts received on any
Asset after its removal from the trust fund whether by reason of
purchase or substitution as contemplated above under "--Assignment of
Assets; Repurchase" and "--Representations and Warranties; Repurchases"
or otherwise;
(17) to make any other withdrawals permitted by the related
Agreement; and
(18) to clear and terminate the Collection Account at the
termination of the trust fund.
OTHER COLLECTION ACCOUNTS. If specified in the prospectus supplement,
the Agreement for any series of Notes or Certificates, as applicable, may
provide for the establishment and maintenance of
46
a separate collection account into which the servicer will deposit on a daily
basis, or any other period as provided in the related Agreement, the amounts
described under "Deposits" above for one or more series of Notes or
Certificates, as applicable. Any amounts on deposit in any of these collection
accounts will be withdrawn from these collection accounts and deposited into the
appropriate Collection Account by a time specified in the prospectus supplement.
To the extent specified in the prospectus supplement, any amounts that could be
withdrawn from the Collection Account as described under "--Withdrawals" above
may also be withdrawn from any of these collection accounts. The prospectus
supplement will set forth any restrictions for any of these collection accounts,
including investment restrictions and any restrictions for financial
institutions with which any of these collection accounts may be maintained.
The servicer will establish and maintain with the indenture trustee an
account, in the name of the indenture trustee on behalf of the holders of Notes,
into which amounts released from the Collection Account for distribution to the
holders of Notes will be deposited and from which all distributions to the
holders of Notes will be made.
COLLECTION AND OTHER SERVICING PROCEDURES. The servicer is required to
make reasonable efforts to collect all scheduled payments under the Assets and
will follow or cause to be followed those collection procedures that it would
follow with respect to assets that are comparable to the Assets and held for its
own account, provided that those procedures are consistent with
(1) the terms of the related Agreement and any related
hazard insurance policy or instrument of credit
support, if any, included in the related trust fund
described in this prospectus or under "Description of
Credit Support,"
(2) applicable law and
(3) the general servicing standard specified in the
prospectus supplement or, if no standard is so
specified, its normal servicing practices (in either
case, the "Servicing Standard").
In connection, the servicer will be permitted in its discretion to waive any
late payment charge or penalty interest in respect of a late payment on an
Asset.
Each servicer will also be required to perform other customary
functions of a servicer of comparable assets, including maintaining hazard
insurance policies as described in this prospectus and in any prospectus
supplement, and filing and settling claims under these policies; maintaining, to
the extent required by the Agreement, escrow or impoundment accounts of
borrowers for payment of taxes, insurance and other items required to be paid by
any borrower pursuant to the terms of the Assets; processing assumptions or
substitutions in those cases where the servicer has determined not to enforce
any applicable due-on-sale clause; attempting to cure delinquencies; supervising
foreclosures or repossessions; inspecting and managing mortgaged properties or
manufactured homes under some circumstances; and maintaining accounting records
relating to the Assets. The servicer or any other entity specified in the
prospectus supplement will be responsible for filing and settling claims in
respect of particular Assets under any applicable instrument of credit support.
See "Description of Credit Support."
The servicer may agree to modify, waive or amend any term of any Asset
in a manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (1) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (2) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due on the Asset. The servicer also may agree to any
modification, waiver or amendment that would so affect or impair the payments
on, or the security for, an Asset if (1) in its judgment, a material default on
the Asset has occurred or a payment default is reasonably foreseeable and (2) in
47
its judgment, that modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Asset on a present value basis
than would liquidation. In the event of any modification, waiver or amendment of
any Asset, the servicer will furnish a copy of that modification, waiver or
amendment to the trustee (or its custodian).
In the case of multifamily loans, a borrower's failure to make required
mortgage loan payments may mean that operating income is insufficient to service
the mortgage loan debt, or may reflect the diversion of that income from the
servicing of the mortgage loan debt. In addition, a borrower under a multifamily
loan that is unable to make mortgage loan payments may also be unable to make
timely payment of all required taxes and otherwise to maintain and insure the
related Mortgaged Property. In general, the servicer will be required to monitor
any multifamily loan that is in default, evaluate whether the causes of the
default can be corrected over a reasonable period without significant impairment
of the value of related Mortgaged Property, initiate corrective action in
cooperation with the borrower if cure is likely, inspect the related Multifamily
Property and take those other actions as are consistent with the related
Agreement. A significant period of time may elapse before the servicer is able
to assess the success of servicer, can make the initial determination of
appropriate action, evaluate the success of corrective action, develop
additional initiatives, institute foreclosure proceedings and actually foreclose
may vary considerably depending on the particular multifamily loan, the
Multifamily Property, the borrower, the presence of an acceptable party to
assume the multifamily loan and the laws of the jurisdiction in which the
Multifamily Property is located.
REALIZATION UPON DEFAULTED ASSETS
Generally, the servicer is required to monitor any Asset that is in
default, initiate corrective action in cooperation with the borrower if cure is
likely, inspect the Asset and take any other actions as are consistent with the
Servicing Standard. A significant period of time may elapse before the servicer
is able to assess the success of that corrective action or the need for
additional initiatives.
Any Agreement relating to a trust fund that includes mortgage loans or
contracts may grant to the servicer and/or the holder or holders of some classes
of Notes or Certificates, as applicable, a right of first refusal to purchase
from the trust fund at a predetermined purchase price any mortgage loan or
contract as to which a specified number of scheduled payments under the
Agreement are delinquent. Any right of first refusal granted to the holder of an
Offered Security will be described in the prospectus supplement. The prospectus
supplement will also describe any similar right granted to any person if the
predetermined purchase price is less than the Purchase Price described above
under "--Representations and Warranties; Repurchases."
If specified in the prospectus supplement, the servicer may offer to
sell any defaulted mortgage loan or contract described in the preceding
paragraph and not otherwise purchased by any person having a right of first
refusal with respect to that defaulted mortgage loan or contract, if and when
the servicer determines, consistent with the Servicing Standard, so that a sale
would produce a greater recovery on a present value basis than would liquidation
through foreclosure, repossession or similar proceedings. The related Agreement
will provide that any offering be made in a commercially reasonable manner for a
specified period and that the servicer accept the highest cash bid received from
any person (including itself, an affiliate of the servicer or any
securityholder) that constitutes a fair price for that defaulted mortgage loan
or contract. If there is no bid that is determined to be fair, the servicer will
proceed with respect to that defaulted mortgage loan or contract as described
below. Any bid in an amount at least equal to the Purchase Price described above
under "--Representations and Warranties; Repurchases" will in all cases be
deemed fair.
The servicer, on behalf of the trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a mortgage loan by operation of law or otherwise and may at
any time repossess and realize upon any manufactured home, if that action is
48
consistent with the Servicing Standard and a default on that mortgage loan or
contract has occurred or, in the servicer's judgment, is imminent.
If title to any Mortgaged Property is acquired by a trust fund as to
which a REMIC election has been made, the servicer, on behalf of the trust fund,
will be required to sell the Mortgaged Property within three years from the
close of the calendar year of acquisition, unless (1) the Internal Revenue
Service grants an extension of time to sell that property or (2) the trustee
receives an opinion of independent counsel to the effect that the holding of the
property by the trust fund longer than three years after the close of the
calendar year of its acquisition will not result in the imposition of a tax on
the trust fund or cause the trust fund to fail to qualify as a REMIC under the
Code at any time that any Notes or Certificates, as applicable, are outstanding.
Subject to the foregoing, the servicer will be required to (A) solicit bids for
any Mortgaged Property so acquired in that manner as will be reasonably likely
to realize a fair price for that property and (B) accept the first (and, if
multiple bids are contemporaneously received, the highest) cash bid received
from any person that constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC
provisions of the Code (if a REMIC election has been made for the related trust
fund) on the ownership and management of any Mortgaged Property acquired on
behalf of the trust fund may result in the recovery of an amount less than the
amount that would otherwise be recovered. See "Certain Legal Aspects of Mortgage
Loans--Foreclosure."
If recovery on a defaulted Asset under any related instrument of credit
support is not available, the servicer nevertheless will be obligated to follow
or cause to be followed those normal practices and procedures as it deems
necessary or advisable to realize upon the defaulted Asset. If the proceeds of
any liquidation of the property securing the defaulted Asset are less than the
outstanding principal balance of the defaulted Asset plus interest accrued on
the defaulted Asset at the applicable interest rate, plus the total amount of
expenses incurred by the servicer in connection with those proceedings and which
are reimbursable under the Agreement, the trust fund will realize a loss in the
amount of that difference. The servicer will be entitled to withdraw or cause to
be withdrawn from the Collection Account out of the Liquidation Proceeds
recovered on any defaulted Asset, before the distribution of those Liquidation
Proceeds to securityholders, amounts representing its normal servicing
compensation on the Security, unreimbursed servicing expenses incurred with
respect to the Asset and any unreimbursed advances of delinquent payments made
with respect to the Asset.
If any property securing a defaulted Asset is damaged the servicer is
not required to expend its own funds to restore the damaged property unless it
determines (1) that restoration will increase the proceeds to securityholders on
liquidation of the Asset after reimbursement of the servicer for its expenses
and (2) that its expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
The pooling and servicing agreement will require the trustee, if it has
not received a distribution for any Mortgage Security or Agency Security by the
fifth business day after the date on which that distribution was due and payable
pursuant to the terms of that Agency Security, to request the issuer or
guarantor, if any, of that Mortgage Security or Agency Security to make that
payment as promptly as possible and legally permitted to take legal action
against that issuer or guarantor as the trustee deems appropriate under the
circumstances, including the prosecution of any claims in connection therewith.
The reasonable legal fees and expenses incurred by the trustee in connection
with the prosecution of this legal action will be reimbursable to the trustee
out of the proceeds of that action and will be retained by the trustee before
the deposit of any remaining proceeds in the Collection Account pending
distribution of the Collection Account to securityholders of the related series.
If the proceeds of any legal action are insufficient to reimburse the trustee
for its legal fees and expenses, the trustee will be entitled to withdraw from
the Collection Account an amount equal to its expenses, and the trust fund may
realize a loss in that amount.
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As servicer of the Assets, a servicer, on behalf of itself, the trustee
and the securityholders, will present claims to the borrower under each
instrument of credit support, and will take those reasonable steps as are
necessary to receive payment or to permit recovery under these instruments for
defaulted Assets.
If a servicer or its designee recovers payments under any instrument of
credit support for any defaulted Assets, the servicer will be entitled to
withdraw or cause to be withdrawn from the Collection Account out of those
proceeds, before distribution of the Collection Account to securityholders,
amounts representing its normal servicing compensation on that Asset,
unreimbursed servicing expenses incurred for the Asset and any unreimbursed
advances of delinquent payments made with respect to the Asset. See "Hazard
Insurance Policies" and "Description of Credit Support."
HAZARD INSURANCE POLICIES
MORTGAGE LOANS. Generally, each Agreement for a trust fund composed of
mortgage loans will require the servicer to cause the borrower on each mortgage
loan to maintain a hazard insurance policy (including flood insurance coverage,
if obtainable, to the extent the property is located in a federally designated
flood area, in an amount as is required under applicable guidelines) providing
for the level of coverage that is required under the related Mortgage or, if any
Mortgage permits its holder to dictate to the borrower the insurance coverage to
be maintained on the related Mortgaged Property, then the level of coverage that
is consistent with the Servicing Standard. That coverage will be in general in
an amount equal to the lesser of the principal balance owing on that mortgage
loan (but not less than the amount necessary to avoid the application of any
co-insurance clause contained in the hazard insurance policy) and the amount
necessary to fully compensate for any damage or loss to the improvements on the
Mortgaged Property on a replacement cost basis or any other amount specified in
the prospectus supplement. The ability of the servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent upon its being
named as an additional insured under any hazard insurance policy and under any
other insurance policy referred to below, or upon the extent to which
information in this regard is furnished by borrowers. All amounts collected by
the servicer under any of these policies (except for amounts to be applied to
the restoration or repair of the Mortgaged Property or released to the borrower
in accordance with the servicer's normal servicing procedures, subject to the
terms and conditions of the related Mortgage and mortgage note) will be
deposited in the Collection Account in accordance with the related Agreement.
The Agreement may provide that the servicer may satisfy its obligation
to cause each borrower to maintain a hazard insurance policy by the servicer's
maintaining a blanket policy insuring against hazard losses on the mortgage
loans. If the blanket policy contains a deductible clause, the servicer will be
required to deposit in the Collection Account from its own funds all sums that
would have been deposited in the Collection Account but for that clause.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the mortgage loans will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms, and therefore will not contain identical terms
and conditions, the basic terms of the policies are dictated by respective state
laws, and most of these policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and other kinds of uninsured
risks.
The hazard insurance policies covering the Mortgaged Properties
securing the mortgage loans will typically contain a coinsurance clause that in
effect requires the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
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improvements on the property to recover the full amount of any partial loss. If
the insured's coverage falls below this specified percentage, the coinsurance
clause generally provides that the insurer's liability in the event of partial
loss does not exceed the lesser of (1) the replacement cost of the improvements
less physical depreciation and (2) that proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of those improvements.
Each Agreement for a trust fund composed of mortgage loans will require
the servicer to cause the borrower on each mortgage loan to maintain all other
insurance coverage for the related Mortgaged Property as is consistent with the
terms of the related Mortgage and the Servicing Standard, which insurance may
typically include flood insurance (if the related Mortgaged Property was located
at the time of origination in a federally designated flood area).
Any cost incurred by the servicer in maintaining any insurance policy
will be added to the amount owing under the mortgage loan where the terms of the
mortgage loan so permit; provided, however, that the addition of that cost will
not be taken into account for purposes of calculating the distribution to be
made to securityholders. Those costs may be recovered by the servicer from the
Collection Account, with interest, as provided by the Agreement.
Under the terms of the mortgage loans, borrowers will generally be
required to present claims to insurers under hazard insurance policies
maintained on the related Mortgaged Properties. The servicer, on behalf of the
trustee and securityholders, is obligated to present or cause to be presented
claims under any blanket insurance policy insuring against hazard losses on
Mortgaged Properties securing the mortgage loans. However, the ability of the
servicer to present or cause to be presented those claims is dependent upon the
extent to which information in this regard is furnished to the servicer by
borrowers.
CONTRACTS. Generally, the terms of the agreement for a trust fund
composed of contracts will require the servicer to maintain for each contract
one or more hazard insurance policies that provide, at a minimum, the same
coverage as a standard form fire and extended coverage insurance policy that is
customary for manufactured housing, issued by a company authorized to issue
those policies in the state in which the manufactured home is located, and in an
amount that is not less than the maximum insurable value of that manufactured
home or the principal balance due from the borrower on the related contract,
whichever is less; provided, however, that the amount of coverage provided by
each hazard insurance policy must be sufficient to avoid the application of any
co-insurance clause contained therein. When a manufactured home's location was,
at the time of origination of the related contract, within a federally
designated special flood hazard area, the servicer must cause flood insurance to
be maintained, which coverage must be at least equal to the minimum amount
specified in the preceding sentence or any lesser amount as may be available
under the federal flood insurance program. Each hazard insurance policy caused
to be maintained by the servicer must contain a standard loss payee clause in
favor of the servicer and its successors and assigns. If any borrower is in
default in the payment of premiums on its hazard insurance policy or policies,
the servicer must pay those premiums out of its own funds, and may add
separately the premiums to the borrower's obligation as provided by the
contract, but may not add the premiums to the remaining principal balance of the
contract.
The servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained for each manufactured home, and must
maintain, to the extent that the related contract does not require the borrower
to maintain a hazard insurance policy for the related manufactured home, one or
more blanket insurance policies covering losses on the borrower's interest in
the contracts resulting from the absence or insufficiency of individual hazard
insurance policies. The servicer must pay the premium for that blanket policy on
the basis described therein and must pay any deductible amount for claims under
that policy relating to the contracts.
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FHA INSURANCE AND VA GUARANTEES
FHA loans will be insured by the FHA as authorized under the Housing
Act. Some FHA loans will be insured under various FHA programs including the
standard FHA 203(b) program to finance the acquisition of one- to four-family
housing units, the FHA 245 graduated payment mortgage program and the FHA Title
I Program. These programs generally limit the principal amount and interest
rates of the mortgage loans insured. The prospectus supplement for Notes or
Certificates, as applicable, of each series evidencing interests in a trust fund
including FHA loans will set forth additional information regarding the
regulations governing the applicable FHA insurance programs. Except as otherwise
specified in the prospectus supplement, the following describes FHA insurance
programs and regulations as generally in effect for FHA loans.
The insurance premiums for FHA loans are collected by lenders approved
by the Department of Housing and Urban Development ("HUD") or by the servicer
and are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to the United States of America or upon assignment of the defaulted
loan to the United States of America. For a defaulted FHA loan, the servicer is
limited in its ability to initiate foreclosure proceedings. When it is
determined, either by the servicer or HUD, that default was caused by
circumstances beyond the borrower's control, the servicer is expected to make an
effort to avoid foreclosure by entering, if feasible, into one of a number of
available forms of forbearance plans with the borrower. Those plans may involve
the reduction or suspension of regular mortgage payments for a specified period,
with those payments to be made on or before the maturity date of the mortgage,
or the recasting of payments due under the mortgage up to or, other than FHA
loans originated under the FHA Title I Program, beyond the maturity date. In
addition, when a default caused by those circumstances is accompanied by other
criteria, HUD may provide relief by making payments to the servicer in partial
or full satisfaction of amounts due under the FHA loan (which payments are to be
repaid by the borrower to HUD) or by accepting assignment of the loan from the
servicer. With some exceptions, at least three full monthly installments must be
due and unpaid under the FHA loan, and HUD must have rejected any request for
relief from the borrower before the servicer may initiate foreclosure
proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Currently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. To the extent specified in the prospectus supplement,
the servicer of each single family FHA loan will be obligated to purchase any
debenture issued in satisfaction of that FHA loan upon default for an amount
equal to the principal amount of that debenture.
Other than in relation to the FHA Title I Program, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted FHA loan adjusted to reimburse the servicer
for some of its costs and expenses and to deduct amounts received or retained by
the servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
servicer is compensated for no more than two-thirds of its foreclosure costs,
and is compensated for interest accrued and unpaid before that date but in
general only to the extent it was allowed pursuant to a forbearance plan
approved by HUD. When entitlement to insurance benefits results from assignment
of the FHA loan to HUD, the insurance payment includes full compensation for
interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA loan, bears interest from a date 30 days
after the borrower's first uncorrected failure to perform any obligation to make
any payment due under the mortgage and, upon assignment, from the date of
assignment to the date of payment of the claim, in each case at the same
interest rate as the applicable HUD debenture interest rate as described above.
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VA loans will be partially guaranteed by the VA under the Serviceman's
Readjustment Act (a "VA Guaranty Policy"). For a defaulted VA loan, the servicer
is, absent exceptional circumstances, authorized to announce its intention to
foreclose only when the default has continued for three months. Generally, a
claim for the guarantee is submitted after liquidation of the Mortgaged
Property.
The amount payable under the guarantee will be the percentage of the VA
loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of that VA loan,
interest accrued on the unpaid balance of that VA loan to the appropriate date
of computation and limited expenses of the mortgagee, but in each case only to
the extent that those amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Each Agreement will require that the servicer obtain and maintain in
effect a fidelity bond or similar form of insurance coverage (which may provide
blanket coverage) or any combination of these insuring against loss occasioned
by fraud, theft or other intentional misconduct of the officers, employees and
agents of the servicer. The related Agreement will allow the servicer to
self-insure against loss occasioned by the errors and omissions of the officers,
employees and agents of the servicer so long as the criteria set forth in the
Agreement are met.
DUE-ON-SALE CLAUSES
The mortgage loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the
mortgage loan upon any sale, transfer or conveyance of the related Mortgaged
Property. The servicer will generally enforce any due-on-sale clause to the
extent it has knowledge of the conveyance or proposed conveyance of the
underlying Mortgaged Property and it is entitled to do so under applicable law;
provided, however, that the servicer will not take any action in relation to the
enforcement of any due-on-sale clause that would:
o adversely affect or jeopardize coverage under any applicable
insurance policy or
o materially increase the risk of default or delinquency on, or
materially impair the security for, that mortgage loan.
Any fee collected by or on behalf of the servicer for entering into an
assumption agreement will be retained by or on behalf of the servicer as
additional servicing compensation. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses."
The contracts may also contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related mortgaged property, or
due-on-sale clauses. The servicer will generally permit that transfer so long as
the transferee satisfies the servicer's then applicable underwriting standards.
The purpose of those transfers is often to avoid a default by the transferring
borrower.
RETAINED INTEREST, SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The prospectus supplement for a series of Notes or Certificates, as
applicable, will specify whether there will be any Retained Interest in the
Assets, and, if so, the initial owner of this Retained Interest. If so, the
Retained Interest will be established on a loan-by-loan basis and will be
specified on an exhibit to the related Agreement. A "Retained Interest" in an
Asset represents a specified portion of the interest payable on the Asset. The
Retained Interest will be deducted from borrower payments as received and will
not be part of the related trust fund.
53
The servicer's primary servicing compensation for a series of Notes or
Certificates, as applicable, will come from the periodic payment to it of a
portion of the interest payment on each Asset or any other amount specified in
the prospectus supplement. Since any Retained Interest and a servicer's primary
compensation are percentages of the principal balance of each Asset, those
amounts will decrease in accordance with the amortization of the Assets. The
prospectus supplement for a series of Notes or Certificates, as applicable,
evidencing interests in a trust fund that includes mortgage loans or contracts
may provide that, as additional compensation, the servicer may retain all or a
portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from borrowers and any interest or other income
that may be earned on funds held in the Collection Account or any account
established by a servicer pursuant to the Agreement.
The servicer may, to the extent provided in the prospectus supplement,
pay from its servicing compensation expenses incurred in connection with its
servicing and managing of the Assets, including payment of the fees and
disbursements of the trustee and independent accountants, payment of expenses
incurred in connection with distributions and reports to securityholders, and
payment of any other expenses described in the prospectus supplement. Some other
expenses, including expenses relating to defaults and liquidations on the Assets
and, to the extent so provided in the prospectus supplement, interest on these
expenses at the rate specified in the prospectus supplement may be borne by the
trust fund.
If and to the extent provided in the prospectus supplement, the
servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to interest shortfalls
resulting from the voluntary prepayment of any Assets in the related trust fund
during that period before their due dates.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets that include mortgage loans or
contracts, unless otherwise provided in the prospectus supplement, will provide
that on or before a specified date in each year, beginning with the first of
these dates at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the trustee to the
effect that, on the basis of the examination by that firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for Freddie Mac
or any other program used by the servicer, the servicing by or on behalf of the
servicer of mortgage loans under agreements substantially similar to each other
(including the related Agreement) was conducted in compliance with the terms of
those agreements or that program except for any significant exceptions or errors
in records that, in the opinion of the firm, either the Audit Program for
Mortgages serviced for Freddie Mac, or paragraph 4 of the Uniform Single
Attestation Program for Mortgage Bankers, or any other program, requires it to
report.
Each Agreement will also provide for delivery to the trustee, on or
before a specified date in each year, of an officer's certificate of the
servicer to the effect that the servicer has fulfilled its obligations under the
Agreement throughout the preceding calendar year or other specified twelve-month
period.
CERTAIN MATTERS REGARDING SERVICERS, THE MASTER SERVICER AND THE
DEPOSITOR
The servicer or master servicer under each Agreement will be named in
the prospectus supplement. The entities serving as servicer or master servicer
may be affiliates of the depositor and may have other normal business
relationships with the depositor or the depositor's affiliates. If applicable,
reference in this prospectus to the servicer will also be deemed to be to the
master servicer. Each Agreement will provide, in general, that:
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o The servicer may resign from its obligations and duties under
the Agreement only upon a determination that its duties under
the Agreement are no longer permissible under applicable law
or are in material conflict by reason of applicable law with
any other activities carried on by it, the other activities of
the servicer so causing that conflict being of a type and
nature carried on by the servicer at the date of the
Agreement. No resignation will become effective until the
trustee or a successor servicer has assumed the servicer's
obligations and duties under the Agreement.
o Neither any servicer, the depositor nor any director, officer,
employee, or agent of a servicer or the depositor will be
under any liability to the related trust fund or
securityholders for any action taken, or for refraining from
the taking of any action, in good faith pursuant to the
Agreement; provided, however, that neither a servicer, the
depositor nor any other person will be protected against any
breach of a representation, warranty or covenant made in the
related Agreement, or against any liability specifically
imposed by the Agreement, or against any liability that would
otherwise be imposed by reason of willful misfeasance, bad
faith or gross negligence in the performance of obligations or
duties under the Agreement or by reason of reckless disregard
of obligations and duties under the Agreement.
o Any servicer, the depositor and any director, officer,
employee or agent of a servicer or the depositor will be
entitled to indemnification by the related trust fund and will
be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the
Agreement or the Notes or Certificates, as applicable;
provided, however, that that indemnification will not extend
to any loss, liability or expense
(1) specifically imposed by that Agreement or otherwise
incidental to the performance of obligations and
duties under the Agreement, including, in the case of
a servicer, the prosecution of an enforcement action
in respect of any specific mortgage loan or mortgage
loans or contract or contracts (except as any loss,
liability or expense will be otherwise reimbursable
pursuant to that Agreement);
(2) incurred in connection with any breach of a
representation, warranty or covenant made in that
Agreement;
(3) incurred by reason of misfeasance, bad faith or gross
negligence in the performance of obligations or
duties under the Agreement, or by reason of reckless
disregard of those obligations or duties;
(4) incurred in connection with any violation of any
state or federal securities law; or
(5) imposed by any taxing authority if that loss,
liability or expense is not specifically reimbursable
pursuant to the terms of the related Agreement.
o Neither any servicer nor the depositor will be under any
obligation to appear in, prosecute or defend any legal action
that is not incidental to its respective responsibilities
under the Agreement and which in its opinion may involve it in
any expense or liability. Any servicer or the depositor may,
however, in its discretion undertake any action which it may
deem necessary or desirable with respect to the Agreement and
the rights and duties of the parties to the Agreement and the
interests of the securityholders under the Agreement. In that
event, the legal expenses and costs of that action and any
liability resulting will be expenses, costs and liabilities of
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the securityholders, and the servicer or the depositor, as the
case may be, will be entitled to be reimbursed therefor and to
charge the Collection Account.
Any person into which the servicer or the depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the servicer or the depositor is a party, or any person succeeding to the
business of the servicer or the depositor, may be the successor of the servicer
or the depositor, as the case may be, under the terms of the related Agreement.
SPECIAL SERVICERS
If and to the extent specified in the prospectus supplement, a special
servicer (a "Special servicer") may be a party to the related Agreement or may
be appointed by the servicer or another specified party to perform specified
duties in respect of servicing the related mortgage loans that would otherwise
be performed by the servicer (for example, the workout and/or foreclosure of
defaulted mortgage loans). The rights and obligations of any Special servicer
will be specified in the prospectus supplement, and the servicer will be liable
for the performance of a Special servicer only if, and to the extent, set forth
in the prospectus supplement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Events of default under the related Agreement will generally include:
o any failure by the servicer to distribute or cause to be
distributed to securityholders, or to remit to the trustee for
distribution to securityholders, any required payment that
continues after a grace period, if any;
o any failure by the servicer duly to observe or perform in any
material respect any of its other covenants or obligations
under the Agreement that continues unremedied for 30 days
after written notice of that failure has been given to the
servicer by the trustee or the depositor, or to the servicer,
the depositor and the trustee by securityholders evidencing
not less than 25% of the voting rights for that series;
o any breach of a representation or warranty made by the
servicer under the Agreement that materially and adversely
affects the interests of securityholders and which continues
unremedied for 30 days after written notice of that breach has
been given to the servicer by the trustee or the depositor, or
to the servicer, the depositor and the trustee by the holders
of Notes or Certificates, as applicable, evidencing not less
than 25% of the voting rights for that series; and
o some events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings and actions by
or on behalf of the servicer indicating its insolvency or
inability to pay its obligations.
Material variations to the foregoing events of default (other than to
shorten cure periods or eliminate notice requirements) will be specified in the
prospectus supplement. The trustee will, not later than the later of 60 days or
any other period specified in the prospectus supplement after the occurrence of
any event that constitutes or, with notice or lapse of time or both, would
constitute an event of default and five days after specific officers of the
trustee become aware of the occurrence of that event, transmit by mail to the
depositor and all securityholders of the applicable series notice of that
occurrence, unless that default has been cured or waived.
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RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENTS
So long as an event of default under an Agreement remains unremedied,
the depositor or the trustee may, and at the direction of holders of Notes or
Certificates, as applicable, evidencing not less than 51% (or any other
percentage specified in the Agreement) of the voting rights for that series, the
trustee will terminate all of the rights and obligations of the servicer under
the Agreement and in and to the mortgage loans (other than as a securityholder
or as the owner of any Retained Interest), whereupon the trustee will succeed to
all of the responsibilities, duties and liabilities of the servicer under the
Agreement (except that if the trustee is prohibited by law from obligating
itself to make advances regarding delinquent Assets, or if the prospectus
supplement so specifies, then the trustee will not be obligated to make those
advances) and will be entitled to similar compensation arrangements. If the
trustee is unwilling or unable so to act, it may or, at the written request of
the holders of Notes or Certificates, as applicable, entitled to at least 51%
(or any other percentage specified in the Agreement) of the voting rights for
that series, it must appoint, or petition a court of competent jurisdiction for
the appointment of, a loan servicing institution acceptable to the rating agency
with a net worth at the time of that appointment of at least $15,000,000 (or any
other amount specified in the Agreement) to act as successor to the servicer
under the Agreement. Pending that appointment, the trustee is obligated to act
in that capacity. The trustee and any successor servicer may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the servicer under the Agreement.
The holders of Notes or Certificates, as applicable, representing at
least 66 2/3% (or any other percentage specified in the Agreement) of the voting
rights allocated to the respective classes of Notes or Certificates, as
applicable, affected by any event of default will be entitled to waive that
event of default; provided, however, that an Event of Default involving a
failure to distribute a required payment to securityholders described in clause
(1) under "Events of Default under the Agreements" may be waived only by all of
the securityholders. Upon any waiver of an event of default, that event of
default will cease to exist and will be deemed to have been remedied for every
purpose under the Agreement.
No securityholders will have the right under any Agreement to institute
any proceeding with respect to the Agreement unless that holder previously has
given to the trustee written notice of default and unless the holders of Notes
or Certificates, as applicable, evidencing not less than 25% (or any other
percentage specified in the Agreement) of the voting rights have made written
request upon the trustee to institute that proceeding in its own name as trustee
under the Agreement and have offered to the trustee reasonable indemnity, and
the trustee for 60 days (or any other number of days specified in the Agreement)
has neglected or refused to institute any proceeding. The trustee, however, is
under no obligation to exercise any of the trusts or powers vested in it by any
Agreement or to make any investigation of matters arising under the Agreement or
to institute, conduct or defend any litigation under the Agreement or in
relation to the Agreement at the request, order or direction of any of the
securityholders covered by that Agreement, unless those securityholders have
offered to the trustee reasonable security or indemnity against the costs,
expenses and liabilities that may be incurred.
The manner of determining the voting rights of a Security or class or
classes of Notes or Certificates, as applicable, will be specified in the
Agreement.
AMENDMENT
In general, each Agreement may be amended by the parties to it, without
the consent of any securityholders covered by the Agreement, to
(1) cure any ambiguity or mistake;
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(2) correct, modify or supplement any provision in the
Agreement that may be inconsistent with any other provision in the
Agreement or with the prospectus supplement;
(3) make any other provisions with respect to matters or
questions arising under the Agreement that are not materially
inconsistent with the provisions of the Agreement; or
(4) comply with any requirements imposed by the Code; provided
that, in the case of clause (3), that amendment will not adversely
affect in any material respect the interests of any securityholders
covered by the Agreement as evidenced either by an opinion of counsel
to that effect or the delivery to the trustee of written notification
from each rating agency that provides, at the request of the depositor,
a rating for the Offered Notes or Offered Certificates, as applicable,
of the related series to the effect that that amendment or supplement
will not cause that rating agency to lower or withdraw the then current
rating assigned to those Notes or Certificates, as applicable.
In general, each Agreement may also be amended by the depositor, the
servicer, if any, and the trustee, with the consent of the securityholders
affected by the amendment evidencing not less than 51% (or any other percentage
specified in the Agreement) of the voting rights, for any purpose; provided,
however, no amendment may (1) reduce in any manner the amount of, or delay the
timing of, payments received or advanced on Assets that are required to be
distributed on any Security without the consent of the securityholder or (2)
reduce the consent percentages described in this paragraph without the consent
of all the securityholders covered by the Agreement then outstanding. However,
for any series of Notes or Certificates, as applicable, as to which a REMIC
election is to be made, the trustee will not consent to any amendment of the
Agreement unless it has first have received an opinion of counsel to the effect
that that amendment will not result in the imposition of a tax on the related
trust fund or, if applicable, cause the related trust fund to fail to qualify as
a REMIC, at any time that the related Notes or Certificates, as applicable, are
outstanding.
THE TRUSTEE
The trustee under each Agreement will be named in the prospectus
supplement. The commercial bank, national banking association, banking
corporation or trust company serving as trustee may have a banking relationship
with the depositor and its affiliates, with any servicer and its affiliates and
with any master servicer and its affiliates. To the extent consistent with its
fiduciary obligations as trustee, the trustee may delegate its duties to one or
more agents as provided in the Agreement.
DUTIES OF THE TRUSTEE
The trustee will make no representations as to the validity or
sufficiency of any Agreement, the Notes or Certificates, as applicable, or any
Asset or related document and is not accountable for the use or application by
or on behalf of any servicer of any funds paid to the master servicer or its
designee in respect of the Notes or Certificates, as applicable, or the Assets,
or deposited into or withdrawn from the Collection Account or any other account
by or on behalf of the servicer. If no Event of Default has occurred and is
continuing, the trustee is required to perform only those duties specifically
required under the related Agreement, as applicable. However, upon receipt of
the various certificates, reports or other instruments required to be furnished
to it, the trustee is required to examine those documents and to determine
whether they conform to the requirements of the Agreement.
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CERTAIN MATTERS REGARDING THE TRUSTEE
The trustee and any director, officer, employee or agent of the trustee
will be entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the trustee's
(1) enforcing its rights and remedies and protecting the interests
of the securityholders during the continuance of an Event of
Default,
(2) defending or prosecuting any legal action in respect of the
related Agreement or series of Notes or Certificates, as
applicable,
(3) being the mortgagee of record for the mortgage loans in a
trust fund and the owner of record for any Mortgaged Property
acquired in respect thereof for the benefit of
securityholders, or
(4) acting or refraining from acting in good faith at the
direction of the holders of the related series of Notes or
Certificates, as applicable, entitled to not less than 25% (or
any other percentage as is specified in the related Agreement
for any particular matter) of the voting rights for that
series;
provided, however, that this indemnification will not extend to any loss,
liability or expense that constitutes a specific liability of the trustee
pursuant to the related Agreement, or to any loss, liability or expense incurred
by reason of willful misfeasance, bad faith or negligence on the part of the
trustee in the performance of its obligations and duties under the Agreement, or
by reason of its reckless disregard of those obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the trustee
made in the Agreement.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The trustee may at any time resign from its obligations and duties
under an Agreement by giving written notice of its resignation to the depositor,
the servicer, if any, each rating agency, and all securityholders. Upon
receiving that notice of resignation, the depositor is required promptly to
appoint a successor trustee acceptable to the servicer, if any. If no successor
trustee has been so appointed and has accepted appointment within 30 days after
the giving of that notice of resignation, the resigning trustee may petition any
court of competent jurisdiction for the appointment of a successor trustee.
If at any time the trustee ceases to be eligible to continue as a
trustee under the related Agreement, or if at any time the trustee becomes
incapable of acting, or is adjudged bankrupt or insolvent, or a receiver of the
trustee or of its property is appointed, or any public officer takes charge or
control of the trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, or if a change in the financial
condition of the trustee has adversely affected or will adversely affect the
rating on any class of the Notes or Certificates, as applicable, then the
depositor and/or a party specified in the related Agreement may remove the
trustee and appoint a successor trustee acceptable to the master servicer, if
any, according to the terms of the related Agreement. Securityholders of any
series entitled to at least 51% (or any other percentage specified in the
prospectus supplement) of the voting rights for that series may at any time
remove the trustee without cause and appoint a successor trustee.
Any resignation or removal of the trustee and appointment of a
successor trustee will not become effective until acceptance of appointment by
the successor trustee.
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MATERIAL TERMS OF THE INDENTURE
GENERAL
The following summary describes the material provisions that may appear
in each indenture. The prospectus supplement for a series of Notes will describe
any provision of the indenture relating to that series that materially differs
from the description of that provision contained in this prospectus. The
summaries do not purport to be complete and are subject to, and are qualified by
reference to, all of the provisions of the indenture for a series of Notes. A
form of an indenture has been filed as an exhibit to the Registration Statement
of which this prospectus is a part. The depositor will provide a copy of the
indenture (without exhibits) relating to any series of Notes without charge upon
written request of a securityholder of that series addressed to ACE Securities
Corp., 6525 Morrison Boulevard, Suite 318, Charlotte, North Carolina 28211,
Attention: Elizabeth S. Eldridge.
EVENTS OF DEFAULT
Events of default under the indenture for each series of Notes will
generally include:
o a default for thirty days (or any other number of days
specified in the prospectus supplement) or more in the payment
of any principal of or interest on a Note of that series, to
the extent specified in the prospectus supplement;
o failure to perform any other covenant of the depositor or the
trust fund in the indenture that continues for a period of
sixty days (or any other number of days specified in the
prospectus supplement or the indenture) after notice of the
failure is given in accordance with the procedures described
in the prospectus supplement;
o any representation or warranty made by the depositor or the
trust fund in the indenture or in any certificate or other
writing delivered pursuant to the indenture or in connection
with the indenture with respect to or affecting that series
having been incorrect in a material respect as of the time
made, and that breach is not cured within sixty days (or any
other number of days specified in the prospectus supplement)
after notice of the breach is given in accordance with the
procedures described in the prospectus supplement;
o specified events of bankruptcy, insolvency, receivership or
liquidation of the trust fund; or
o any other event of default provided with respect to Notes of
that series.
If an event of default with respect to the Notes of any series at the
time outstanding occurs and is continuing, subject to and in accordance with the
terms of the indenture, either the indenture trustee or the holders of a
majority of the then total outstanding amount of the Notes of that series may
declare the principal amount (or, if the Notes of that series are Accrual
Securities, that portion of the principal amount as may be specified in the
terms of that series, as provided in the indenture) of all the Notes of that
series to be due and payable immediately. That declaration may, under some
circumstances, be rescinded and annulled by the securityholders of a majority in
total outstanding amount of the Notes of that series.
If, following an event of default with respect to any series of Notes,
the Notes of that series have been declared to be due and payable, the indenture
trustee may, in its discretion, notwithstanding that acceleration, elect to
maintain possession of the collateral securing the Notes of that series and to
continue to apply distributions on that collateral as if there had been no
declaration of acceleration if that collateral continues to provide sufficient
funds for the payment of
60
principal of and interest on the Notes of that series as they would have become
due if there had not been that declaration. In addition, the indenture trustee
may not sell or otherwise liquidate the collateral securing the Notes of a
series following an event of default, other than a default in the payment of any
principal or interest on any Note of that series for thirty days or more, unless
(1) the holders of 100% (or any other percentage specified in
the indenture) of the then total outstanding amount of the Notes of
that series consent to that sale;
(2) the proceeds of that sale or liquidation are sufficient to
pay in full the principal of and accrued interest, due and unpaid, on
the outstanding Notes of that series at the date of that sale; or
(3) the indenture trustee determines that that collateral
would not be sufficient on an ongoing basis to make all payments on the
Notes as those payments would have become due if the Notes had not been
declared due and payable, and the indenture trustee obtains the consent
of the holders of 66 2/3% (or any other percentage specified in the
indenture) of the then total outstanding amount of the Notes of that
series.
If so specified in the prospectus supplement, only holders of
particular classes of Notes will have the right to declare the Notes of that
series to be immediately due and payable in the event of a payment default, as
described above, and to exercise the remedies described above.
If the indenture trustee liquidates the collateral in connection with
an event of default involving a default for thirty days (or any other number of
days specified in the indenture) or more in the payment of principal of or
interest on the Notes of a series, the indenture provides that the indenture
trustee will have a prior lien on the proceeds of any liquidation for unpaid
fees and expenses. As a result, upon the occurrence of that event of default,
the amount available for distribution to the securityholders would be less than
would otherwise be the case. However, the indenture trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the indenture for the benefit of
the securityholders after the occurrence of that event of default.
To the extent provided in the prospectus supplement, in the event the
principal of the Notes of a series is declared due and payable, as described
above, the holders of any Notes issued at a discount from par may be entitled to
receive no more than an amount equal to the unpaid principal amount of the Notes
less the amount of the discount that is unamortized.
Subject to the provisions of the indenture relating to the duties of
the indenture trustee, in case an event of default occurs and continues for a
series of Notes, the indenture trustee will be under no obligation to exercise
any of the rights or powers under the indenture at the request or direction of
any of the securityholders of that series, unless those holders offer to the
indenture trustee security or indemnity satisfactory to it against the costs,
expenses and liabilities that might be incurred by it in complying with that
request or direction. Subject to those provisions for indemnification and some
limitations contained in the indenture, the holders of a majority of the then
total outstanding amount of the Notes of that series will have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the indenture trustee or exercising any trust or power conferred on
the indenture trustee with respect to the Notes of that series, and the holders
of a majority of the then total outstanding amount of the Notes of that series
may, in some cases, waive any default with respect to the Notes, except a
default in the payment of principal or interest or a default in respect of a
covenant or provision of the indenture that cannot be modified without the
waiver or consent of all the holders of the outstanding Notes of that series
affected.
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DISCHARGE OF INDENTURE
The indenture will be discharged, subject to the provisions of the
indenture, for a series of Notes (except for continuing rights specified in the
indenture) upon the delivery to the indenture trustee for cancellation of all
the Notes of that series or, with some limitations, upon deposit with the
indenture trustee of funds sufficient for the payment in full of all of the
Notes of that series.
With some limitations, the indenture will provide that, if specified
for the Notes of any series, the related trust fund will be discharged from any
and all obligations in respect of the Notes of that series (except for
obligations specified in the indenture including obligations relating to
temporary Notes and exchange of Notes, to register the transfer of or exchange
Notes of that series, to replace stolen, lost or mutilated Notes of that series,
to maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the indenture trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect of the Notes in accordance with
their terms will provide money in an amount sufficient to pay the principal of
and each installment of interest on the Notes of that series on the maturity
date for those Notes and any installment of interest on those Notes in
accordance with the terms of the indenture and the Notes of that series. In the
event of any defeasance and discharge of Notes of that series, holders of Notes
of that series would be able to look only to that money and/or those direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
INDENTURE TRUSTEE'S ANNUAL REPORT
The indenture trustee for each series of Notes will be required to mail
each year to all related securityholders a brief report, as provided in the
indenture, relating to its eligibility and qualification to continue as
indenture trustee under the related indenture, any amounts advanced by it under
the indenture, the amount, interest rate and maturity date of indebtedness owing
by that Trust to the applicable indenture trustee in its individual capacity,
the property and funds physically held by the indenture trustee in its capacity
as indenture trustee and any action taken by it that materially affects the
Notes and that has not been previously reported.
THE INDENTURE TRUSTEE
The indenture trustee for a series of Notes will be specified in the
prospectus supplement. The indenture trustee for any series may resign at any
time in accordance with the terms of the indenture, in which event the depositor
or the appropriate party designated in the indenture will be obligated to
appoint a successor trustee for that series. The depositor or the appropriate
party designated in the indenture may also remove any indenture trustee if that
indenture trustee ceases to be eligible to continue as the indenture trustee
under the related indenture, if that indenture trustee becomes insolvent or for
any other grounds specified in the indenture. In those circumstances the
depositor or the appropriate party designated in the indenture will be obligated
to appoint a successor trustee for the applicable series of Notes. Any
resignation or removal of the indenture trustee and appointment of a successor
trustee for any series of Notes does not become effective until acceptance of
the appointment by the successor trustee for that series.
The bank or trust company serving as indenture trustee may have a
banking relationship with the depositor or any of its affiliates, a servicer or
any of its affiliates or the master servicer or any of its affiliates. To the
extent consistent with its fiduciary obligations as indenture trustee, the
indenture trustee may delegate its duties to one or more agents as provided in
the indenture and the Agreement.
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DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Notes or Certificates, as applicable, credit support
may be provided for one or more classes of the series or the related Assets.
Credit support may be in the form of:
o the subordination of one or more classes of Notes or
Certificates, as applicable;
o letters of credit;
o insurance policies;
o guarantees;
o the establishment of one or more reserve funds; or
o any other method of credit support described in the prospectus
supplement, or any combination of the foregoing.
Any form of credit support may be structured so as to be drawn upon by
more than one series to the extent described in the prospectus supplement.
The coverage provided by any credit support will be described in the
prospectus supplement. Generally, that coverage will not provide protection
against all risks of loss and will not guarantee repayment of the entire
Security Balance of the Notes or Certificates, as applicable, and interest on
the Security Balance. If losses or shortfalls occur that exceed the amount
covered by credit support or that are not covered by credit support,
securityholders will bear their allocable share of deficiencies. Moreover, if a
form of credit support covers more than one series of Notes or Certificates, as
applicable, (each, a "Covered Trust"), securityholders evidencing interests in
any of those Covered Trusts will be subject to the risk that the credit support
will be exhausted by the claims of other Covered Trusts before that Covered
Trust receiving any of its intended share of that coverage.
If credit support is provided for one or more classes of Notes or
Certificates, as applicable, of a series, or the related Assets, the prospectus
supplement will include a description of
(a) the nature and amount of coverage under that credit support,
(b) any conditions to payment under the prospectus supplement not
otherwise described in this prospectus,
(c) the conditions (if any) under which the amount of coverage
under that credit support may be reduced and under which that
credit support may be terminated or replaced and
(d) the material provisions relating to that credit support.
Additionally, the prospectus supplement will set forth information with
respect to the obligor under any financial guaranty insurance policy, letter of
credit, guarantee or similar instrument of credit support, including
(1) a brief description of its principal business activities,
(2) its principal place of business, place of incorporation and
the jurisdiction under which it is chartered or licensed to do
business,
63
(3) if applicable, the identity of regulatory agencies that
exercise primary jurisdiction over the conduct of its business
and
(4) its total assets, and its stockholders' or policyholders'
surplus, if applicable, as of the date specified in the
prospectus supplement.
SUBORDINATE SECURITIES
One or more classes of Notes or Certificates, as applicable, of a
series may be Subordinate Notes or Subordinate Certificates, as applicable, if
specified in the prospectus supplement. The rights of the holders of Subordinate
Notes or Subordinate Certificates, as applicable, to receive distributions of
principal and interest from the Collection Account on any Distribution Date will
be subordinated to those rights of the holders of Senior Notes or Senior
Certificates, as applicable. The subordination of a class may apply only in the
event of (or may be limited to) particular types of losses or shortfalls. The
prospectus supplement will set forth information concerning the amount of
subordination of a class or classes of Subordinate Notes or Subordinate
Certificates, as applicable, in a series, the circumstances in which that
subordination will be applicable and the manner, if any, in which the amount of
subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Notes or Certificates, as applicable,
of a series, credit support may be provided by cross-support provisions
requiring that distributions be made on Senior Notes or Senior Certificates, as
applicable, evidencing interests in one group of mortgage loans before
distributions on Subordinate Notes or Subordinate Certificates, as applicable,
evidencing interests in a different group of mortgage loans within the trust
fund. The prospectus supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying those provisions.
LIMITED GUARANTEE
If specified in the prospectus supplement for a series of Notes or
Certificates, as applicable, credit enhancement may be provided in the form of a
limited guarantee issued by a guarantor named in the prospectus supplement.
FINANCIAL GUARANTY INSURANCE POLICY OR SURETY BOND
Credit enhancement may be provided in the form of a financial guaranty
insurance policy or a surety bond issued by an insurer named in the policy or
surety bond, if specified in the prospectus supplement.
LETTER OF CREDIT
Alternative credit support for a series of Notes or Certificates, as
applicable, may be provided by the issuance of a letter of credit by the bank or
financial institution specified in the prospectus supplement. The coverage,
amount and frequency of any reduction in coverage provided by a letter of credit
issued for a series of Notes or Certificates, as applicable, will be set forth
in the prospectus supplement relating to that series.
POOL INSURANCE POLICIES
If specified in the prospectus supplement relating to a series of Notes
or Certificates, as applicable, a pool insurance policy for the mortgage loans
in the related trust fund will be obtained. The pool insurance policy will cover
any loss (subject to the limitations described in the prospectus
64
supplement) by reason of default to the extent a related mortgage loan is not
covered by any primary mortgage insurance policy. The amount and principal terms
of any pool insurance coverage will be set forth in the prospectus supplement.
SPECIAL HAZARD INSURANCE POLICIES
A special hazard insurance policy may also be obtained for the related
trust fund, if specified in the prospectus supplement, in the amount set forth
in the prospectus supplement. The special hazard insurance policy will, subject
to the limitations described in the prospectus supplement, protect against loss
by reason of damage to Mortgaged Properties caused by hazards not insured
against under the standard form of hazard insurance policy for the respective
states, in which the Mortgaged Properties are located. The amount and principal
terms of any special hazard insurance coverage will be set forth in the
prospectus supplement.
BORROWER BANKRUPTCY BOND
Losses resulting from a bankruptcy proceeding relating to a borrower
affecting the mortgage loans in a trust fund for a series of Notes or
Certificates, as applicable, will, if specified in the prospectus supplement, be
covered under a borrower bankruptcy bond (or any other instrument that will not
result in a downgrading of the rating of the Notes or Certificates, as
applicable, of a series by the rating agency or agencies that rate that series).
Any borrower bankruptcy bond or any other instrument will provide for coverage
in an amount meeting the criteria of the rating agency or agencies rating the
Notes or Certificates, as applicable, of the related series, which amount will
be set forth in the prospectus supplement. The amount and principal terms of any
borrower bankruptcy coverage will be set forth in the prospectus supplement.
RESERVE FUNDS
If so provided in the prospectus supplement for a series of Notes or
Certificates, as applicable, deficiencies in amounts otherwise payable on those
Notes or Certificates, as applicable, or specific classes of Notes or
Certificates, as applicable, will be covered by one or more reserve funds in
which cash, a letter of credit, Permitted Investments, a demand note or a
combination of these will be deposited, in the amounts so specified in the
prospectus supplement. The reserve funds for a series may also be funded over
time by depositing a specified amount of the distributions received on the
related Assets as specified in the prospectus supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income on these amounts, if any, will be applied for the purposes,
in the manner, and to the extent specified in the prospectus supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Notes or Certificates, as applicable. If
specified in the prospectus supplement, reserve funds may be established to
provide limited protection against only some types of losses and shortfalls.
Following each Distribution Date amounts in a reserve fund in excess of any
amount required to be maintained in the reserve fund may be released from the
reserve fund under the conditions and to the extent specified in the prospectus
supplement and will not be available for further application to the Notes or
Certificates, as applicable.
Money deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the prospectus supplement. To the extent
specified in the prospectus supplement, any reinvestment income or other gain
from those investments will be credited to the related reserve fund for that
series, and any loss resulting from those investments will be charged to the
reserve fund. However, that income may be payable to any related servicer or
another service provider or other entity. To the extent specified in the
prospectus supplement, the reserve fund, if any, for a series will not be a part
of the trust fund.
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Additional information concerning any reserve fund will be set forth in
the prospectus supplement, including the initial balance of the reserve fund,
the balance required to be maintained in the reserve fund, the manner in which
the required balance will decrease over time, the manner of funding the reserve
fund, the purposes for which funds in the reserve fund may be applied to make
distributions to securityholders and use of investment earnings from the reserve
fund, if any.
OVERCOLLATERALIZATION
If specified in the prospectus supplement, subordination provisions of
a trust fund may be used to accelerate to a limited extent the amortization of
one or more classes of Notes or Certificates, as applicable, relative to the
amortization of the related Assets. The accelerated amortization is achieved by
the application of excess interest to the payment of principal of one or more
classes of Notes or Certificates, as applicable. This acceleration feature
creates, for the Assets or groups of Assets, overcollateralization, which is the
excess of the total principal balance of the related Assets, or a group of
related Assets, over the principal balance of the related class or classes of
Notes or Certificates, as applicable. This acceleration may continue for the
life of the related Security, or may be limited. In the case of limited
acceleration, once the required level of overcollateralization is reached, and
subject to the provisions specified in the prospectus supplement, the limited
acceleration feature may cease, unless necessary to maintain the required level
of overcollateralization.
PRIMARY MORTGAGE INSURANCE POLICIES
The servicer will maintain or cause to be maintained with respect to
each mortgage loan, a primary mortgage insurance policy in accordance with the
underwriting standards described in the related prospectus supplement. Although
the terms and conditions of primary mortgage insurance policies differ, each
primary mortgage insurance policy will generally cover losses up to an amount
equal to the excess of the unpaid principal amount of a defaulted mortgage loan,
plus accrued and unpaid interest thereon and approved expenses, over a specified
percentage of the value of the related mortgaged property.
As conditions to the filing or payment of a claim under a primary
mortgage insurance policy, the insured will typically be required, in the event
of default by the borrower, to:
o advance or discharge (a) hazard insurance premiums and (b) as
necessary and approved in advance by the insurer, real estate
taxes, property protection and preservation expenses and
foreclosure and related costs,
o in the event of any physical loss or damage to the mortgaged
property,have the mortgaged property restored to at least its
condition at the effective date of the primary mortgage
insurance policy, ordinary wear and tear excepted, and
o tender to the insurer good and merchantable title to, and
possession of, the mortgaged property.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in
nature, of legal aspects of loans secured by single-family or multi-family
residential properties. Because these legal aspects are governed primarily by
applicable state law (which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the mortgage loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the mortgage loans. In this regard,
the following discussion does not fully reflect federal regulations for FHA
loans and VA
66
loans. See "Description of The Trust Funds--FHA Loans and VA Loans,"
"Description of the Agreements--Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements--FHA Insurance and VA Guarantees"
and "Description of the Trust Funds--Assets."
GENERAL
All of the mortgage loans are evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending on
the prevailing practice and law in the state in which the Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are in this
prospectus collectively referred to as "mortgages." Any of the foregoing types
of mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to that instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties -a borrower (usually the owner of the subject
property) and a mortgagee (the lender). In contrast, a deed of trust is a
three-party instrument, among a trustor (the equivalent of a borrower), a
trustee to whom the mortgaged property is conveyed, and a beneficiary (the
lender) for whose benefit the conveyance is made. As used in this prospectus,
unless the context otherwise requires, "borrower" includes the trustor under a
deed of trust and a grantor under a security deed or a deed to secure debt.
Under a deed of trust, the borrower grants the property, irrevocably
until the debt is paid, in trust, generally with a power of sale as security for
the indebtedness evidenced by the related note. A deed to secure debt typically
has two parties. By executing a deed to secure debt, the grantor conveys title
to, as opposed to merely creating a lien upon, the subject property to the
grantee until the underlying debt is repaid, generally with a power of sale as
security for the indebtedness evidenced by the related mortgage note.
In case the borrower under a mortgage is a land trust, there would be
an additional party because legal title to the property is held by a land
trustee under a land trust agreement for the benefit of the borrower. At
origination of a mortgage loan involving a land trust, the borrower executes a
separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, some federal laws (including the Soldiers' and Sailors' Civil Relief
Act of 1940) and, in some cases, in deed of trust transactions, the directions
of the beneficiary.
The mortgages that encumber multifamily properties may contain an
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease and
the income derived therefrom, while retaining a revocable license to collect the
rents for so long as there is no default. If the borrower defaults, the license
terminates and the lender is entitled to collect the rents. Local law may
require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
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INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed
or deed to secure debt is most often the fee estate in land and improvements.
However, that instrument may encumber other interests in real property such as a
tenant's interest in a lease of land or improvements, or both, and the leasehold
estate created by that lease. An instrument covering an interest in real
property other than the fee estate requires special provisions in the instrument
creating that interest or in the mortgage, deed of trust, security deed or deed
to secure debt, to protect the mortgagee against termination of that interest
before the mortgage, deed of trust, security deed or deed to secure debt is
paid. The depositor, the Asset Seller or other entity specified in the
prospectus supplement will make representations and warranties in the Agreement
or representations and warranties will be assigned to the trustee for any
mortgage loans secured by an interest in a leasehold estate. Those
representation and warranties, if applicable, will be set forth in the
prospectus supplement.
COOPERATIVE LOANS
If specified in the prospectus supplement, the mortgage loans may also
consist of cooperative apartment loans ("Cooperative Loans") secured by security
interests in shares issued by a cooperative housing corporation (a
"Cooperative") and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the cooperatives'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property that it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. That lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
Each Cooperative owns in fee or has a leasehold interest in all the
real property and owns in fee or leases the building and all separate dwelling
units in the building. The Cooperative is directly responsible for property
management and, in most cases, payment of real estate taxes, other governmental
impositions and hazard and liability insurance. If there is a blanket mortgage
or mortgages on the cooperative apartment building or underlying land, as is
generally the case, or an underlying lease of the land, as is the case in some
instances, the Cooperative, as property borrower, or lessee, as the case may be,
is also responsible for meeting these mortgage or rental obligations. A blanket
mortgage is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the Cooperative's apartment building or obtaining of
capital by the Cooperative. The interest of the occupant under proprietary
leases or occupancy agreements as to which that Cooperative is the landlord are
generally subordinate to the interest of the holder of a blanket mortgage and to
the interest of the holder of a land lease.
If the Cooperative is unable to meet the payment obligations (1)
arising under a blanket mortgage, the mortgagee holding a blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (2) arising under its land lease, the holder of the
landlord's interest under the land lease could terminate it and all subordinate
proprietary leases and occupancy agreements. Also, a blanket mortgage on a
cooperative may provide financing in the form of a mortgage that does not fully
amortize, with a significant portion of principal being due in one final payment
at maturity. The inability of the Cooperative to refinance a mortgage and its
consequent inability to make that final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreement. In either event,
a foreclosure by the holder of a blanket mortgage or the termination of the
underlying lease could eliminate or significantly diminish the value of any
collateral held by the lender that financed the purchase by an individual tenant
stockholder of cooperative shares or, in the case of the mortgage loans, the
collateral securing the Cooperative Loans.
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The Cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary lease or occupancy
agreements that confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing that tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed through
a Cooperative Loan evidenced by a promissory note and secured by an assignment
of and a security interest in the occupancy agreement or proprietary lease and a
security interest in the related Cooperative shares. The lender generally takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary lease
or occupancy agreement and the cooperative shares is filed in the appropriate
state and local offices to perfect the lender's interest in its collateral.
Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares. See "--Foreclosure--Cooperative
Loans" below.
LAND SALE CONTRACTS
Under an installment land sale contract for the sale of real estate (a
"land sale contract") the contract seller (hereinafter referred to as the
"contract lender") retains legal title to the property and enters into an
agreement with the contract purchaser (hereinafter referred to as the "contract
borrower") for the payment of the purchase price, plus interest, over the term
of the land sale contract. Only after full performance by the borrower of the
contract is the contract lender obligated to convey title to the real estate to
the purchaser. As with mortgage or deed of trust financing, during the effective
period of the land sale contract, the contract borrower is responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the contract lender under an
installment contract varies on a state-by-state basis depending on the extent to
which state courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to its terms. The terms of land sale contracts
generally provide that upon default by the contract borrower, the borrower loses
his or her right to occupy the property, the entire indebtedness is accelerated,
and the buyer's equitable interest in the property is forfeited. The contract
lender in that situation does not have to foreclose to obtain title to the
property, although in some cases a quiet title action is in order if the
contract borrower has filed the land sale contract in local land records and an
ejectment action may be necessary to recover possession.
In a few states, particularly in cases of contract borrower default
during the early years of a land sale contract, the courts will permit ejectment
of the buyer and a forfeiture of his or her interest in the property. However,
most state legislatures have enacted provisions by analogy to mortgage law
protecting borrowers under land sale contracts from the harsh consequences of
forfeiture. Under those statues, a judicial contract may be reinstated upon full
payment of the default amount and the borrower may have a post-foreclosure
statutory redemption right. In other states, courts in equity may permit a
contract borrower with significant investment in the property under a land sale
contract for the sale of real estate to share the proceeds of sale of the
property after the indebtedness is repaid or may otherwise refuse to enforce the
forfeiture clause. Nevertheless, generally speaking, the contract lender's
procedures for obtaining possession and clear title under a land sale contract
for the sale of real estate in a particular state are simpler and less time
consuming and costly than are the procedures for foreclosing and obtaining clear
title to a mortgaged property.
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FORECLOSURE
GENERAL
Foreclosure is a legal procedure that allows the mortgagee to recover
its mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures for the enforcement of a mortgage vary from
state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
some limited circumstances, such as strict foreclosure.
JUDICIAL FORECLOSURE
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Those sales are made in accordance with procedures that
vary from state to state.
EQUITABLE LIMITATIONS ON ENFORCEABILITY OF CERTAIN PROVISIONS
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
borrower from the legal effect of mortgage defaults, to the extent that the
effect is perceived as harsh or unfair. Relying on those principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the borrower's default and the likelihood that the borrower will be able to
reinstate the loan.
In some cases, courts have substituted their judgment for the lender's
and have required that lenders reinstate loans or recast payment schedules to
accommodate borrowers who are suffering from a temporary financial disability.
In other cases, courts have limited the right of the lender to foreclose if the
default under the mortgage is not monetary, e.g., the borrower failed to
maintain the mortgaged property adequately or the borrower executed a junior
mortgage on the mortgaged property. The exercise by the court of its equity
powers will depend on the individual circumstances of each case presented to it.
Finally, some courts have been faced with the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness of
the notice provisions or have found that a public sale under a mortgage
providing for a power of sale does not involve sufficient state action to afford
constitutional protections to the borrower.
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NON-JUDICIAL FORECLOSURE/POWER OF SALE
Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale pursuant to the power of sale granted in the deed of
trust. A power of sale is typically granted in a deed of trust. It may also be
contained in any other type of mortgage instrument. A power of sale allows a non
judicial public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
borrower under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law.
In some states, before the sale, the trustee under a deed of trust must
record a notice of default and notice of sale and send a copy to the borrower
and to any other party who has recorded a request for a copy of a notice of
default and notice of sale. In addition, in some states the trustee must provide
notice to any other party having an interest of record in the real property,
including junior lienholders. A notice of sale must be posted in a public place
and, in most states, published for a specified period of time in one or more
newspapers. The borrower or junior lienholder may then have the right, during a
reinstatement period required in some states, to cure the default by paying the
entire actual amount in arrears (without acceleration) plus the expenses
incurred in enforcing the obligation. In other states, the borrower or the
junior lienholder is not provided a period to reinstate the loan, but has only
the right to pay off the entire debt to prevent the foreclosure sale. Generally,
the procedure for public sale, the parties entitled to notice, the method of
giving notice and the applicable time periods are governed by state law and vary
among the states. Foreclosure of a deed to secure debt is also generally
accomplished by a non-judicial sale similar to that required by a deed of trust,
except that the lender or its agent, rather than a trustee, is typically
empowered to perform the sale in accordance with the terms of the deed to secure
debt and applicable law.
PUBLIC SALE
A third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of that property
at the time of sale, due to, among other things, redemption rights that may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. For these reasons, it is common for the lender to
purchase the mortgaged property for an amount equal to or less than the
underlying debt and accrued and unpaid interest plus the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses that may be recovered by a lender. Thereafter, subject to the
borrower's right in some states to remain in possession during a redemption
period, if applicable, the lender will become the owner of the property and have
both the benefits and burdens of ownership of the mortgaged property. For
example, the lender will become obligated to pay taxes, obtain casualty
insurance and to make those repairs at its own expense as are necessary to
render the property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission in connection
with the sale of the property. Depending on market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Moreover, a lender commonly incurs substantial legal fees and
court costs in acquiring a mortgaged property through contested foreclosure
and/or bankruptcy proceedings. Generally, state law controls the amount of
foreclosure expenses and costs, including attorneys' fees, that may be recovered
by a lender.
A junior mortgagee may not foreclose on the property securing the
junior mortgage unless it forecloses subject to senior mortgages and any other
prior liens, in which case it may be obliged to make payments on the senior
mortgages to avoid their foreclosure. In addition, if the foreclosure of a
junior mortgage triggers the enforcement of a "due-on-sale" clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, for those mortgage
loans, if any, that are junior mortgage loans, if the lender purchases the
property the lender's title will be subject to all senior mortgages, prior liens
and specific governmental liens.
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The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage under which the sale was conducted.
Any proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the borrower. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by those holders.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the borrower, and all persons who have an
interest in the property that is subordinate to the mortgage being foreclosed,
from exercise of their "equity of redemption." The doctrine of equity of
redemption provides that, until the property covered by a mortgage has been sold
in accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest that is subordinate to that of the foreclosing mortgagee have
an equity of redemption and may redeem the property by paying the entire debt
with interest. In addition, in some states, when a foreclosure action has begun,
the redeeming party must pay some of the costs of that action. Those having an
equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is a common-law (non-statutory) right that
exists before completion of the foreclosure, is not waivable by the borrower,
must be exercised before foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior
lienors are given a statutory period in which to redeem the property from the
foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust.
Consequently, the practical effect of the redemption right is to force
the lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than three years from the close
of the calendar year of its acquisition. For a series of Notes or Certificates,
as applicable, for which an election is made to qualify the trust fund or a part
of the trust fund as a REMIC, the Agreement will permit foreclosed property to
be held for more than such three year period if the Internal Revenue Service
grants an extension of time within which to sell the property or independent
counsel renders an opinion to the effect that holding the property for that
additional period is permissible under the REMIC Provisions.
COOPERATIVE LOANS
The Cooperative shares owned by the tenant-stockholder and pledged to
the lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's certificate of incorporation and bylaws, as well as
the proprietary lease or occupancy agreement, and may be canceled by the
Cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by that tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by that
tenant-stockholder. The proprietary lease or occupancy agreement
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generally permit the Cooperative to terminate the lease or agreement in the
event a borrower fails to make payments or defaults in the performance of
covenants required under the proprietary lease or occupancy agreement.
Typically, the lender and the Cooperative enter into a recognition agreement
that establishes the rights and obligations of both parties in the event of a
default by the tenant-stockholder under the proprietary lease or occupancy
agreement will usually constitute a default under the security agreement between
the lender and the tenant-stockholder.
The recognition agreement generally provides that, if the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate that lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under that proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest on the
Cooperative Loan.
Recognition agreements also provide that in the event of a foreclosure
on a Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished
by a sale in accordance with the provisions of Article 9 of the UCC and the
security agreement relating to those shares. Article 9 of the UCC requires that
a sale be conducted in a "commercially reasonable" manner. Whether a foreclosure
sale has been conducted in a "commercially reasonable" manner will depend on the
facts in each case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time, place and terms of
the foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperatives to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency.
In the case of foreclosure on a building that was converted from a
rental building to a building owned by a Cooperative under a non-eviction plan,
some states require that a purchaser at a foreclosure sale take the property
subject to rent control and rent stabilization laws that apply to tenants who
elected to remain in a building so converted.
JUNIOR MORTGAGES
Some of the mortgage loans may be secured by junior mortgages or deeds
of trust, that are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the trust fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the borrower, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed
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of trust, the junior mortgagee's or junior beneficiary's lien will be
extinguished unless the junior lienholder satisfies the defaulted senior loan or
asserts its subordinate interest in a property in foreclosure proceedings. See
"--Foreclosure" above.
Furthermore, because the terms of the junior mortgage or deed of trust
are subordinate to the terms of the first mortgage or deed of trust, in the
event of a conflict between the terms of the first mortgage or deed of trust and
the junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the borrower or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends these sums, these sums will
generally have priority over all sums due under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed
of trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the borrower following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former borrower equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender.
Some states require the lender to exhaust the security afforded under a
mortgage by foreclosure in an attempt to satisfy the full debt before bringing a
personal action against the borrower. In some other states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting that security; however, in some of these states, the lender,
following judgment on the personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting that election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a judicial sale to the
excess of the outstanding debt over the fair market value of the property at the
time of the public sale. The purpose of these statutes is generally to prevent a
lender from obtaining a large deficiency judgment against the former borrower as
a result of low or no bids at the judicial sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws
and state laws affording relief to debtors, may interfere with or affect the
ability of a secured mortgage lender to realize upon its security. For example,
numerous statutory provisions under the United States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq. (the "Bankruptcy Code"), may interfere with or affect the
ability of the secured mortgage lender to obtain payment of a mortgage loan, to
realize upon collateral and/or enforce a deficiency judgment. Under federal
bankruptcy law, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and often no interest or principal payments are made during
the course of the bankruptcy proceeding. In a case under the Bankruptcy Code,
the secured party is precluded from foreclosing without authorization from the
bankruptcy court. In addition, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13 plan to cure a
monetary default in respect of a mortgage loan by paying arrearages within a
reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final judgment
of foreclosure had been entered in state court (provided no foreclosure sale had
yet occurred) before the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction
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have approved plans, based on the particular facts of the case, that affected
the curing of a mortgage loan default by paying arrearages over a number of
years.
If a mortgage loan is secured by property not consisting solely of the
debtor's principal residence, the Bankruptcy Code also permits that mortgage
loan to be modified. These modifications may include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
and reducing the lender's security interest to the value of the property, thus
leaving the lender in the position of a general unsecured creditor for the
difference between the value of the property and the outstanding balance of the
mortgage loan. Some courts have permitted these modifications when the mortgage
loan is secured both by the debtor's principal residence and by personal
property.
In the case of income-producing multifamily properties, federal
bankruptcy law may also have the effect of interfering with or affecting the
ability of the secured lender to enforce the borrower's assignment of rents and
leases related to the mortgaged property. Under Section 362 of the Bankruptcy
Code, the lender will be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents.
Some tax liens arising under the Code may in some circumstances provide
priority over the lien of a mortgage or deed of trust. In addition, substantive
requirements are imposed upon mortgage lenders in connection with the
origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes. These
federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases this liability may affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative
shares and the related proprietary lease or occupancy agreement. Some courts
have interpreted Section 9-504 of the UCC to prohibit a deficiency award unless
the creditor establishes that the sale of the collateral (which, in the case of
a Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL CONSIDERATIONS
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to a security
interest may be subject to federal, state, and local laws and regulations
relating to environmental protection. These laws may regulate, among other
things: emissions of air pollutants; discharges of wastewater or storm water;
generation, transport, storage or disposal of hazardous waste or hazardous
substances; operation, closure and removal of underground storage tanks; removal
and disposal of asbestos containing materials; and/or management of electrical
or other equipment containing polychlorinated biphenyls ("PCBs"). Failure to
comply with these laws and regulations may result in significant penalties,
including civil and criminal fines. Under the laws of some states, environmental
contamination on a property may give rise to a lien on the property to ensure
the availability and/or reimbursement of cleanup costs. Generally all subsequent
liens on that property are subordinated to the environmentally-related lien and,
in some states, even prior recorded liens are subordinated to these liens
("Superliens"). In the latter states, the security interest of the trustee in a
property that is subject to a Superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation
and Liability Act, as amended ("CERCLA"), and under state law in some states, a
secured party that takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property
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or undertakes particular types of activities that may constitute management of
the mortgaged property may become liable in some circumstances for the cleanup
costs of remedial action if hazardous wastes or hazardous substances have been
released or disposed of on the property. These cleanup costs may be substantial.
CERCLA imposes strict, as well as joint and several, liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, irrespective
of whether those owners or operators caused or contributed to the contamination
on the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other "off-site" locations may be
held strictly, jointly and severally liable for environmental remediation and/or
damages at those off-site locations. Many states also have laws that are similar
to CERCLA. Liability under CERCLA or under similar state law could exceed the
value of the property itself as well as the total assets of the property owner.
Although some provisions of the Asset Conservation Act (as defined in
this prospectus) apply to trusts and fiduciaries, the law is somewhat unclear as
to whether and under what precise circumstances cleanup costs, or the obligation
to take remedial actions, could be imposed on a secured lender, such as the
trust fund. Under the laws of some states and under CERCLA, a lender may be
liable as an "owner or operator" for costs of addressing releases or threatened
releases of hazardous substances on a mortgaged property if that lender or its
agents or employees have "participated in the management" of the operations of
the borrower, even though the environmental damage or threat was caused by a
prior owner or current owner or operator or other third party. Excluded from
CERCLA's definition of "owner or operator" is a person "who without
participating in the management of ... [the] facility, holds indicia of
ownership primarily to protect his security interest" (the "secured-creditor
exemption"). This exemption for holders of a security interest such as a secured
lender applies only to the extent that a lender seeks to protect its security
interest in the contaminated facility or property. Thus, if a lender's
activities begin to encroach on the actual management of that facility or
property, the lender faces potential liability as an "owner or operator" under
CERCLA. Similarly, when a lender forecloses and takes title to a contaminated
facility or property, the lender may incur potential CERCLA liability in various
circumstances, including among others, when it holds the facility or property as
an investment (including leasing the facility or property to a third party),
fails to market the property in a timely fashion or fails to properly address
environmental conditions at the property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"),
contains a similar secured-creditor exemption for those lenders who hold a
security interest in a petroleum underground storage tank ("UST") or in real
estate containing a UST, or that acquire title to a petroleum UST or facility or
property on which a UST is located. As under CERCLA, a lender may lose its
secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if that lender or its employees or agents participate in the management
of the UST. In addition, if the lender takes title to or possession of the UST
or the real estate containing the UST, under some circumstances the
secured-creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in UNITED STATES V. FLEET FACTORS CORP. very narrowly construed
CERCLA's secured-creditor exemption. The court's opinion suggested that a lender
need not have involved itself in the day-to-day operations of the facility or
participated in decisions relating to hazardous waste to be liable under CERCLA;
rather, liability could attach to a lender if its involvement with the
management of the facility were broad enough to support the inference that the
lender had the capacity to influence the borrower's treatment of hazardous
waste. The court added that a lender's capacity to influence these decisions
could be inferred from the extent of its involvement in the facility's financial
management. A subsequent decision by the United States Court of Appeals for the
Ninth Circuit in re Bergsoe Metal Corp., apparently disagreeing with, but not
expressly contradicting, the Fleet Factors court, held that a secured lender had
no liability absent "some actual management of the facility" on the part of the
lender.
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Court decisions have taken varying views of the scope of the
secured-creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger CERCLA
and/or RCRA liability. Until recently, these efforts have failed to provide
substantial guidance.
On September 28, 1996, however, Congress enacted, and on September 30,
1996, the President signed into law the Asset Conservation Lender Liability and
Deposit Insurance Protection Act of 1996 (the "Asset Conservation Act"). The
Asset Conservation Act was intended to clarify the scope of the secured creditor
exemption under both CERCLA and RCRA. The Asset Conservation Act more explicitly
defined the kinds of "participation in management" that would trigger liability
under CERCLA and specified activities that would not constitute "participation
in management" or otherwise result in a forfeiture of the secured-creditor
exemption before foreclosure or during a workout period. The Asset Conservation
Act also clarified the extent of protection against liability under CERCLA in
the event of foreclosure and authorized specific regulatory clarifications of
the scope of the secured-creditor exemption for purposes of RCRA, similar to the
statutory protections under CERCLA. However, since the courts have not yet had
the opportunity to interpret the new statutory provisions, the scope of the
additional protections offered by the Asset Conservation Act is not fully
defined. It also is important to note that the Asset Conservation Act does not
offer complete protection to lenders and that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that person
or entity may be bankrupt or otherwise judgment proof. It is therefore possible
that cleanup or other environmental liability costs could become a liability of
the trust fund and occasion a loss to the trust fund and to securityholders in
some circumstances. The new secured creditor amendments to CERCLA, also, would
not necessarily affect the potential for liability in actions by either a state
or a private party under other federal or state laws that may impose liability
on "owners or operators" but do not incorporate the secured creditor exemption.
Traditionally, residential mortgage lenders have not taken steps to
evaluate whether hazardous wastes or hazardous substances are present with
respect to any mortgaged property before the origination of the mortgage loan or
before foreclosure or accepting a deed-in-lieu of foreclosure. Neither the
depositor nor any servicer makes any representations or warranties or assumes
any liability with respect to: environmental conditions of the Mortgaged
Property; the absence, presence or effect of hazardous wastes or hazardous
substances on, near or emanating from the Mortgaged Property; the impact on
securityholders of any environmental condition or presence of any substance on
or near the Mortgaged Property; or the compliance of any Mortgaged Property with
any environmental laws. In addition, no agent, person or entity otherwise
affiliated with the depositor is authorized or able to make any representation,
warranty or assumption of liability relative to any Mortgaged Property.
DUE-ON-SALE CLAUSES
The mortgage loans may contain due-on-sale clauses. These clauses
generally provide that the lender may accelerate the maturity of the loan if the
borrower sells, transfers or conveys the related Mortgaged Property. The
enforceability of due-on-sale clauses has been the subject of legislation or
litigation in many states and, in some cases, the enforceability of these
clauses was limited or denied. However, for some loans the Garn-St. Germain
Depository Institutions Act of 1982 (the "Garn-St. Germain Act") preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to limited exceptions. Due-on-sale clauses contained
in mortgage loans originated by federal savings and loan associations of federal
savings banks are fully enforceable pursuant to regulations of the United States
Federal Home Loan Bank Board, as succeeded by the Office of Thrift Supervision,
which preempt state law restrictions on the enforcement of those clauses.
Similarly,
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"due-on-sale" clauses in mortgage loans made by national banks and federal
credit unions are now fully enforceable pursuant to preemptive regulations of
the Comptroller of the Currency and the National Credit Union Administration,
respectively.
The Garn-St. Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a "due-on-sale" clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, some transfers by operation of law, leases
of fewer than three years and the creation of a junior encumbrance. Regulations
promulgated under the Garn-St. Germain Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale
clause. The inability to enforce a "due-on-sale" clause may result in a mortgage
that bears an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may affect the average life of the
mortgage loans and the number of mortgage loans which may extend to maturity.
PREPAYMENT CHARGES AND LATE FEES
Some state laws restrict the imposition of prepayment charges and late
fees even when the loans expressly provide for the collection of those charges.
Although the Alternative Mortgage Transaction Parity Act of 1982 (the "Parity
Act"), permits the collection of prepayment charges and late fees in connection
with some types of eligible loans preempting any contrary state law
prohibitions, some states may not recognize the preemptive authority of the
Parity Act or have formally opted out of the Parity Act. As a result, it is
possible that prepayment charges and late fees may not be collected even on
loans that provide for the payment of those charges unless otherwise specified
in the accompanying prospectus supplement. The related servicer or another
entity identified in the accompanying prospectus supplement will be entitled to
all prepayment charges and late payment charges received on the loans and those
amounts will not be available for payment on the certificates. The Office of
Thrift Supervision ("OTS"), the agency that administers the Parity Act for
unregulated housing creditors, withdrew its favorable Parity Act regulations and
Chief Counsel Opinions that previously authorized lenders to charge prepayment
charges and late fees in certain circumstances notwithstanding contrary state
law, effective with respect to loans originated on or after July 1, 2003.
However, the OTS's ruling does not retroactively affect loans originated before
July 1, 2003.
SUBORDINATE FINANCING
Where a borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risks, such as:
o The borrower may have difficulty repaying multiple loans. In
addition, if the junior loan permits recourse to the borrower
(as junior loans often do) and the senior loan does not, a
borrower may be more likely to repay sums due on the junior
loan than those on the senior loan.
o Acts of the senior lender that prejudice the junior lender or
impair the junior lender's security may create a superior
equity in favor of the junior lender. For example, if the
borrower and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior
loan, the senior lender may lose its priority to the extent
any existing junior lender is harmed or the borrower is
additionally burdened.
o If the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the
senior lender and can interfere with or delay the taking of
action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
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APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations will not apply to some types of residential first mortgage
loans originated by lenders after March 31, 1980. A similar federal statute was
in effect for mortgage loans made during the first three months of 1980. The
Office of Thrift Supervision is authorized to issue rules and regulations and to
publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose interest rate limits by adopting, before April
1, 1983, a law or constitutional provision that expressly rejects application of
the federal law. In addition, even where Title V is not so rejected, any state
is authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Some states have taken action to
reimpose interest rate limits and/or to limit discount points or other charges.
The depositor believes that a court interpreting Title V would hold
that residential first mortgage loans that are originated on or after January 1,
1980, are subject to federal preemption. Therefore, in a state that has not
taken the requisite action to reject application of Title V or to adopt a
provision limiting discount points or other charges before origination of those
mortgage loans, any limitation under that state's usury law would not apply to
those mortgage loans.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted, no
mortgage loan originated after the date of that state action will be eligible
for inclusion in a trust fund unless (1) the mortgage loan provides for the
interest rate, discount points and charges as are permitted in that state or (2)
the mortgage loan provides that its terms will be construed in accordance with
the laws of another state under which the interest rate, discount points and
charges would not be usurious and the borrower's counsel has rendered an opinion
that the choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the interest
due above the applicable limit or impose a specified penalty. Under this
statutory scheme, the borrower may cancel the recorded mortgage or deed of trust
upon paying its debt with lawful interest, and the lender may foreclose, but
only for the debt plus lawful interest. A second group of statutes is more
severe. A violation of this type of usury law results in the invalidation of the
transaction, thus permitting the borrower to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Those
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St. Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the
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provisions of Title VIII by adopting, before October 15, 1985, a law or
constitutional provision expressly rejecting the applicability of those
provisions. Some states have taken that action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940,
as amended (the "Relief Act"), a borrower who enters military service after the
origination of the borrower's mortgage loan (including a borrower who was in
reserve status and is called to active duty after origination of the mortgage
loan) may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of the borrower's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
borrowers who are members of the Army, Navy, Air Force, Marines, National Guard,
Reserves, Coast Guard and officers of the U.S. Public Health Service assigned to
duty with the military. Because the Relief Act applies to borrowers who enter
military service (including reservists who are called to active duty) after
origination of the related mortgage loan, no information can be provided as to
the number of loans that may be affected by the Relief Act.
Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of the servicer to collect full
amounts of interest on some of the mortgage loans. Any shortfalls in interest
collections resulting from the application of the Relief Act would result in a
reduction of the amounts distributable to the holders of the related series of
Notes or Certificates, as applicable, and would not be covered by advances.
These shortfalls will be covered by the credit support provided in connection
with the Notes or Certificates, as applicable, only to the extent provided in
the prospectus supplement. In addition, the Relief Act imposes limitations that
would impair the ability of the servicer to foreclose on an affected mortgage
loan during the borrower's period of active duty status, and, under some
circumstances, during an additional three month period thereafter. Thus, if an
affected mortgage loan goes into default, there may be delays and losses
occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, those crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the "Crime
Control Act"), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties "known to have an alleged interest in the property," including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (1) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (2) the lender was, at the
time of execution of the mortgage, "reasonably without cause to believe" that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in
nature, of certain legal matters relating to the contracts. Because these legal
aspects are governed primarily by applicable state law, which laws may differ
substantially, the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the contracts is situated. The summaries are qualified in their
entirety by reference to the appropriate laws of the states in which contracts
may be originated.
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GENERAL
As a result of the assignment of the contracts to the trustee, the
trustee will succeed collectively to all of the rights including the right to
receive payment on the contracts, of the obligee under the contracts. Each
contract evidences both
(a) the obligation of the borrower to repay the loan evidenced
thereby, and
(b) the grant of a security interest in the manufactured home
to secure repayment of the loan. Aspects of both features of the
contracts are described more fully below.
The contracts generally are "chattel paper" as defined in the UCC in
effect in the states in which the manufactured homes initially were registered.
Pursuant to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the agreement, the
servicer will transfer physical possession of the contracts to the trustee. In
addition, the servicer will make an appropriate filing of a UCC-1 financing
statement in the appropriate states to give notice of the trustee's ownership of
the contracts. The contracts will be stamped or marked otherwise to reflect
their assignment from the depositor to the trustee only if provided in the
prospectus supplement. Therefore, if, through negligence, fraud or otherwise, a
subsequent purchaser were able to take physical possession of the contracts
without notice of the assignment, the trustee's interest in contracts could be
defeated.
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The manufactured homes securing the contracts may be located in all 50
states, Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some nontitle states, perfection pursuant
to the provisions of the UCC is required. The asset seller may effect that
notation or delivery of the required documents and fees, and obtain possession
of the certificate of title, as appropriate under the laws of the state in which
any manufactured home securing a manufactured housing conditional sales contract
is registered. In the event the asset seller fails, due to clerical error, to
effect that notation or delivery, or files the security interest under the wrong
law, the asset seller may not have a first priority security interest in the
manufactured home securing a contract. As manufactured homes have become larger
and often have been attached to their sites without any apparent intention to
move them, courts in many states have held that manufactured homes, under some
circumstances, may become subject to real estate title and recording laws. As a
result, a security interest in a manufactured home could be rendered subordinate
to the interests of other parties claiming an interest in the home under
applicable state real estate law.
To perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a fixture filing
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located.
Substantially all of the contracts contain provisions prohibiting the borrower
from permanently attaching the manufactured home to its site. So long as the
borrower does not violate this agreement, a security interest in the
manufactured home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the manufactured home. If, however, a manufactured
home is permanently attached to its site, other parties could obtain an interest
in the manufactured home that is prior to the security interest originally
retained by the asset seller and transferred to the depositor. For a series of
securities and if so described in the prospectus supplement, the servicer may be
required to perfect a security interest in the manufactured home under
applicable real estate laws. The warranting party will represent that as of the
date of the sale to the depositor it has obtained a
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perfected first priority security interest by proper notation or delivery of the
required documents and fees for substantially all of the manufactured homes
securing the contracts.
The depositor will cause the security interests in the manufactured
homes to be assigned to the trustee on behalf of the securityholders. The
depositor or the trustee will amend the certificates of title, or file UCC-3
statements, to identify the trustee as the new secured party, and will deliver
the certificates of title to the trustee or note thereon the interest of the
trustee only if specified in the prospectus supplement. Accordingly, the asset
seller, or other originator of the contracts, will continue to be named as the
secured party on the certificates of title relating to the manufactured homes.
In some states, that assignment is an effective conveyance of the security
interest without amendment of any lien noted on the related certificate of title
and the new secured party succeeds to servicer's rights as the secured party.
However, in some states, in the absence of an amendment to the certificate of
title and the new secured party succeeds to servicer's rights as the secured
party. However, in some states, in the absence of an amendment to the
certificate of title, or the filing of a UCC-3 statement, the assignment of the
security interest in the manufactured home may not be held effective or the
security interest in the manufactured home may not be held effective or the
security interests may not be perfected and in the absence of that notation or
delivery to the trustee, the assignment of the security interest in the
manufactured home may not be effective against creditors of the asset seller, or
any other originator of the contracts, or a trustee in bankruptcy of the asset
seller, or any other originator.
In the absence of fraud, forgery or permanent affixation of the
manufactured home to its site by the manufactured home owner, or administrative
error by state recording officials, the notation of the lien of the asset
seller, or other originator of the Contracts, on the certificate of title or
delivery of the required documents and fees will be sufficient to protect the
securityholders against the rights or subsequent purchasers of a manufactured
home or subsequent lenders who take a security interest in the manufactured
home. If there are any manufactured homes as to which the security interest
assigned to the trustee is not perfected, that security interest would be
subordinate to, among others, subsequent purchasers for value of manufactured
homes and holders of perfected security interests. There also exists a risk in
not identifying the trustee as the new secured party on the certificate of title
that, through fraud or negligence, the security interest of the trustee could be
released.
If the owner of a manufactured home moves it to a state other than the
state in which the manufactured home initially is registered, under the laws of
most states the perfected security interest in the manufactured home would
continue for four months after the relocation and thereafter only if and after
the owner re-registers the manufactured home in that state. If the owner were to
relocate a manufactured home to another state and not re-register the
manufactured home in that state, and if steps are not taken to re-perfect the
trustee's security interest in that state, the security interest in the
manufactured home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a manufactured home;
accordingly, the servicer must surrender possession if it holds the certificate
of title to the manufactured home or, in the case of manufactured homes
registered in states that provide for notation of lien, the asset seller, or
other originator, would receive notice of surrender if the security interest in
the manufactured home is noted on the certificate of title. Accordingly, the
trustee would have the opportunity to re-perfect its security interest in the
manufactured home in the state of relocation. In states that do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection. In the ordinary course of servicing the manufactured
housing contracts, the servicer takes steps to effect re-perfection upon receipt
of notice of re-registration or information from the borrower as to relocation.
Similarly, when a borrower under a manufactured housing contract sells
a manufactured home, the servicer must surrender possession of the certificate
of title or, if it is noted as lienholder on the certificate of title, will
receive notice as a result of its lien noted thereon and accordingly will have
an opportunity to require satisfaction of the related manufactured housing
conditional sales contract before release of the lien. Under the Agreement, the
servicer is obligated to take those steps,
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at the servicer's expense, as are necessary to maintain perfection of security
interests in the manufactured homes.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority even over
a perfected security interest. The warranting party will represent in the
agreement that it has no knowledge of any of these liens for any manufactured
home securing payment on any contract. However, these liens could arise at any
time during the term of a contract. No notice will be given to the trustee or
securityholders if a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN THE MANUFACTURED HOMES
The servicer on behalf of the trustee, to the extent required by the
related agreement, may take action to enforce the trustee's security interest
with respect to contracts in default by repossession and resale of the
manufactured homes securing those defaulted contracts. So long as the
manufactured home has not become subject to the real estate law, a creditor can
repossess a manufactured home securing a contract by voluntary surrender, by
"self-help" repossession that is "peaceful" or, in the absence of voluntary
surrender and the ability to repossess without breach of the peace, by judicial
process. The holder of a contract must give the debtor a number of days' notice,
which varies from 10 to 30 days depending on that state, before beginning any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting that sale. The law in most
states also requires that the debtor be given notice of any sale before resale
of the unit so that the debtor may redeem at or before that resale. In the event
of repossession and resale of a manufactured home, the trustee would be entitled
to be paid out of the sale proceeds before the proceeds could be applied to the
payment of the claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the manufactured home securing the debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
Other statutory provisions, including federal and state bankruptcy and
insolvency laws and general equitable principles, may limit or delay the ability
of a lender to repossess and resell collateral or enforce a deficiency judgment.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
The terms of the Relief Act apply to a borrower on a Contract as
described for a borrower on a mortgage loan under "Certain Legal Aspects of
Mortgage Loans--Soldiers' and Sailors' Civil Act of 1940."
CONSUMER PROTECTION LAWS
The so-called Holder-in-Due-Course rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract that is the seller of goods which gave rise to the transaction, and
some related lenders and assignees, to transfer the contract free of notice of
claims by the debtor thereunder. The effect of this rule is to subject the
assignee of the contract to all claims and defenses that the debtor could assert
against the seller of goods. Liability under this rule is limited to amounts
paid under a contract; however, the borrower also may be able to assert the rule
to set off remaining amounts due as a defense against a claim brought by the
trustee against the borrower. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal
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Credit Opportunity Act, the Fair Debt Collection Practices Act and the Uniform
Consumer Credit Code. In the case of some of these laws, the failure to comply
with their provisions may affect the enforceability of the related contract.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE" CLAUSES
The contracts, in general, prohibit the sale or transfer of the related
manufactured homes without the consent of the servicer and permit the
acceleration of the maturity of the contracts by the servicer upon any sale or
transfer that is not consented to. Generally, it is expected that the servicer
will permit most transfers of manufactured homes and not accelerate the maturity
of the related contracts. In some cases, the transfer may be made by a
delinquent borrower to avoid a repossession proceeding for a manufactured home.
In the case of a transfer of a manufactured home after which the
servicer desires to accelerate the maturity of the related contract, the
servicer's ability to do so will depend on the enforceability under state law of
the due-on-sale clauses applicable to the manufactured homes. Consequently, in
some states the servicer may be prohibited from enforcing a due-on-sale clause
in respect of some manufactured homes.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended (Title V), provides that, subject to the
following conditions, state usury limitations will not apply to any loan that is
secured by a first lien on certain kinds of manufactured housing.
The contracts would be covered if they satisfy certain conditions,
among other things, governing the terms of any prepayments, late charges and
deferral fees and requiring a 30-day notice period before instituting any action
leading to repossession of or foreclosure on the related unit.
Title V authorized any state to re-impose limitations on interest rates
and finance charges by adopting before April 1, 1983, a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted a similar law before the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The related asset seller will represent that all of the contracts comply with
applicable usury law.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion represents the opinion of McKee Nelson LLP and
Thacher Proffitt & Wood LLP as to the material federal income tax consequences
of the purchase, ownership and disposition of the Notes or Certificates, as
applicable, offered under this prospectus. This opinion assumes compliance with
all provisions of the Agreements pursuant to which the Notes or Certificates, as
applicable, are issued. This discussion is directed solely to securityholders
that hold the Notes or Certificates, as applicable, as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the
"Code"), and does not purport to discuss all federal income tax consequences
that may be applicable to particular categories of investors, some of which
(such as banks, insurance companies and foreign investors) may be subject to
special rules. Further, the authorities on which this discussion, and the
opinions referred to below, are based are subject to change or differing
interpretations, which could apply retroactively.
In addition to the federal income tax consequences described in this
prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the Notes or
Certificates, as applicable. See "State and Other Tax Considerations." The
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depositor recommends that securityholders consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Notes or Certificates, as applicable,
offered under this prospectus.
The following discussion addresses securities of five general types:
o securities ("REMIC Securities") representing interests in a
trust fund, or a portion of a trust fund, that the trustee
will elect to have treated as a real estate mortgage
investment conduit ("REMIC") under Sections 860A through 860G
(the "REMIC Provisions") of the Code;
o securities ("FASIT Securities") representing interests in a
trust fund, or a portion of a trust fund, that the trustee
will elect to have treated as a financial asset securitization
investment trust ("FASIT") under Sections 860H through 860L
(the "FASIT Provisions") of the Code;
o securities ("Grantor Trust Securities") representing interests
in a trust fund (a "Grantor Trust Fund") as to which no
election will be made;
o securities ("Partnership Certificates") representing equity
interests in a trust fund (a "Partnership Trust Fund") which
is treated as a partnership for federal income tax purposes;
and
o securities ("Debt Securities") representing indebtedness of a
Partnership Trust Fund or a trust fund which is disregarded as
a separate entity for federal income tax purposes.
The prospectus supplement for each series of Notes or Certificates, as
applicable, will indicate which of the foregoing treatments will apply to that
series and, if a REMIC election (or elections) will be made for the related
trust fund, will identify all "regular interests" and "residual interests" in
the REMIC or, if a FASIT election will be made for the related trust fund, will
identify all "regular interests" and "ownership interests" in the FASIT. For
purposes of this tax discussion,
(1) references to a "securityholder" or a "holder" are to the
beneficial owner of a Security,
(2) references to "REMIC Pool" are to an entity or portion thereof
as to which a REMIC election will be made and
(3) to the extent specified in the prospectus supplement,
references to "mortgage loans" include Contracts. Except to
the extent specified in the prospectus supplement, no REMIC
election will be made for Unsecured Home Improvement Loans.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271 through 1275 of the
Code and in the Treasury regulations promulgated thereunder (the "OID
Regulations"), in part upon the REMIC Provisions and the Treasury regulations
promulgated thereunder (the "REMIC Regulations"), and in part upon the FASIT
Provisions. Although the FASIT Provisions of the Code became effective on
September 1, 1997, the Treasury regulations issued with respect to those
provisions are still in proposed form only. Accordingly, the discussion herein
does not address the proposed FASIT regulations (which will be discussed in the
related prospectus supplement if and to the extent they are relevant) and
definitive guidance cannot be provided with respect to many aspects of the tax
treatment of the holders of FASIT Securities. In addition, the OID Regulations
do not adequately address some issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Notes or Certificates,
as applicable.
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TAXABLE MORTGAGE POOLS
Corporate income tax can be imposed on the net income of some entities
issuing non-REMIC and non-FASIT debt obligations secured by real estate
mortgages ("Taxable Mortgage Pools"). Any entity other than a REMIC or a FASIT
(as defined in this prospectus) will be considered a Taxable Mortgage Pool if
(1) substantially all of the assets of the entity consist of debt
obligations and more than 50% of those obligations consist of
"real estate mortgages,"
(2) that entity is the borrower under debt obligations with two or
more maturities, and
(3) under the terms of the debt obligations on which the entity is
the borrower, payments on those obligations bear a
relationship to payments on the obligations held by the
entity.
Furthermore, a group of assets held by an entity can be treated as a separate
Taxable Mortgage Pool if the assets are expected to produce significant cash
flow that will support one or more of the entity's issues of debt obligations.
The depositor generally will structure offerings of non-REMIC and non-FASIT
Securities to avoid the application of the Taxable Mortgage Pool rules.
REMICS
CLASSIFICATION OF REMICS
For each series of REMIC Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
McKee Nelson LLP and Thacher Proffitt & Wood LLP, the related trust fund (or
each applicable portion of the trust fund) will qualify as a REMIC and the REMIC
Securities offered with respect thereto will be considered to evidence ownership
of "regular interests" ("Regular Securities") or "residual interests" ("Residual
Securities") in the REMIC within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be
ongoing compliance on the part of the REMIC Pool with the requirements set forth
in the Code. The REMIC Pool must fulfill an asset test, which requires that no
more than a DE MINIMIS portion of the assets of the REMIC Pool, as of the close
of the third calendar month beginning after the "Startup Day" (which for
purposes of this discussion is the date of issuance of the REMIC Securities) and
at all times thereafter, may consist of assets other than "qualified mortgages"
and "permitted investments." The REMIC Regulations provide a safe harbor
pursuant to which the DE MINIMIS requirement will be met if at all times the
total adjusted basis of the nonqualified assets is less than 1% of the total
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a DE MINIMIS
amount of nonqualified assets. A REMIC Pool also must provide "reasonable
arrangements" to prevent its residual interests from being held by "disqualified
organizations" or agents of "disqualified organizations" and must furnish
applicable tax information to transferors or agents that violate this
requirement. The pooling and servicing agreement for each series of REMIC
Securities will contain provisions meeting these requirements. See "--Taxation
of Owners of Residual Securities-Tax-Related Restrictions on Transfer of
Residual Securities--Disqualified Organizations" below.
A qualified mortgage is any obligation that is principally secured by
an interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans and, generally, certificates of
beneficial interest in a grantor trust that holds mortgage loans and regular
interests in another REMIC, such as lower-tier
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regular interests in a tiered REMIC. The REMIC Regulations specify that loans
secured by timeshare interests, shares held by a tenant stockholder in a
cooperative housing corporation, and manufactured housing that qualifies as a
"single family residence" under Code Section 25(e)(10) can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage, which
is any property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either:
(1) in exchange for any qualified mortgage within a
three-month period from the Startup Day; or
(2) in exchange for a "defective obligation" within a two-year
period from the Startup Day.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is reasonably
foreseeable;
(2) a mortgage as to which a customary representation or
warranty made at the time of transfer to the REMIC Pool has been
breached;
(3) a mortgage that was fraudulently procured by the borrower;
and
(4) a mortgage that was not in fact principally secured by
real property (but only if the mortgage is disposed of within 90 days
of discovery).
A mortgage loan that is "defective" as described in clause (4) above that is not
sold or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after that 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in that fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be "promptly and appropriately" reduced to the extent it exceeds a
reasonably required amount. Foreclosure property is real property acquired by
the REMIC Pool in connection with the default or imminent default of a qualified
mortgage and generally may not be held for more than three taxable years after
the taxable year of acquisition unless extensions are granted by the Secretary
of the Treasury.
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet specific requirements. All of the interests in a REMIC
Pool must be either of the following: (1) one or more classes of regular
interests or (2) a single class of residual interests on which distributions, if
any, are made pro rata.
o A regular interest is an interest in a REMIC Pool that is
issued on the Startup Day with fixed terms, is designated as a
regular interest, and unconditionally entitles the holder to
receive a specified principal amount (or other similar
amount), and provides that
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interest payments (or other similar amounts), if any, at or
before maturity either are payable based on a fixed rate or a
qualified variable rate, or consist of a specified, nonvarying
portion of the interest payments on qualified mortgages. That
specified portion may consist of a fixed number of basis
points, a fixed percentage of the total interest, or a
qualified variable rate, inverse variable rate or difference
between two fixed or qualified variable rates on some or all
of the qualified mortgages. The specified principal amount of
a regular interest that provides for interest payments
consisting of a specified, nonvarying portion of interest
payments on qualified mortgages may be zero.
o A residual interest is an interest in a REMIC Pool other than
a regular interest that is issued on the Startup Day and that
is designated as a residual interest.
An interest in a REMIC Pool may be treated as a regular interest even
if payments of principal for that interest are subordinated to payments on other
regular interests or the residual interest in the REMIC Pool, and are dependent
on the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls. Accordingly, except as disclosed in a related prospectus supplement,
in the opinion of McKee Nelson LLP and Thacher Proffitt & Wood LLP, the Regular
Securities of a series will constitute one or more classes of regular interests,
and the Residual Securities for that series will constitute a single class of
residual interests for each REMIC Pool.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for that status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for that year and thereafter. In that event, that entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Securities may not
be accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, none of these
regulations have been issued. Any relief provided, moreover, may be accompanied
by sanctions, such as the imposition of a corporate tax on all or a portion of
the trust fund's income for the period in which the requirements for that status
are not satisfied. The pooling and servicing agreement for each REMIC Pool will
include provisions designed to maintain the trust fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any trust fund as
a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC SECURITIES
The REMIC Securities will be treated as "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
Pool underlying these Notes or Certificates, as applicable, would be so treated.
Moreover, if 95% or more of the assets of the REMIC Pool qualify for either of
the foregoing treatments at all times during a calendar year, the REMIC
Securities will qualify for the corresponding status in their entirety for that
calendar year.
Interest (including original issue discount) on the Regular Securities
and income allocated to the class of Residual Securities will be interest
described in Section 856(c)(3)(B) of the Code to the extent that the Notes or
Certificates, as applicable, are treated as "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code. In addition, the Regular Securities
generally will be "qualified mortgages" within the meaning of Section 860G(a)(3)
of the Code if transferred to another REMIC on its Startup Day in exchange for
regular or residual interests in the REMIC.
The assets of the REMIC Pool will include, in addition to mortgage
loans, payments on mortgage loans held pending distribution on the REMIC
Securities and property acquired by
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foreclosure held pending sale, and may include amounts in reserve accounts. It
is unclear whether property acquired by foreclosure held pending sale and
amounts in reserve accounts would be considered to be part of the mortgage
loans, or whether those assets (to the extent not invested in assets described
in the foregoing sections) otherwise would receive the same treatment as the
mortgage loans for purposes of all of the foregoing sections. The REMIC
Regulations do provide, however, that payments on mortgage loans held pending
distribution are considered part of the mortgage loans for purposes of Section
856(c)(4)(A) of the Code. Furthermore, foreclosure property generally will
qualify as "real estate assets" under Section 856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES
For some series of REMIC Securities, two or more separate elections may
be made to treat designated portions of the related trust fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any of
these series of REMIC Securities, McKee Nelson LLP or Thacher Proffitt & Wood
LLP will deliver its opinion that, assuming compliance with all provisions of
the related pooling and servicing agreement, the Tiered REMICs will each qualify
as a REMIC and the respective REMIC Securities issued by each Tiered REMIC will
be considered to evidence ownership of Regular Securities or Residual Securities
in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701 (a)(19)(C) of
the Code, and whether the income on those Notes or Certificates, as applicable,
is interest described in Section 856(c)(3)(B) of the Code, the Tiered REMICs
will be treated as one REMIC.
TAXATION OF OWNERS OF REGULAR SECURITIES
(1) General
Except as otherwise indicated herein, the Regular Securities will be
treated for federal income tax purposes as debt instruments that are issued by
the REMIC and not as beneficial interests in the REMIC or the REMIC's assets. In
general, interest, original issue discount, and market discount on a Regular
Security will be treated as ordinary income to a holder of the Regular Security
(the "Regular Securityholder"), and principal payments on a Regular Security
will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by that
Regular Securityholder.
Payments of interest on Regular Securities may be based on a fixed
rate, a variable rate as permitted by the REMIC Regulations, or may consist of a
specified portion of the interest payments on qualified mortgages where such
portion does not vary during the period the Regular Security is outstanding. The
definition of a variable rate for purposes of the REMIC Regulations is based on
the definition of a qualified floating rate for purposes of the rules governing
original issue discount set forth in the OID Regulations, with certain
modifications and permissible variations. See "--Variable Rate Regular
Securities" below for a discussion of the definition of a qualified floating
rate for purposes of the OID Regulations. A qualified floating rate, as defined
above for purposes of the REMIC Regulations (a "REMIC qualified floating rate"),
qualifies as a variable rate for purposes of the REMIC Regulations if such REMIC
qualified floating rate is set at a "current rate" as defined in the OID
Regulations. In addition, a rate equal to the highest, lowest or an average of
two or more REMIC qualified floating rates qualifies as a variable rate for
REMIC purposes. A Regular Security may also have a variable rate based on a
weighted average of the interest rates on some or all of the qualified mortgages
held by the REMIC where each qualified mortgage taken into account has a fixed
rate or a variable rate that is permissible under the REMIC Regulations.
Further, a Regular Security may have a rate that is the product of a REMIC
qualified floating rate or a weighted average rate and a fixed
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multiplier, is a constant number of basis points more or less than a REMIC
qualified floating rate or a weighted average rate, or is the product, plus or
minus a constant number of basis points, of a REMIC qualified floating rate or a
weighted average rate and a fixed multiplier. An otherwise permissible variable
rate for a Regular Security, described above, will not lose its character as
such because it is subject to a floor or a cap, including a "funds available
cap" as that term is defined in the REMIC Regulations. Lastly, a Regular
Security will be considered as having a permissible variable rate if it has a
fixed or otherwise permissible variable rate during one or more payment or
accrual periods and different fixed or otherwise permissible variable rates
during other payment or accrual periods.
(2) Original Issue Discount
Accrual Securities will be, and other classes of Regular Securities may
be, issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class or Subclass of Regular Securities having original
issue discount generally must include original issue discount in ordinary income
for federal income tax purposes as it accrues, in accordance with a constant
yield method that takes into account the compounding of interest, in advance of
the receipt of the cash attributable to that income. The following discussion is
based in part on the "OID Regulations" and in part on the provisions of the Tax
Reform Act of 1986 (the "1986 Act"). Regular Securityholders should be aware,
however, that the OID Regulations do not adequately address some of the issues
relevant to, and in some instances provide that they are not applicable to,
prepayable securities, such as the Regular Securities. To the extent that those
issues are not addressed in the regulations, the Seller intends to apply the
methodology described in the Conference Committee Report to the 1986 Act. No
assurance can be provided that the Internal Revenue Service will not take a
different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Internal Revenue Service to apply or depart from the OID Regulations where
necessary or appropriate to ensure a reasonable tax result because of the
applicable statutory provisions. A tax result will not be considered
unreasonable under the anti-abuse rule in the absence of a substantial effect on
the present value of a taxpayer's tax liability. Investors are advised to
consult their own tax advisors as to the discussion in the OID Regulations and
the appropriate method for reporting interest and original issue discount for
the Regular Securities.
Each Regular Security will be treated as a single installment
obligation for purposes of determining the original issue discount includible in
a Regular Securityholder's income. The total amount of original issue discount
on a Regular Security is the excess of the "stated redemption price at maturity"
of the Regular Security over its "issue price." The issue price of a Class of
Regular Securities offered pursuant to this prospectus generally is the first
price at which a substantial amount of that Class is sold to the public
(excluding bond houses, brokers and underwriters). Although unclear under the
OID Regulations, it is anticipated that the trustee will treat the issue price
of a Class as to which there is no substantial sale as of the issue date or that
is retained by the depositor as the fair market value of the Class as of the
issue date. The issue price of a Regular Security also includes any amount paid
by an initial Regular Securityholder for accrued interest that relates to a
period before the issue date of the Regular Security, unless the Regular
Securityholder elects on its federal income tax return to exclude that amount
from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Security always
includes the original principal amount of the Regular Security, but generally
will not include distributions of interest if those distributions constitute
"qualified stated interest." Under the OID Regulations, qualified stated
interest generally means interest payable at a single fixed rate or a qualified
variable rate (as described below), provided that the interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the Regular Security. Because there is no penalty or default remedy in the
case of nonpayment of interest for a Regular Security, it is possible that no
interest on any Class of Regular Securities will be treated as qualified stated
interest. However, except as provided in the following three sentences or in the
prospectus supplement, because the underlying mortgage loans provide for
remedies in the event of default, it is anticipated that the trustee will treat
interest for the Regular
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Securities as qualified stated interest. Distributions of interest on an Accrual
Security, or on other Regular Securities for which deferred interest will
accrue, will not constitute qualified stated interest, in which case the stated
redemption price at maturity of those Regular Securities includes all
distributions of interest as well as principal on the Regular Securities.
Likewise, it is anticipated that the trustee will treat an interest-only Class
or a Class on which interest is substantially disproportionate to its principal
amount (a so-called "super-premium" Class) as having no qualified stated
interest. Where the interval between the issue date and the first Distribution
Date on a Regular Security is shorter than the interval between subsequent
Distribution Dates, the interest attributable to the additional days will be
included in the stated redemption price at maturity.
Under a DE MINIMIS rule, original issue discount on a Regular Security
will be considered to be zero if the original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular Security is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of those
distributions should be determined in accordance with the assumed rate of
prepayment of the mortgage loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption for a series of Regular Securities will be set forth in
the prospectus supplement. Holders generally must report DE MINIMIS original
issue discount pro rata as principal payments are received, and that income will
generally be capital gain if the Regular Security is held as a capital asset.
Under the OID Regulations, however, Regular Securityholders may elect to accrue
all DE MINIMIS original issue discount as well as market discount and market
premium, under the constant yield method. See "--Election to Treat All Interest
Under the Constant Yield Method" below.
A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which it holds the Regular Security, including the date of purchase but
excluding the date of disposition. The trustee will treat the monthly period
ending on the day before each Distribution Date as the accrual period. For each
Regular Security, a calculation will be made of the original issue discount that
accrues during each successive full accrual period (or shorter period from the
date of original issue) that ends on the day before the related Distribution
Date on the Regular Security. The Conference Committee Report to the 1986 Act
states that the rate of accrual of original issue discount is intended to be
based on the Prepayment Assumption. The original issue discount accruing in a
full accrual period would be the excess, if any, of:
(1) the sum of:
(a) the present value of all of the remaining
distributions to be made on the Regular Security as of the end
of that accrual period and
(b) the distributions made on the Regular Security
during the accrual period that are included in the Regular
Security's stated redemption price at maturity, over
(2) the adjusted issue price of the Regular Security at
the beginning of the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence is calculated based on:
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(1) the yield to maturity of the Regular Security at the issue
date; and
(2) the Prepayment Assumption.
For these purposes, the adjusted issue price of a Regular Security at the
beginning of any accrual period equals the issue price of the Regular Security,
increased by the total amount of original issue discount for the Regular
Security that accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Security's stated redemption price at
maturity that were made on the Regular Security in those prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. For an initial accrual period shorter than a full accrual period, the
daily portions of original issue discount must be determined according to an
appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the mortgage loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. An increase in
prepayments on the mortgage loans for a series of Regular Securities can result
in both a change in the priority of principal payments for some Classes of
Regular Securities and either an increase or decrease in the daily portions of
original issue discount for those Regular Securities.
(3) Acquisition Premium
A purchaser of a Regular Security having original issue discount at a
price greater than its adjusted issue price but less than its stated redemption
price at maturity will be required to include in gross income the daily portions
of the original issue discount on the Regular Security reduced pro rata by a
fraction, the numerator of which is the excess of its purchase price over the
adjusted issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, a subsequent purchaser may elect to treat all that acquisition
premium under the constant yield method, as described below under the heading
"--Election to Treat All Interest Under the Constant Yield Method" below.
(4) Variable Rate Regular Securities
Regular Securities may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a qualified
variable rate if, generally, (1) the issue price does not exceed the original
principal balance by more than a specified amount, (2) it does not provide for
any principal payments that are contingent, within the meaning of the OID
Regulations, except as provided in (1), and (3) the interest compounds or is
payable at least annually at current values of
(a) one or more "qualified floating rates,"
(b) a single fixed rate and one or more qualified floating rates,
(c) a single "objective rate," or
(d) a single fixed rate and a single objective rate that is a
"qualified inverse floating rate."
A floating rate is a qualified floating rate if variations can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. A multiple of a qualified floating rate is considered a qualified
floating rate only if the rate is equal to either (a) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35 or (b) the product of
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a qualified floating rate and a fixed multiple that is greater than 0.65 but not
more than 1.35, increased or decreased by a fixed rate. That rate may also be
subject to a fixed cap or floor, or a cap or floor that is not reasonably
expected as of the issue date to affect the yield of the instrument
significantly. An objective rate is any rate (other than a qualified floating
rate) that is determined using a single fixed formula and that is based on
objective financial or economic information, provided that the information is
not (1) within the control of the issuer or a related party or (2) unique to the
circumstances of the issuer or a related party. However, an objective rate does
not include a rate if it is reasonably expected that the average value of such
rate during the first half of the Regular Security's term will be either
significantly less than or significantly greater than the average value of the
rate during the final half of the Regular Security's term. A qualified inverse
floating rate is a rate equal to a fixed rate minus a qualified floating rate
that inversely reflects contemporaneous variations in the qualified floating
rate; an inverse floating rate that is not a qualified inverse floating rate may
nevertheless be an objective rate. A Class of Regular Securities may be issued
under this prospectus that does not have a qualified variable rate under the
foregoing rules, for example, a Class that bears different rates at different
times during the period it is outstanding that it is considered significantly
"front-loaded" or "back-loaded" within the meaning of the OID Regulations. It is
possible that a Class may be considered to bear "contingent interest' within the
meaning of the OID Regulations. The OID Regulations, as they relate to the
treatment of contingent interest, are by their terms not applicable to Regular
Securities. However, if final regulations dealing with contingent interest for
Regular Securities apply the same principles as the OID Regulations, those
regulations may lead to different timing of income inclusion than would be the
case under the OID Regulations. Furthermore, application of those principles
could lead to the characterization of gain on the sale of contingent interest
Regular Securities as ordinary income. Investors should consult their tax
advisors regarding the appropriate treatment of any Regular Security that does
not pay interest at a fixed rate or qualified variable rate as described in this
paragraph.
The amount of original issue discount for a Regular Security bearing a
qualified variable rate of interest will accrue in the manner described above
under "--Original Issue Discount," with the yield to maturity and future
payments on that Regular Security generally to be determined by assuming that
interest will be payable for the life of the Regular Security based on the
initial rate (or, if different, the value of the applicable variable rate as of
the pricing date) for the relevant Class, if the Class bears interest at a
qualified floating rate or qualified inverse floating rate, or based on a fixed
rate which reflects the reasonably expected yield for the relevant Class, if the
Class bears interest at an objective rate (other than a qualified inverse
floating rate). Unless required otherwise by applicable final regulations, it is
anticipated that the trustee will treat interest, other than variable interest
on an interest-only or super-premium Class, as qualified stated interest at the
qualified variable rate. However, the qualified stated interest allocable to an
accrual period will be increased (or decreased) if the interest actually paid
during the accrual period exceed (or is less than) the interest assumed to be
paid under the rate just described.
(5) Market Discount
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (1) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified stated
interest payments due on a Regular Security, or (2) in the case of a Regular
Security having original issue discount, is exceeded by the adjusted issue price
of that Regular Security at the time of purchase. The purchaser generally will
be required to recognize ordinary income to the extent of accrued market
discount on that Regular Security as distributions includible in the stated
redemption price at maturity of the Regular Security are received, in an amount
not exceeding that distribution. The market discount would accrue in a manner to
be provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
these regulations
93
are issued, the market discount would accrue either (1) on the basis of a
constant interest rate, or (2) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for that period plus the remaining
interest as of the end of that period, or in the case of a Regular Security
issued with original issue discount, in the ratio of original issue discount
accrued for the relevant period to the sum of the original issue discount
accrued for that period plus the remaining original issue discount as of the end
of that period. The purchaser also generally will be required to treat a portion
of any gain on a sale or exchange of the Regular Security as ordinary income to
the extent of the market discount accrued to the date of disposition under one
of the foregoing methods, less any accrued market discount previously reported
as ordinary income as partial distributions in reduction of the stated
redemption price at maturity were received. The purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Security over the interest
distributable on the Regular Security. The deferred portion of the interest
expense in any taxable year generally will not exceed the accrued market
discount on the Regular Security for that year. Any deferred interest expense
is, in general, allowed as a deduction not later than the year in which the
related market discount income is recognized or the Regular Security is disposed
of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the Regular Securityholder may elect to include market discount
in income currently as it accrues on all market discount instruments acquired by
the Regular Securityholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. See "--Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in which
that election may be deemed to be made. A person who purchases a Regular
Security at a price lower than the remaining amounts includible in the stated
redemption price at maturity of the security, but higher than its adjusted issue
price, does not acquire the Regular Security with market discount, but will be
required to report original issue discount, appropriately adjusted to reflect
the excess of the price paid over the adjusted issue price.
Market discount for a Regular Security will be considered to be zero if
the market discount is less than 0.25% of the remaining stated redemption price
at maturity of the Regular Security (or, in the case of a Regular Security
having original issue discount, the adjusted issue price of that Regular
Security) multiplied by the weighted average maturity of the Regular Security
(presumably determined as described above in the third paragraph under
"--Original Issue Discount" above) remaining after the date of purchase. It
appears that DE MINIMIS market discount would be reported in a manner similar to
DE MINIMIS original issue discount. See "--Original Issue Discount" above.
Treasury regulations implementing the market discount rules have not
yet been issued, and uncertainty exists with respect to many aspects of those
rules. Due to the substantial lack of regulatory guidance with respect to the
market discount rules, it is unclear how those rules will affect any secondary
market that develops for a particular Class of Regular Securities. Prospective
investors in Regular Securities should consult their own tax advisors regarding
the application of the market discount rules to the Regular Securities and the
elections to include market discount in income currently and to accrue market
discount on the basis of the constant yield method.
(6) Amortizable Premium
A Regular Security purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds that Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize the premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Security. The election will apply to all taxable debt obligations
(including REMIC regular interests) acquired by the Regular Securityholder at a
premium held in that taxable year or thereafter, unless revoked with the
permission of the Internal Revenue Service. The Conference Committee Report to
the 1986 Act
94
indicates a Congressional intent that the same rules that apply to the accrual
of market discount on installment obligations will also apply to amortizing bond
premium under Code Section 171 on installment obligations as the Regular
Securities, although it is unclear whether the alternatives to the constant
interest method described above under "Market Discount" are available.
Amortizable bond premium generally will be treated as an offset to interest
income on a Regular Security, rather than as a separate deductible item. See
"--Election to Treat All Interest Under the Constant Yield Method" below
regarding an alternative manner in which the Code Section 171 election may be
deemed to be made.
(7) Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to this election, (1) "interest" includes stated interest, original issue
discount, DE MINIMIS original issue discount, market discount and DE MINIMIS
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (2) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make this election on an instrument by instrument basis or for a
class or group of debt instruments. However, if the holder makes this election
for a debt instrument with amortizable bond premium, the holder is deemed to
have made elections to amortize bond premium currently as it accrues under the
constant yield method for all premium bonds held by the holder in the same
taxable year or thereafter. Alternatively, if the holder makes this election for
a debt instrument with market discount, the holder is deemed to have made
elections to report market discount income currently as it accrues under the
constant yield method for all market discount bonds acquired by the holder in
the same taxable year or thereafter. The election is made on the holder's
federal income tax return for the year in which the debt instrument is acquired
and is irrevocable except with the approval of the Internal Revenue Service.
Investors should consult their own tax advisors regarding the advisability of
making this election.
(8) Treatment of Losses
Regular Securityholders will be required to report income for Regular
Securities on the accrual method of accounting, without giving effect to delays
or reductions in distributions attributable to defaults or delinquencies on the
mortgage loans, except to the extent it can be established that the losses are
uncollectible. Accordingly, the holder of a Regular Security, particularly a
Subordinate Security, may have income, or may incur a diminution in cash flow as
a result of a default or delinquency, but may not be able to take a deduction
(subject to the discussion below) for the corresponding loss until a subsequent
taxable year. In this regard, investors are cautioned that while they may
generally cease to accrue interest income if it reasonably appears that the
interest will be uncollectible, the Internal Revenue Service may take the
position that original issue discount must continue to be accrued in spite of
its uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166.
To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Securityholders that are corporations or
that otherwise hold the Regular Securities in connection with a trade or
business should in general be allowed to deduct as an ordinary loss that loss
with respect to principal sustained during the taxable year on account of any
Regular Securities becoming wholly or partially worthless, and that, in general,
Regular Securityholders that are not corporations and do not hold the Regular
Securities in connection with a trade or business should be allowed to deduct as
a short-term capital loss any loss sustained during the taxable year on account
of a portion of any Regular Securities becoming wholly worthless. Although the
matter is not free from
95
doubt, non-corporate Regular Securityholders should be allowed a bad debt
deduction at the time the principal balance of the Regular Securities is reduced
to reflect losses resulting from any liquidated mortgage loans. The Internal
Revenue Service, however, could take the position that non-corporate holders
will be allowed a bad debt deduction to reflect those losses only after all the
mortgage loans remaining in the trust fund have been liquidated or the
applicable Class of Regular Securities has been otherwise retired. The Internal
Revenue Service could also assert that losses on the Regular Securities are
deductible based on some other method that may defer those deductions for all
holders, such as reducing future cashflow for purposes of computing original
issue discount. This may have the effect of creating "negative" original issue
discount that may be deductible only against future positive original issue
discount or otherwise upon termination of the Class.
Regular Securityholders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained for
their Regular Securities. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate and
non-corporate holders, the Internal Revenue Service may take the position that
losses attributable to accrued original issue discount may only be deducted as
capital losses in the case of non-corporate holders who do not hold the Regular
Securities in connection with a trade or business. Special loss rules may be
applicable to banks and thrift institutions. These taxpayers are advised to
consult their tax advisors regarding the treatment of losses on Regular
Securities.
(9) Sale or Exchange of Regular Securities
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the original cost
of the Regular Security to the seller, increased by any original issue discount
or market discount previously included in the seller's gross income for the
Regular Security and reduced by amounts included in the stated redemption price
at maturity of the Regular Security that were previously received by the seller,
by any amortized premium, and by any recognized losses.
Except as described above regarding market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently, more than one year). That gain will be
treated as ordinary income
(1) if a Regular Security is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Securityholder's net
investment in the conversion transaction at 120% of the appropriate
applicable federal rate in effect at the time the taxpayer entered into
the transaction minus any amount previously treated as ordinary income
for any prior disposition of property that was held as part of that
transaction;
(2) in the case of a non-corporate taxpayer, to the extent
that the taxpayer has made an election under Code Section 163(d)(4) to
have net capital gains taxed as investment income at ordinary income
rates; or
(3) to the extent that the gain does not exceed the excess, if
any, of (a) the amount that would have been includible in the gross
income of the holder if its yield on that Regular Security were 110% of
the applicable federal rate as of the date of purchase, over (b) the
amount of income actually includible in the gross income of the holder
for that Regular Security (the "110% yield rule").
96
In addition, gain or loss recognized from the sale of a Regular
Security by some banks or thrift institutions will be treated as ordinary income
or loss pursuant to Code Section 582(c). Long-term capital gains of noncorporate
taxpayers generally are subject to a lower maximum tax rate than ordinary income
of those taxpayers for property held for more than one year, with further rate
reductions for property held for more than five years. Currently, the maximum
tax rate for corporations is the same for both ordinary income and capital
gains.
TAXATION OF OWNERS OF RESIDUAL SECURITIES
(1) Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss
will be includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Securities ("Residual Holders"), and will not be
taxed separately to the REMIC Pool. The daily portions of REMIC taxable income
or net loss of a Residual Holder are determined by allocating the REMIC Pool's
taxable income or net loss for each calendar quarter ratably to each day in that
quarter and by allocating that daily portion among the Residual Holders in
proportion to their respective holdings of Residual Securities in the REMIC Pool
on that day. REMIC taxable income is generally determined in the same manner as
the taxable income of an individual using the accrual method of accounting,
except that
(1) the limitations on deductibility of investment interest
expense and expenses for the production of income do not apply;
(2) all bad loans will be deductible as business bad debts;
and
(3) the limitation on the deductibility of interest and
expenses related to tax- exempt income will apply.
The REMIC Pool's gross income includes interest, original issue discount income
and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from amortization
of issue premium, if any, on the Regular Securities, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the Regular Securities. The REMIC Pool's
deductions include interest and original issue discount expense on the Regular
Securities, servicing fees on the mortgage loans, other administrative expenses
of the REMIC Pool and realized losses on the mortgage loans. The requirement
that Residual Holders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Notes or Certificates, as
applicable, of any class of the related series outstanding.
The taxable income recognized by a Residual Holder in any taxable year
will be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium for the mortgage loans, on the one hand, and the timing
of deductions for interest (including original issue discount) or income from
amortization of issue premium on the Regular Securities, on the other hand. If
an interest in the mortgage loans is acquired by the REMIC Pool at a discount,
and one or more of these mortgage loans is prepaid, the prepayment may be used
in whole or in part to make distributions in reduction of principal on the
Regular Securities, and the discount on the mortgage loans that is includible in
income may exceed the original issue discount deductions allowed with respect to
the Regular Securities. When there is more than one Class of Regular Securities
that distribute principal sequentially, this mismatching of income and
deductions is particularly likely to occur in the early years following issuance
of the Regular Securities when distributions in reduction of principal are being
made in respect of earlier Classes of Regular Securities to the extent that
those Classes are not issued with substantial discount or are issued at a
premium. If taxable income attributable to that
97
mismatching is realized, in general, losses would be allowed in later years as
distributions on the later maturing Classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years
as a result of the fact that interest expense deductions, expressed as a
percentage of the outstanding principal amount of that series of Regular
Securities, may increase over time as distributions in reduction of principal
are made on the lower yielding Classes of Regular Securities, whereas, to the
extent the REMIC Pool consists of fixed rate mortgage loans, interest income for
any particular mortgage loan will remain constant over time as a percentage of
the outstanding principal amount of that loan. Consequently, Residual Holders
must have sufficient other sources of cash to pay any federal, state, or local
income taxes due as a result of that mismatching or unrelated deductions against
which to offset that income, subject to the discussion of "excess inclusions"
below under "--Limitations on Offset or Exemption of REMIC Income." The timing
of mismatching of income and deductions described in this paragraph, if present
for a series of Notes or Certificates, as applicable, may have a significant
adverse effect upon a Residual Holder's after-tax rate of return.
A portion of the income of a Residual Holder may be treated unfavorably
in three contexts:
(1) it may not be offset by current or net operating loss
deductions;
(2) it will be considered unrelated business taxable income to
tax-exempt entities; and
(3) it is ineligible for any statutory or treaty reduction in
the 30% withholding tax otherwise available to a foreign Residual
Holder.
See "--Limitations on Offset or Exemption of REMIC Income" below. In addition, a
Residual Holder's taxable income during some periods may exceed the income
reflected by those Residual Holders for those periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Securities.
(2) Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Holder is limited to the adjusted basis of the Residual
Security as of the close of the quarter (or time of disposition of the Residual
Security if earlier), determined without taking into account the net loss for
the quarter. The initial adjusted basis of a purchaser of a Residual Security is
the amount paid for that Residual Security. The adjusted basis will be increased
by the amount of taxable income of the REMIC Pool reportable by the Residual
Holder and will be decreased (but not below zero), first, by a cash distribution
from the REMIC Pool and, second, by the amount of loss of the REMIC Pool
reportable by the Residual Holder. Any loss that is disallowed on account of
this limitation may be carried over indefinitely with respect to the Residual
Holder as to whom the loss was disallowed and may be used by the Residual Holder
only to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost
of its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, if, in any year, cash distributions to a Residual
Holder exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its
Residual Security. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the Residual Holder (but
not below zero). If a Residual Security's basis is reduced to zero, any cash
distributions with respect to that Residual Security in any taxable year in
excess of its share of the REMIC's income would be taxable to the holder as gain
on the sale or exchange of its interest in the REMIC.
98
A Residual Security may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of the residual
interest as zero rather than the negative amount for purposes of determining the
REMIC Pool's basis in its assets. The preamble to the REMIC Regulations states
that the Internal Revenue Service may provide future guidance on the proper tax
treatment of payments made by a transferor of the residual interest to induce
the transferee to acquire the interest, and Residual Holders should consult
their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Holder (other than an original holder) in the Residual Security is greater than
the corresponding portion of the REMIC Pool's basis in the mortgage loans, the
Residual Holder will not recover a portion of the basis until termination of the
REMIC Pool unless future Treasury regulations provide for periodic adjustments
to the REMIC income otherwise reportable by the holder. The REMIC Regulations
currently in effect do not so provide. See "--Treatment of Certain Items of
REMIC Income and Expense--Market Discount" below regarding the basis of mortgage
loans to the REMIC Pool and "--Sale or Exchange of a Residual Security" below
regarding possible treatment of a loss upon termination of the REMIC Pool as a
capital loss.
(3) Treatment of Certain Items of REMIC Income and Expense
Although it is anticipated that the trustee will compute REMIC income
and expense in accordance with the Code and applicable regulations, the
authorities regarding the determination of specific items of income and expense
are subject to differing interpretations. The depositor makes no representation
as to the specific method that will be used for reporting income with respect to
the mortgage loans and expenses for the Regular Securities, and different
methods could result in different timing or reporting of taxable income or net
loss to Residual Holders or differences in capital gain versus ordinary income.
ORIGINAL ISSUE DISCOUNT AND PREMIUM. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of premium
will be determined in the same manner as original issue discount income on
Regular Securities as described above under "Taxation of Owners of Regular
Securities Original Issue Discount" and "--Variable Rate Regular Securities,"
without regard to the DE MINIMIS rule described therein, and "--Amortizable
Premium."
MARKET DISCOUNT. The REMIC Pool will have market discount income in
respect of mortgage loans if, in general, the basis of the REMIC Pool in those
mortgage loans is exceeded by their unpaid principal balances. The REMIC Pool's
basis in those mortgage loans is generally the fair market value of the mortgage
loans immediately after the transfer of the mortgage loans to the REMIC Pool.
The REMIC Regulations provide that the basis is equal to the total of the issue
prices of all regular and residual interests in the REMIC Pool. The market
discount must be recognized currently as an item of ordinary income as it
accrues, rather than being included in income upon the sale of mortgage loans or
as principal on the mortgage loans is paid. Market discount income generally
should accrue in the manner described above under "--Taxation of Owners of
Regular Securities--Market Discount."
PREMIUM. Generally, if the basis of the REMIC Pool in the mortgage
loans exceeds the unpaid principal balances of the mortgage loans, the REMIC
Pool will be considered to have acquired those mortgage loans at a premium equal
to the amount of that excess. As stated above, the REMIC Pool's basis in
mortgage loans is generally the fair market value of the mortgage loans and is
based on the total of the issue prices of the regular and residual interests in
the REMIC Pool immediately after the transfer of the mortgage loans to the REMIC
Pool. In a manner analogous to the discussion above under "--Taxation of Owners
of Regular Securities Amortizable Premium," a person that holds a mortgage loan
as a capital asset under Code Section 1221 may elect under Code Section 171 to
amortize premium on mortgage loans originated after September 27, 1985, under
the constant yield method. Amortizable bond premium will be treated as an offset
to interest income on the mortgage
99
loans, rather than as a separate deduction item. Because substantially all of
the borrowers on the mortgage loans are expected to be individuals, Code Section
171 will not be available for premium on mortgage loans originated on or before
September 27, 1985. Premium for those mortgage loans may be deductible in
accordance with a reasonable method regularly employed by the holder of those
mortgage loans. The allocation of that premium pro rata among principal payments
should be considered a reasonable method; however, the Internal Revenue Service
may argue that the premium should be allocated in a different manner, such as
allocating the premium entirely to the final payment of principal.
(4) Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in
determining the federal income tax liability of a Residual Holder will be
subject to special treatment. That portion, referred to as the "excess
inclusion," is equal to the excess of REMIC taxable income for the calendar
quarter allocable to a Residual Security over the daily accruals for that
quarterly period of (1) 120% of the long-term applicable federal rate that would
have applied to the Residual Security (if it were a debt instrument) on the
Startup Day under Code Section 1274(d), multiplied by (2) the adjusted issue
price of the Residual Security at the beginning of the quarterly period. For
this purpose, the adjusted issue price of a Residual Security at the beginning
of a quarter is the issue price of the Residual Security, plus the amount of
those daily accruals of REMIC income described in this paragraph for all prior
quarters, decreased by any distributions made with respect to the Residual
Security before the beginning of that quarterly period.
The portion of a Residual Holder's REMIC taxable income consisting of
the excess inclusions generally may not be offset by other deductions, including
net operating loss carry-forwards, on the Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of the
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax for persons who are not U.S. Persons
(as defined below under "--Tax-Related Restrictions on Transfer of Residual
Securities--Foreign Investors"), and the portion thereof attributable to excess
inclusions is not eligible for any reduction in the rate of withholding tax (by
treaty or otherwise). See "--Taxation of Certain Foreign Investors Residual
Securities" below. Finally, if a real estate investment trust or a regulated
investment company owns a Residual Security, a portion (allocated under Treasury
regulations yet to be issued) of dividends paid by the real estate investment
trust or regulated investment company could not be offset by net operating
losses of its shareholders, would constitute unrelated business taxable income
for tax-exempt shareholders, and would be ineligible for reduction of
withholding to persons who are not U.S. Persons.
Provisions governing the relationship between excess inclusions and the
alternative minimum tax provide that (i) alternative minimum taxable income for
a Residual Holder is determined without regard to the special rule, discussed
above, that taxable income cannot be less than excess inclusions, (ii) a
Residual Holder's alternative minimum taxable income for a taxable year cannot
be less than the excess inclusions for the year, and (iii) the amount of any
alternative minimum tax net operating loss deduction must be computed without
regard to any excess inclusions.
The Internal Revenue Service has authority to promulgate regulations
providing that if the aggregate value of the Residual Securities is not
considered to be "significant," then the entire share of REMIC taxable income of
a Residual Holder may be treated as excess inclusions subject to the foregoing
limitations. This authority has not been exercised to date.
100
(5) Tax-Related Restrictions on Transfer of Residual Securities
DISQUALIFIED ORGANIZATIONS. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (1) the
present value of the total anticipated excess inclusions for that Residual
Security for periods after the transfer and (2) the highest marginal federal
income tax rate applicable to corporations. The REMIC Regulations provide that
the anticipated excess inclusions are based on actual prepayment experience to
the date of the transfer and projected payments based on the Prepayment
Assumption. The present value rate equals the applicable federal rate under Code
Section 1274(d) as of the date of the transfer for a term ending with the last
calendar quarter in which excess inclusions are expected to accrue. That rate is
applied to the anticipated excess inclusions from the end of the remaining
calendar quarters in which they arise to the date of the transfer. That tax
generally would be imposed on the transferor of the Residual Security, except
that where the transfer is through an agent (including a broker, nominee, or
other middleman) for a Disqualified Organization, the tax would instead be
imposed on the agent. However, a transferor of a Residual Security would in no
event be liable for the tax for a transfer if the transferee furnished to the
transferor an affidavit stating that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not have
actual knowledge that the affidavit is false. Under the REMIC Regulations, an
affidavit will be sufficient if the transferee furnishes (A) a social security
number, and states under penalties of perjury that the social security number is
that of the transferee, or (B) a statement under penalties of perjury that it is
not a disqualified organization.
"Disqualified Organization" means the United States, any state or
political subdivision of the United States, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that the term does not include an instrumentality if all of
its activities are subject to tax and a majority of its board of directors in
not selected by any governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless the organization is subject to the tax on
unrelated business income imposed by Code Section 511.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income for a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in that
entity, then a tax is imposed on the entity equal to the product of (1) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the Disqualified
Organization, and (2) the highest marginal federal corporate income tax rate.
That tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for the
tax if (1) it has received an affidavit from the record holder stating, under
penalties of perjury, that it is not a Disqualified Organization, or providing
the holder's taxpayer identification number and stating, under penalties of
perjury, that the social security number is that of the record owner, and (2)
during the period that person is the record holder of the Residual Security, the
Pass-Through Entity does not have actual knowledge that the affidavit is false.
"Pass-Through Entity" means any regulated investment company, real
estate investment trust, common trust fund, partnership, trust or estate and
corporations operating on a cooperative basis. Except as may be provided in
Treasury regulations, any person holding an interest in a Pass-Through Entity as
a nominee for another will, with respect to that interest, be treated as a
Pass-Through Entity.
If an "electing large partnership" holds a Residual Security, all
interests in the electing large partnership are treated as held by Disqualified
Organizations for purposes of the tax imposed upon a Pass-Through Entity by
Section 860E(c) of the Code. The exception to this tax, otherwise available to a
Pass-Through Entity that is furnished particular affidavits by record holders of
interests in the
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entity and that does not know those affidavits are false, is not available to an
electing large partnership.
The pooling and servicing agreement for a series will provide that no
legal or beneficial interest in a Residual Security may be transferred or
registered unless (1) the proposed transferee furnished to the transferor and
the trustee an affidavit providing its taxpayer identification number and
stating that the transferee is the beneficial owner of the Residual Security and
is not a Disqualified Organization and is not purchasing the Residual Security
on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman) and (2) the transferor provides a statement in writing to the trustee
that it has no actual knowledge that the affidavit is false. Moreover, the
pooling and servicing agreement will provide that any attempted or purported
transfer in violation of these transfer restrictions will be null and void and
will vest no rights in any purported transferee. Each Residual Security for a
series will bear a legend referring to those restrictions on transfer, and each
Residual Holder will be deemed to have agreed, as a condition of ownership of
the Residual Security, to any amendments to the related pooling and servicing
agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
trustee may charge a fee for computing and providing that information.
NONECONOMIC RESIDUAL INTERESTS. The REMIC Regulations would disregard
some transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under "--Foreign Investors") is
disregarded to all federal income tax purposes if a significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "noneconomic residual interest" unless, at the time of the transfer, (1) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest corporate income tax rate in effect for the year in
which the transfer occurs, and (2) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount sufficient
to satisfy the accrued taxes on each excess inclusion. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under "--Disqualified Organizations." The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (1) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, (2) the transferee represents to the transferor
that it understands that, as the holder of the non-economic residual interest,
the transferee may incur liabilities in excess of any cash flows generated by
the interest and that the transferee intends to pay taxes associated with
holding the residual interest as they become due, and (3) either the formula
test or the asset test (each as described below) is satisfied.
The formula test is satisfied if the present value of the anticipated
tax liabilities associated with holding the Residual Security does not exceed
the sum of the present values of (1) any consideration given to the transferee
to the acquire the Residual Security, (2) the expected future distributions on
the Residual Security, and (3) the anticipated tax savings associated with
holding the Residual Security as the REMIC generates losses. For purposes of
this calculation, the present values generally are
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calculated using a discount rate equal to the applicable federal rate, and the
transferee is assumed to pay tax at the highest corporate rate of tax.
The asset test is satisfied if
1. at the time of the transfer of the Residual Security, and at
the close of each of the transferee's two fiscal years
preceding the year of transfer, the transferee's gross assets
for financial reporting purposes exceed $100 million and its
net assets for financial reporting purposes exceed $10
million,
2. the transferee is a taxable domestic C corporation, other than
a RIC, REIT, REMIC or Subchapter T cooperative (an "Eligible
Corporation"), that makes a written agreement that any
subsequent transfer of the Residual Security will be to
another Eligible Corporation in a transaction that satisfies
the safe harbor described above, and the transferor does not
know, or have reason to know, that the transferee will not
honor such agreement, and
3. the facts and circumstances known to the transferor on or
before the date of transfer do not reasonably indicate that
the taxes associated with the Residual Security will not be
paid.
For purposes of requirement (1), the gross and net assets of a transferee do not
include any obligations of a person related to the transferee or any other asset
if a principal purpose for holding or acquiring the asset is to permit the
transferee to satisfy the asset test. Further, neither the formula test nor the
asset test will be treated as satisfied in the case of any transfer or
assignment of the Residual Security to a foreign branch of the transferee or any
other arrangement by which the Residual Security is at any time subject to net
tax by a foreign country or possession of the United States.
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless the
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that (1) the future distributions on the Residual Security
will equal at least 30% of the anticipated excess inclusions after the transfer,
and (2) such amounts will be distributed at or after the time at which the
excess inclusions accrue and before the end of the next succeeding taxable year.
A safe harbor in the REMIC Regulations provides that the reasonable expectation
requirement will be satisfied if the above test would be met at all assumed
prepayment rates for the mortgage loans from 50 percent to 200 percent of the
Prepayment Assumption. If the non-U.S. Person transfers the Residual Security
back to a U.S. Person, the transfer will be disregarded and the foreign
transferor will continue to be treated as the owner unless arrangements are made
so that the transfer does not have the effect of allowing the transferor to
avoid tax on accrued excess inclusions.
The prospectus supplement relating to the Certificates of a series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which the transfer may be made. The term "U.S. Person"
means a citizen or resident of the United States, a corporation or partnership
(or other entity properly treated as a partnership or as a corporation for
federal income tax purposes) created or organized in or under the laws of the
United States or of any state (including, for this purpose, the District of
Columbia), an estate that is subject to U.S. federal income tax regardless of
the source of its income, or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more U.S. Persons have the authority to control all
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substantial decisions of the trust (or, to the extent provided in applicable
Treasury regulations, trusts in existence on August 20, 1996, which are eligible
to elect and do elect to be treated as U.S. Persons).
(6) Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount realized
over the adjusted basis (as described above under "--Taxation of Owners of
Residual Securities--Basis and Losses") of the Residual Holder in the Residual
Security at the time of the sale or exchange.
Further, as described above under "--Taxation of Owners of Residual
Securities--Basis and Losses", if a Residual Security's basis is reduced to
zero, any cash distributions with respect to that Residual Security in any
taxable year in excess of its share of the REMIC's income for that year would be
taxable to the holder as gain on the sale or exchange of its interest in the
REMIC. If a Residual Holder has an adjusted basis in its Residual Security when
its interest in the REMIC Pool terminates, then it will recognize a capital loss
(assuming the Residual Security was held as a capital asset) at that time in an
amount equal to the remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (1) if a Residual Security is held as part of a "conversion transaction"
as defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder's net investment in the conversion transaction at
120% of the appropriate applicable federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income for any prior disposition of property that was held as a part of
that transaction or (2) in the case of a non-corporate taxpayer, to the extent
that the taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates. In addition,
gain or loss recognized from the sale of a Residual Security by some banks or
thrift institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
Except as provided in Treasury regulations yet to be issued, the wash
sale rules of Code Section 1091 will apply to dispositions of Residual
Securities where the seller of the Residual Security, during the period
beginning six months before the sale or disposition of the Residual Security and
ending six months after the sale or disposition, acquires (or enters into any
other transaction that results in the application of Code Section 1091) any
residual interest in any REMIC or any interest in a "taxable mortgage pool"
(such as a non-REMIC owner trust) that is economically comparable to a Residual
Security.
(7) Mark to Market Regulations
Treasury regulations provide that a Residual Security acquired on or
after January 4, 1995 is not treated as a security and thus may not be marked to
market pursuant to Section 475 of the Code.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
(8) Inducement Fees
Regulations have been proposed regarding the federal income tax
treatment of "inducement fees" received by transferees of non-economic REMIC
residual interests. The proposed regulations (i) provide tax accounting rules
for the treatment of such fees as income over an appropriate period and (ii)
specify that inducement fees constitute income from sources within the United
States. The proposed regulations provide that the final regulations will be
applicable to taxable years ending on or after the date final regulations are
published, and thus yet to be issued final regulations may apply to the
treatment of any inducement fee received in connection with the acquisition of a
Residual
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Certificate. Prospective purchasers of Residual Certificates should consult
their tax advisors regarding the effect of these proposed regulations and the
tax consequences of receiving any inducement fee.
(1) Prohibited Transactions
Income from transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include:
(1) the disposition of a qualified mortgages other than for
(a) substitution for a defective (including a
defaulted) obligation within two years of the Startup Day (or
repurchase in lieu of substitution of a defective (including a
defaulted) obligation at any time) or for any qualified
mortgage within three months of the Startup Day;
(b) foreclosure, default, or imminent default of a
qualified mortgage;
(c) bankruptcy or insolvency of the REMIC Pool; or
(d) a qualified (complete) liquidation;
(2) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold;
(3) the receipt of compensation for services; or
(4) the receipt of gain from disposition of cash flow
investments other than pursuant to a qualified liquidation.
Notwithstanding (1) and (4) above, it is not a prohibited transaction
to sell a qualified mortgage or cash flow investment held by a REMIC Pool to
prevent a default on Regular Securities as a result of a default on qualified
mortgages or to facilitate a clean-up call (generally, an optional termination
to save administrative costs when no more than a small percentage of the Notes
or Certificates, as applicable, is outstanding). The REMIC Regulations indicate
that the modification of a mortgage loan generally will not be treated as a
disposition if it is occasioned by a default or reasonably foreseeable default,
an assumption of the mortgage loan, the waiver of a due-on-sale or
due-on-encumbrance clause, or the conversion of an interest rate by a borrower
pursuant to the terms of a convertible adjustable rate mortgage loan.
(2) Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on
the value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool
(1) during the three months following the Startup Day,
(2) made to a qualified reserve fund by a Residual Holder,
(3) in the nature of a guarantee,
(4) made to facilitate a qualified liquidation or clean-up call, and
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(5) as otherwise permitted in Treasury regulations yet to be issued.
It is not anticipated that there will be any contributions to the REMIC Pool
after the Startup Day.
(3) Net Income from Foreclosure Property
The REMIC Pool will be subject of federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" until the close of the third calendar year after the year
in which the REMIC Pool acquired that property, with possible extensions. Net
income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust. It is not anticipated that the REMIC Pool will
have any taxable net income from foreclosure property.
(4) Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the
meaning of Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC Pool's final tax return a date on which that adoption
is deemed to occur, and sells all of its assets (other than cash) within a
90-day period beginning on that date, the REMIC Pool will not be subject to the
prohibited transaction rules on the sale of its assets, provided that the REMIC
Pool credits or distributes in liquidation all of the sale proceeds plus its
cash (other than amounts retained to meet claims) to holders of Regular
Securities and Residual Holders within the 90-day period.
(5) Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar
year basis and to file federal income tax returns for federal income tax
purposes in a manner similar to a partnership. The form for the income tax
return is Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax
Return. The trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual Holder for an
entire taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The master servicer will be obligated to act as "tax
matters person," as defined in applicable Treasury regulations, for the REMIC
Pool as agent of the Residual Holders holding the largest percentage interest in
the Residual Securities. If the Code or applicable Treasury regulations do not
permit the master servicer to act as tax matters person in its capacity as agent
of the Residual Holder, the Residual Holder or any other person specified
pursuant to Treasury regulations will be required to act as tax matters person.
The tax matters person generally has responsibility for overseeing and providing
notice to the other Residual Holders of administrative and judicial proceedings
regarding the REMIC Pool's tax affairs, although other holders of the Residual
Securities of the same series would be able to participate in those proceedings
in appropriate circumstances.
(6) Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to some itemized deductions described in Code Section
67, to the extent that those itemized deductions, in total, do not exceed 2% of
the investor's adjusted gross income. In the case of a partnership that has 100
or more partners and elects to be treated as an "electing large partnership,"
70% of that partnership's miscellaneous itemized deductions will be disallowed,
although the remaining deductions will generally be allowed at the partnership
level and will not be subject to the 2% floor that
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would otherwise be applicable to individual partners. In addition, Code Section
68 provides that itemized deductions otherwise allowable for a taxable year of
an individual taxpayer will be reduced by the lesser or (1) 3% of the excess of
adjusted gross income in excess of a specified threshold amount (which is
adjusted annually), or (2) 80% of the amount of itemized deductions otherwise
allowable for that year. In the case of a REMIC Pool, those deductions may
include deductions under Code Section 212 for the Servicing Fee and all
administrative and other expenses relating to the REMIC Pool, or any similar
expenses allocated to the REMIC Pool for a regular interest it holds in another
REMIC. Those investors who hold REMIC Securities either directly or indirectly
through pass-through entities may have their pro rata share of those expenses
allocated to them as additional gross income, but may be subject to that
limitation on deductions. In addition, those expenses are not deductible at all
for purposes of computing the alternative minimum tax, and may cause those
investors to be subject to significant additional tax liability. Temporary
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Securities in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. For a REMIC Pool that
would be classified as an investment trust in the absence of a REMIC election or
that is substantially similar to an investment trust, any holder of a Regular
Security that is an individual, trust, estate, or pass-through entity also will
be allocated its pro rata share of those expenses and a corresponding amount of
income and will be subject to the limitations or deductions imposed by Code
Sections 67 and 68, as described above. The prospectus supplement will indicate
if all those expenses will not be allocable to the Residual Securities.
TAXATION OF CERTAIN FOREIGN INVESTORS
(1) Regular Securities
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), generally will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that (1) the interest is not effectively connected
with the conduct of a trade or business in the United States of the
securityholder, (2) the 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 (3) that Non-U. S. Person complies
to the extent necessary with certain certification requirements, which generally
relate to the identity of the beneficial owner and the status of the beneficial
owner as a person that is a Non-U.S. person. Each Regular Securityholder should
consult its tax advisors regarding the tax documentation and certifications that
must be provided to secure the exemption from United States withholding taxes.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Regular Security by a Non-U.S. Person generally will be
exempt from United States federal income and withholding tax, provided that (i)
such gain is not effectively connected with the conduct of a trade or business
in the United States by the Non-U.S. Person and (ii) in the case of an
individual Non-U.S. Person, the Non-U.S. Person is not present in the United
States for 183 days or more in the taxable year.
If the interest on the Regular Security is effectively connected with
the conduct of a trade or business within the United States by that Non-U.S.
Person, the Non-U.S. Person, although exempt from the withholding tax previously
discussed if the holder provides an appropriate statement establishing that such
income is so effectively connected, will be subject to United States federal
income tax at regular rates. Investors who are Non-U.S. Persons should consult
their own tax advisors regarding the specific tax consequences to them of owning
a Regular Security. The term "Non-U.S. Person" means any person who is not a
U.S. Person.
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(2) Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Securities" above, but only to the extent that (1) the
mortgage loans were issued after July 18, 1984, and (2) the trust fund or
segregated pool of assets in the trust fund (as to which a separate REMIC
election will be made), to which the Residual Security relates, consists of
obligations issued in "registered form" within the meaning of Code Section 163
(f) (1). Generally, mortgage loans will not be, but regular interests in another
REMIC Pool will be, considered obligations issued in registered form.
Furthermore, Residual Holders will not be entitled to any exemption from the 30%
withholding tax (or lower treaty rate) to the extent of that portion of REMIC
taxable income that constitutes an "excess inclusion." See "--Taxation of Owners
of Residual Securities. Limitations on Offset or Exemption of REMIC Income"
above. If the amounts paid to Residual Holders who are Non-U.S. Persons are
effectively connected with the conduct of a trade or business within the United
States by those Non-U.S. Persons, although exempt from the withholding tax
previously discussed if the holder provides an appropriate statement
establishing that such income is so effectively connected, the amounts paid to
those Non-U.S. Persons will be subject to United States federal income tax at
regular rates. See "--Tax-Related Restrictions on Transfer of Residual
Securities--Foreign Investors" above concerning the disregard of transfers
having "tax avoidance potential." Investors who are Non-U.S. Persons should
consult their own tax advisors regarding the specific tax consequences to them
of owning Residual Securities.
(3) Backup Withholding
Distributions made on the REMIC Securities, and proceeds from the sale
of the REMIC Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under some
circumstances, principal distributions) if the Holder fails to comply with
certain identification procedures, unless the Holder is otherwise an exempt
recipient under applicable provisions of the Code, and, if necessary,
demonstrates such status. Any amounts to be withheld from distribution on the
REMIC Securities would be refunded by the Internal Revenue Service or allowed as
a credit against the Regular Holder's federal income tax liability.
FASITs
CLASSIFICATION OF FASITs
For each series of FASIT Securities, assuming compliance with all
provisions of the related pooling and servicing agreement, in the opinion of
McKee Nelson LLP or Thacher Proffitt & Wood LLP, the related trust fund (or each
applicable portion of the trust fund) will qualify as a FASIT. The trust fund
will qualify under the Code as a FASIT in which FASIT regular securities (the
"FASIT Regular Securities") and the ownership interest security (the "FASIT
Ownership Security") will constitute the "regular interests" and the "ownership
interest," respectively, if
(1) a FASIT election is in effect;
(2) tests concerning
(a) the composition of the FASIT's assets and
(b) the nature of the securityholders' interests in
the FASIT are met on a continuing basis; and
108
(3) the trust fund is not a regulated investment company as
defined in Section 851(a) of the Code.
A segregated pool of assets may also qualify as a FASIT.
(1) Asset Composition
In order for the trust fund to be eligible for FASIT status,
substantially all of the assets of the trust fund must consist of "permitted
assets" as of the close of the third month beginning after the closing date and
at all times thereafter. Permitted assets include:
(1) cash or cash equivalents;
(2) debt instruments with fixed terms that would qualify as
regular interests if issued by a REMIC as defined in Section 860D of
the Code (generally, instruments that provide for interest at a fixed
rate, a qualifying variable rate, or a qualifying interest-only type
rate);
(3) foreclosure property;
(4) some hedging instruments (generally, interest and currency
rate swaps and credit enhancement contracts) that are reasonably
required to guarantee or hedge against the FASIT's risks associated
with being the obligor on FASIT interests;
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments;
(6) FASIT regular interests; and
(7) REMIC regular interests.
Permitted assets do not include any debt instruments issued by the
holder of the FASIT's ownership interest or by any person related to that
holder. A debt instrument is a permitted asset only if the instrument is
indebtedness for federal income tax purposes, including regular interests in a
REMIC or regular interests issued by another FASIT, and it bears (1) fixed
interest or (2) variable interest of a type that relates to qualified variable
rate debt (as defined in Treasury regulations prescribed under section
860G(a)(1)(B)). Permitted hedges include interest rate or foreign currency
notional principal contracts, letters of credit, insurance, guarantees against
payment default and similar instruments to be provided in regulations, and which
are reasonably required to guarantee or hedge against the FASIT's risks
associated with being the obligor on interests issued by the FASIT. Foreclosure
property is real property acquired by the FASIT in connection with the default
or imminent default of a debt instrument, provided the depositor had no
knowledge or reason to know as of the date the debt instrument was acquired by
the FASIT that a default had occurred or would occur.
(2) Interests in a FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet specific requirements. All of the interests
in a FASIT must belong to either of the following:
(1) one or more classes of regular interests or
(2) a single class of ownership interest that is held by an
Eligible Corporation (as defined in this prospectus).
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FASIT regular interests generally will be treated as debt for federal
income tax purposes. FASIT ownership interests generally will not treated as
debt for federal income tax purposes, but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
FASIT. The prospectus supplement for each Series of Notes or Certificates, as
applicable, will indicate which securities of the Series will be designated as
regular interests, and which, if any, will be designated as ownership interests.
A FASIT interest generally qualifies as a regular interest if:
(1) it is designated as a regular interest;
(2) it has a stated maturity no greater than thirty years;
(3) it entitles its holder to a specified principal amount;
(4) the issue price of the interest does not exceed 125% of
its stated principal amount;
(5) the yield to maturity of the interest is less than the
applicable Treasury rate published by the IRS plus 5%; and
(6) if it pays interest, this interest is payable at either:
(a) a fixed rate with respect to the principal amount
of the regular interest or
(b) a permissible variable rate with respect to the
principal amount.
Permissible variable rates for FASIT regular interests are the same as those for
REMIC regular interests. See "REMICs--Taxation of Owners of Regular
Securities--(1) General" for a discussion of permissible variable rates for
REMIC regular interests.
If an interest in a FASIT fails to meet one or more of the requirements
set out in clauses (3), (4), or (5) in the immediately preceding paragraph, but
otherwise meets all requirements to be treated as a FASIT, it may still qualify
as a type of regular interest known as a "high-yield interest." In addition, if
an interest in a FASIT fails to meet the requirement of clause (6), but the
interest payable on the interest consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the interest will also qualify as a high-yield interest.
See "--Taxation of Owners of FASIT Regular Securities," "--Taxation of
Owners of High-Yield Interests" and "--Taxation of FASIT Ownership Securities"
below.
(3) Consequences of Disqualification
If the trust fund fails to comply with one or more of the Code's
ongoing requirements for FASIT status during any taxable year, the Code provides
that it's FASIT status may be lost for that year and thereafter. If FASIT status
is lost, the treatment of the former FASIT and interests in the FASIT for U.S.
federal income tax purposes is uncertain. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good faith, final
regulations have not yet been issued. It is possible that disqualification
relief might be accompanied by sanctions, such as the imposition of a corporate
tax on all or a portion of the FASIT's income for the period of time in which
the requirements for FASIT status are not satisfied.
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TAXATION OF OWNERS OF FASIT REGULAR SECURITIES
(1) General
Payments received by holders of FASIT Regular Securities generally will
be accorded the same tax treatment under the Code as payments received on other
taxable debt instruments. Holders of FASIT Regular Securities must report income
from these Notes or Certificates, as applicable, under an accrual method of
accounting, even if they otherwise would have used the cash receipts and
disbursements method. Except in the case of FASIT Regular Securities issued with
original issue discount, interest paid or accrued on a FASIT Regular Security
generally will be treated as ordinary income to the Holder and a principal
payment on the security will be treated as a return of capital to the extent
that the securityholder's basis is allocable to that payment.
(2) Original Issue Discount; Market Discount; Acquisition Premium
FASIT Regular Securities issued with original issue discount or
acquired with market discount or acquisition premium generally will treat
interest and principal payments on these Notes or Certificates, as applicable,
in the same manner described for REMIC Regular Securities. See
"--REMICs--Taxation of Owners of Regular Securities" above.
(3) Sale or Exchange
If the FASIT Regular Securities are sold, the holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "--REMICs-- Taxation of Owners of Regular
Securities--Sale or Exchange of Regular Securities."
TAXATION OF OWNERS OF HIGH-YIELD INTERESTS
(1) General
The treatment of high-yield interests is intended to ensure that the
return on instruments issued by a FASIT yielding an equity-like return continues
to have a corporate level tax. High-yield interests are subject to special rules
regarding the eligibility of holders of this interest, and the ability of these
holders to offset income derived from their FASIT Security with losses.
High-yield interests may only be held by Eligible Corporations, other
FASITs, and dealers in securities who acquire such interests as inventory
(together, "Eligible Holders").
o An "Eligible Corporation" is a taxable domestic C corporation
that does not qualify as a regulated investment company, a
real estate investment trust, a REMIC, or a cooperative.
If a securities dealer (other than an Eligible Corporation) initially
acquires a high-yield interest as inventory, but later begins to hold it for
investment, the dealer will be subject to an excise tax equal to the income from
the high-yield interest multiplied by the highest corporate income tax rate. In
addition, transfers of high-yield interests to a person that is not an Eligible
Holder will be disregarded for federal income tax purposes, and the transferor
will continue to be treated as the holder of the high-yield interest.
In addition, the FASIT Provisions contain an anti-abuse rule that
imposes corporate income tax on income derived from a FASIT Regular Interest
that is held by a pass-through entity (other than another FASIT) that issues
debt or equity securities backed by the FASIT Regular Interest and that have an
original yield to maturity that is both five percentage points above the
applicable federal rate and
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more than the yield on the FASIT Regular Interest. The excise tax is limited to
those arrangements that have a principal purpose of avoiding the ownership
restriction relating to high-yield interests.
(2) Treatment of Losses
The holder of a high-yield interest may not use non-FASIT current
losses or net operating loss carry-forwards or carrybacks to offset any income
derived from the high-yield interest, for either regular federal income tax
purposes or for alternative minimum tax purposes.
TAXATION OF FASIT OWNERSHIP SECURITY
(1) General
A FASIT Ownership Security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT Ownership Security determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT. The holder, however, does not take
into account any item of income, gain or deduction allocable to a "prohibited
transaction" as discussed below. In general, the character of the income to the
holder of a FASIT Ownership Security will be the same as the character of the
income to the FASIT, except that any tax-exempt interest income taken into
account by the holder of a FASIT Ownership Security is treated as ordinary
income. In determining that taxable income, the holder of a FASIT Ownership
Security must determine the amount of interest, original issue discount, market
discount, and premium recognized with respect to each debt instrument held by
the FASIT according to a constant yield methodology and under an accrual method
of accounting. In addition, a holder of a FASIT Ownership Security is subject to
the same limitations on their ability to use losses to offset income from their
FASIT Regular Securities as are holders of high-yield interest. See "--Taxation
of Owners of High-Yield Interests" above.
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Security. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where
within six months before or after the disposition, the seller of the Security
acquires any other FASIT Ownership Security that is economically comparable to a
FASIT Ownership Security. In addition, if any security that is sold or
contributed to a FASIT by the holders of the related FASIT Ownership Security
was required to be marked-to-market under Section 475 of the Code by the holder,
then Section 475 of the Code will continue to apply to these securities, except
that the amount realized under the mark-to-market rules cannot be less than the
securities' value determined after applying special valuation rules contained in
the FASIT Provisions. Those special valuation rules generally require that the
value of debt instruments that are not traded on an established securities
market be determined by calculating the present value of the reasonably expected
payments under the instrument using a discount rate of 120% of the applicable
federal rate, compounded semi-annually.
(2) Prohibited Transaction
The holder of a FASIT Ownership Security is required to pay a penalty
excise tax equal to 100 percent of net income derived from:
(1) an asset that is not a permitted asset;
(2) any disposition of an asset other than a permitted
disposition (as described below);
(3) any income attributable to loans originated by the FASIT;
and
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(4) compensation for services (other than fees for a waiver,
amendment, or consent with respect to permitted assets other than
foreclosure property).
A permitted disposition is any disposition of any permitted asset:
(1) arising from complete liquidation of a class of regular
interest;
(2) incident to the foreclosure, default (or imminent default)
on the asset;
(3) incident to the bankruptcy or insolvency of the FASIT;
(4) necessary to avoid a default on any indebtedness of the a
FASIT attributable to a default (or imminent default) on an asset of
the FASIT;
(5) to facilitate a clean-up call; or
(6) to substitute a permitted debt instrument for another
permitted debt instrument or in order to reduce over-collateralization
by distributing a debt instrument contributed by the holder of the
FASIT Ownership Security to such holder, but only if a principal
purpose of acquiring the debt instrument which is disposed of was not
the recognition of gain (or the reduction of a loss) arising from an
increase in its market value after its acquisition by the FASIT.
Notwithstanding this rule, the holder of an Ownership Security may currently
deduct its losses incurred in prohibited transactions in computing its taxable
income for the year of the loss. A Series of Notes or Certificates, as
applicable, for which a FASIT election is made generally will be structured in
order to avoid application of the prohibited transactions tax.
(3) Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to
the same extent as holders of REMIC Securities.
GRANTOR TRUST FUNDS
CHARACTERIZATION. For each series of Grantor Trust Securities, Federal
Tax Counsel will deliver its opinion that the Grantor Trust Fund will not be
classified as an association taxable as a corporation and that the Grantor Trust
Fund will be classified as a grantor trust under subpart E, Part I of subchapter
J of the Code. In this case, beneficial owners of Grantor Trust Securities
(referred to in this Prospectus as "Grantor Trust Securityholders") will be
treated for federal income tax purposes as owners of a portion of the Grantor
Trust Fund's assets as described below.
TAXATION OF GRANTOR TRUST SECURITYHOLDERS. Subject to the discussion
below under "Stripped Certificates" and "Subordinated Certificates," each
Grantor Trust Securityholder will be treated as the owner of a pro rata
undivided interest in the assets of the Grantor Trust Fund. Accordingly, and
subject to the discussion below of the recharacterization of the servicing fee,
each Grantor Trust Securityholder must include in income its pro rata share of
the interest and other income from the assets of the Grantor Trust Fund,
including any interest, original issue discount, market discount, prepayment
fees, assumption fees, and late payment charges with respect to the assets, and,
subject to limitations discussed below, may deduct its pro rata share of the
fees and other deductible expenses paid by the Grantor Trust Fund, at the same
time and to the same extent as these items would be included or deducted by the
Grantor Trust Securityholder if the Grantor Trust Securityholder held directly a
pro rata interest in the assets of the Grantor Trust Fund and received and paid
directly the amounts received and paid by the Grantor Trust Fund. Any amounts
received by a Grantor Trust
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Securityholder in lieu of amounts due with respect to any asset of the Grantor
Trust Fund because of a default or delinquency in payment will be treated for
federal income tax purposes as having the same character as the payments they
replace.
Each Grantor Trust Securityholder will be entitled to deduct its pro
rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late payment charges retained by the servicer,
provided that these amounts are reasonable compensation for services rendered to
the Grantor Trust Fund. Grantor Trust Securityholders that are individuals,
estates or trusts will be entitled to deduct their share of expenses only to the
extent these expenses plus all other miscellaneous itemized deductions exceed
two percent of the Grantor Trust Securityholder's adjusted gross income, and
will be allowed no deduction for these expenses in determining their liabilities
for alternative minimum tax. In addition, Section 68 of the Code provides that
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds a prescribed threshold amount
will be reduced by the lesser of (1) 3% of the excess of adjusted gross income
over the specified threshold amount (adjusted annually for inflation) or (2) 80%
of the amount of itemized deductions otherwise allowable for the applicable
taxable year. In the case of a partnership that has 100 or more partners and
elects to be treated as an "electing large partnership," 70% of the
partnership's miscellaneous itemized deductions will be disallowed, although the
remaining deductions will generally be allowed at the partnership level and will
not be subject to the 2% floor that would otherwise be applicable to individual
partners.
The servicing compensation to be received by the servicer may be
questioned by the IRS as exceeding a reasonable fee for the services being
performed in exchange for the servicing compensation, and a portion of the
servicing compensation could be recharacterized as an ownership interest
retained by the servicer or other party in a portion of the interest payments to
be made with respect to the Grantor Trust Fund's assets. In this event, a
certificate might be treated as a Stripped Certificate subject to the stripped
bond rules of Section 1286 of the Code, and either the original issue discount
or the market discount rules. See the discussion below under "--Stripped
Certificates". Except as discussed below under "--Stripped Certificates" or
"--Subordinated Certificates," this discussion assumes that the servicing fees
paid to the servicer do not exceed reasonable servicing compensation.
A purchaser of a Grantor Trust Security will be treated as purchasing
an interest in each asset in the Grantor Trust Fund at a price determined by
allocating the purchase price paid for the certificate among all asset of the
Grantor Trust Fund in proportion to their fair market values at the time of the
purchase of the certificate. To the extent that the portion of the purchase
price of a Grantor Trust Security allocated to an asset of the Grantor Trust
Fund is less than or greater than the stated redemption price at maturity of the
asset, the interest in the asset will have been acquired at a discount or
premium. See "--Market Discount" and "--Premium," below.
The treatment of any discount on an asset of the Grantor Trust Fund
will depend on whether the discount represents original issue discount or market
discount. Except as indicated otherwise in the applicable Prospectus Supplement,
it is not expected that any asset of the Grantor Trust Fund (other than a
Stripped Agency Security or other instrument evidencing ownership of specific
interest and/or principal of a particular bond) will have original issue
discount (except as discussed below under "Stripped Certificates" or
"Subordinated Certificates"). For the rules governing original issue discount,
see "REMICs--Taxation of Owners of Regular Securities--Original Issue Discount"
above.
The information provided to Grantor Trust Securityholders will not
include information necessary to compute the amount of discount or premium, if
any, at which an interest in each asset of the Grantor Trust Fund is acquired.
MARKET DISCOUNT. A Grantor Trust Securityholder that acquires an
undivided interest in the Grantor Trust Fund's assets may be subject to the
market discount rules of Sections 1276 through 1278
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to the extent an undivided interest in an asset of the Grantor Trust Fund is
considered to have been purchased at a "market discount". For a discussion of
the market discount rules under the Code, see "REMICs--Taxation of Owners of
Regular Securities--Market Discount" above. As discussed above, to the extent an
asset of the Grantor Trust Fund is a Stripped Agency Security or other
instrument evidencing ownership of specific interest and/or principal of a
particular bond, it will be subject to the rules relating to original issue
discount (in lieu of the rules relating to market discount). See
"REMICs--Taxation of Owners of Regular Securities--Original Issue Discount"
above.
PREMIUM. To the extent a Grantor Trust Securityholder is considered to
have purchased an undivided interest in an asset of the Grantor Trust Fund for
an amount that is greater than the stated redemption price at maturity of the
interest, the Grantor Trust Securityholder will be considered to have purchased
the interest in the asset with "amortizable bond premium" equal in amount to the
excess. For a discussion of the rules applicable to amortizable bond premium,
see "REMICs--Taxation of Owners of Regular Securities--Amortizable Premium"
above.
STATUS OF THE GRANTOR TRUST SECURITIES. Except for that portion of a
trust fund consisting of unsecured home improvement loans and except as
qualified below, a Grantor Trust Security owned by a:
o "domestic building and loan association" within the meaning of
Code Section 7701(a)(19) will be considered to represent
"loans ... secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v), to the extent
assets of the Trust consist of mortgage loans and other assets
of the type described in that section of the Code.
o real estate investment trust will be considered to represent
"real estate assets" within the meaning of Code Section
856(c)(4)(A) to the extent that the assets of the related
Grantor Trust Fund consist of qualified assets, and interest
income on those assets will be considered "interest on
obligations secured by mortgages on real property" to that
extent within the meaning of Code Section 856(c)(3)(B).
o REMIC will be considered to represent an "obligation
(including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest
in real property" within the meaning of Code Section
860G(a)(3)(A) to the extent that the assets of the related
Grantor Trust Fund consist of "qualified mortgages" within the
meaning of Code Section 860G(a)(3).
It is not clear whether Grantor Trust Certificates that are Stripped
Certificates (as described below under "Stripped Certificates") should be
treated as qualifying under the Code provisions cited in the first two bullet
points above to the same extent as Grantor Trust Certificates that are not
Stripped Certificate. Grantor Trust Securityholders are urged to consult their
own tax advisors concerning the characterization of the securityholder's
investment for federal income tax purposes.
STRIPPED CERTIFICATES. Some classes of certificates may be subject to
the stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a mortgage loan held by the Grantor Trust Fund from
ownership of the right to receive some or all of the related interest payments.
Generally, where a separation has occurred, under the stripped bond rules of
Section 1286 of the Code, the holder of a right to receive a principal or
interest payment on the bond is required to accrue into income, on a constant
yield basis under rules governing original issue discount (see "REMICs Taxation
of Owners of Regular Securities--Original Issue Discount"), the difference
between the holder's initial purchase price for the right to receive principal
or interest, and the principal or interest payment to be received with respect
to that right. However, a holder of
115
a Stripped Certificate will account for any discount on the Stripped Certificate
(other than an interest treated as a "stripped coupon") as market discount
rather than original issue discount if either (i) the amount of original issue
discount with respect to the Stripped Certificate was treated as zero under the
original issue discount DE MINIMIS rule when the Stripped Certificate was
stripped or (ii) no more than 100 basis points (including any amount of
servicing in excess of reasonable servicing) is stripped off from the mortgage
assets.
Certificates will constitute Stripped Certificates and will be subject
to these rules under various circumstances, including the following:
o if any servicing compensation is deemed to exceed a reasonable
amount;
o if the company or any other party retains a retained yield
with respect to the assets held by the Grantor Trust Fund;
o if two or more classes of certificates are issued representing
the right to non-pro rata percentages of the interest or
principal payments on the Grantor Trust Fund's assets; or
o if certificates are issued which represent the right to
interest-only payments or principal-only payments.
The tax treatment of the Stripped Certificates with respect to the
application of the original issue discount provisions of the Code is currently
unclear. However, the trustee intends to treat each Stripped Certificate as a
single debt instrument issued on the day it is purchased for purposes of
calculating any original issue discount. Original issue discount with respect to
a Stripped Certificate must be included in ordinary gross income for federal
income tax purposes as it accrues in accordance with the constant yield method
that takes into account the compounding of interest and this accrual of income
may be in advance of the receipt of any cash attributable to that income. See
"REMICs--Taxation of Owners of Regular Securities--Original Issue Discount"
above. For purposes of applying the original issue discount provisions of the
Code, the issue price of a Stripped Certificate will be the purchase price paid
by each holder of the Stripped Certificate and the stated redemption price at
maturity may include the aggregate amount of all payments to be made with
respect to the Stripped Certificate whether or not denominated as interest. The
amount of original issue discount with respect to a Stripped Certificate may be
treated as zero under the original issue discount DE MINIMIS rules described
above.
The precise tax treatment of Stripped Coupon Certificates is
substantially uncertain. The Code could read literally to require that OID
computations be made for each payment from each mortgage loan. However, based on
IRS guidance, it appears that all payments from a mortgage loan underlying a
Stripped Coupon Certificate should be treated as a single installment obligation
subject to the OID rules of the Code, in which case, all payments from the
mortgage loan would be included in the mortgage loans's stated redemption price
at maturity for purposes of calculating income on the Stripped Coupon
Certificate under the OID rules of the Code.
Based on current authority it is unclear under what circumstances, if
any, the prepayment of mortgage loans will give rise to a loss to the holder of
a Stripped Bond Certificate purchased at a premium or a Stripped Coupon
Certificate. The Code provides that a prepayment assumption must be used to
accrue income on any pool of debt instruments the yield on which can be affected
by prepayments. There is no guidance as to whether a Stripped Coupon Certificate
or a Stripped Bond Certificate would represent an interest in a pool of debt
instruments for purpose of this Code provision. In addition, the manner in which
to take prepayments into account is uncertain. It is possible that no loss may
be available as a result of any particular prepayment, except perhaps to the
extent that even if no further prepayments were received, a Certificateholder
would be unable to recover its
116
basis. In addition, amounts received in redemption for debt instruments issued
by natural persons purchased or issued after June 8, 1997 are treated as
received in exchange therefore (that is treated the same as obligations issued
by corporations). This change could affect the character of any loss.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates
are encouraged to consult with their own tax advisors regarding the proper
treatment of these certificates for federal income tax purposes.
SUBORDINATED CERTIFICATES. In the event the Grantor Trust Fund issues
two classes of Grantor Trust Securities that are identical except that one class
is a subordinate class, with a relatively high certificate pass-through rate,
and the other is a senior class, with a relatively low certificate pass-through
rate (referred to in this Prospectus as the "Subordinate Certificates" and
"Senior Certificates", respectively), the Grantor Trust Securityholders in the
aggregate will be deemed to have acquired the following assets: (1) the
principal portion of each mortgage loan plus a portion of the interest due on
each mortgage loan (the "Grantor Trust Fund Stripped Bond"), and (2) a portion
of the interest due on each mortgage loan equal to the difference between the
Interest Rate on the Subordinate Certificates and the Interest Rate on the
Senior Certificates, if any, which difference is then multiplied by the
Subordinate Class Percentage (the "Grantor Trust Fund Stripped Coupon"). The
"Subordinate Class Percentage" equals the initial aggregate principal amount of
the Subordinate Certificates divided by the sum of the initial aggregate
principal amount of the Subordinate Certificates and the Senior Certificates.
The "Senior Class Percentage" equals the initial aggregate principal amount of
the Senior Certificates divided by the sum of the initial aggregate principal
amount of the Subordinate Certificates and the Senior Certificates.
The Senior Certificateholders in the aggregate will own the Senior
Class Percentage of the Grantor Trust Fund Stripped Bond and accordingly each
Senior Certificateholder will be treated as owning its pro rata share of such
asset. The Senior Certificateholders will not own any portion of the Grantor
Trust Fund Stripped Coupon. The Subordinate Certificateholders in the aggregate
own both the Subordinate Class Percentage of the Grantor Trust Fund Stripped
Bond plus 100% of the Grantor Trust Fund Stripped Coupon, if any, and
accordingly each Subordinate Certificateholder will be treated as owning its pro
rata share in both assets. The Grantor Trust Fund Stripped Bond will be treated
as a "stripped bond" and the Grantor Trust Fund Stripped Coupon will be treated
as "stripped coupons" within the meaning of Section 1286 of the Code.
Although not entirely clear, the interest income on the Subordinate
Certificates and the portion of the servicing fee allocable to such certificates
that does not constitute excess servicing will be treated by the Grantor Trust
Fund as qualified stated interest, assuming the interest with respect to the
mortgage loans held by the Grantor Trust Fund would otherwise qualify as
qualified stated interest. Accordingly, except to the extent modified below, the
income of the Subordinate Certificates will be reported in the same manner as
described generally above for holders of Senior Certificates.
If the Subordinate Certificateholders receive distribution of less than
their share of the Grantor Trust Fund's receipts of principal or interest (the
"Shortfall Amount") because of the subordination of the Subordinate
Certificates, holders of Subordinate Certificates would probably be treated for
federal income tax purposes as if they had
o received as distributions their full share of receipts;
o paid over to the Senior Certificateholders an amount equal to
the Shortfall Amount; and
o retained the right to reimbursement of the relevant amounts to
the extent these amounts are otherwise available as a result
of collections on the mortgage loans or amounts available from
a reserve account or other form of credit enhancement, if any.
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Under this analysis,
o Subordinate Certificateholders would be required to accrue as
current income any interest income, original issue discount,
or (to the extent paid on assets of the Grantor Trust Fund)
accrued market discount of the Grantor Trust Fund that was a
component of the Shortfall Amount, even though that amount was
in fact paid to the Senior Certificateholders;
o a loss would only be allowed to the Subordinate
Certificateholders when their right to receive reimbursement
of the Shortfall Amount became worthless (i.e., when it
becomes clear that amount will not be available from any
source to reimburse the loss); and
o reimbursement of the Shortfall Amount prior to a claim of
worthlessness would not be taxable income to Subordinate
Certificateholders because the amount was previously included
in income.
Those results should not significantly affect the inclusion of income for
Subordinate Certificateholders on the accrual method of accounting, but could
accelerate inclusion of income to Subordinate Certificateholders on the cash
method of accounting by, in effect, placing them on the accrual method.
Moreover, the character and timing of loss deductions are unclear. Subordinate
Certificateholders are strongly urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any losses sustained
with respect to the Subordinate Certificates including any loss resulting from
the failure to recover previously accrued interest or discount income.
ELECTION TO TREAT ALL INTEREST AS ORIGINAL ISSUE DISCOUNT. The Treasury
Regulations relating to original issue discount permit a Grantor Trust
Securityholder to elect to accrue all interest, discount, including DE MINIMIS
market or original issue discount, reduced by any premium, in income as
interest, based on a constant yield method. If an election were to be made with
respect to an interest in a mortgage loan with market discount, the Grantor
Trust Securityholder would be deemed to have made an election to include in
income currently market discount with respect to all other debt instruments
having market discount that the Grantor Trust Securityholder acquires during the
year of the election or afterward. See "--Market Discount" above. Similarly, a
Grantor Trust Securityholder that makes this election for an interest in a
mortgage loan that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the Grantor Trust Securityholder owns at the
beginning of the first taxable year to which the election applies or acquires
afterward. See "--Premium" above. The election to accrue interest, discount and
premium on a constant yield method with respect to a Grantor Trust Security is
irrevocable.
PREPAYMENTS. The Taxpayer Relief Act of 1997 (the "1997 Act") contains
a provision requiring original issue discount on any pool of debt instruments
the yield on which may be affected by reason of prepayments be calculated taking
into account the Prepayment Assumption and requiring the discount to be taken
into income on the basis of a constant yield to assumed maturity taking account
of actual prepayments. The legislative history to the 1986 Act states that
similar rules apply with respect to market discount and amortizable bond premium
on debt instruments.
SALE OR EXCHANGE OF A GRANTOR TRUST SECURITY. Sale or exchange of a
Grantor Trust Security prior to its maturity will result in gain or loss equal
to the difference, if any, between the amount realized, exclusive of amounts
attributable to accrued and unpaid interest (which will be treated as ordinary
income allocable to the related asset of the Grantor Trust Fund), and the
owner's adjusted basis in the Grantor Trust Security. The adjusted basis
generally will equal the seller's cost for the Grantor Trust Security, increased
by the original issue discount and any market discount included in the seller's
gross income with respect to the Grantor Trust Security, and reduced, but not
below zero,
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by any premium amortized by the seller and by principal payments on the Grantor
Trust Security previously received by the seller. The gain or loss will, except
as discussed below, be capital gain or loss to an owner for which the assets of
the Grantor Trust Fund represented by a Grantor Trust Security are "capital
assets" within the meaning of Section 1221. A capital gain or loss will be
long-term or short-term depending on whether or not the Grantor Trust Security
has been owned for the long-term capital gain holding period, currently more
than one year.
Notwithstanding the foregoing, any gain realized on the sale or
exchange of a Grantor Trust Security will be ordinary income to the extent of
the seller's interest in accrued market discount on Grantor Trust Fund assets
not previously taken into income. See "--Market Discount," above. Further,
Grantor Trust Securities will be "evidences of indebtedness" within the meaning
of Section 582(c)(1), to the extent the assets of the grantor trust would be so
treated. Accordingly, gain or loss recognized from the sale of a Grantor Trust
Security by a bank or thrift institution to which such section applied will be
treated as ordinary gain or loss to the extent selling the assets of the grantor
trust directly would be so treated.
FOREIGN INVESTORS IN GRANTOR TRUST SECURITIES. A holder of a Grantor
Trust Security who is not a "U.S. person" (as defined above at "REMICs--Tax
Related Restrictions on Transfer of Residual Securities--Foreign Investors") and
is not subject to federal income tax as a result of any direct or indirect
connection to the United States other than its ownership of a Grantor Trust
Security generally will not be subject to United States income or withholding
tax in respect of payments of interest or original issue discount on its Grantor
Trust Security to the extent attributable to debt obligations held by the
Grantor Trust Fund that were originated after July 18, 1984, provided that the
Grantor Trust Securityholder complies to the extent necessary with certain
certification requirements which generally relate to the identity of the
beneficial owner and the status of the beneficial owner as a person that is not
a U.S. person. Interest or original issue discount on a Grantor Trust Security
attributable to debt obligations held by the Grantor Trust Fund that were
originated prior to July 19, 1984 will be subject to a 30% withholding tax
(unless such tax is reduced or eliminated by an applicable tax treaty). All
holders of Grantor Trust Securities should consult their tax advisors regarding
the tax documentation and certifications that must be provided to secure any
applicable exemptions from United States withholding taxes.
Any capital gain realized on the sale or other taxable disposition of a
Grantor Trust Security by a Non-U.S. Person (as defined above at
"REMICs--Taxation of Certain Foreign Investors--Regular Securities") generally
will be exempt from United States federal income and withholding tax, provided
that (i) such gain is not effectively connected with the conduct of a trade or
business in the United States by the Non-U.S. Person and (ii) in the case of an
individual Non-U.S. Person, the Non-U.S. Person is not present in the United
States for 183 days or more in the taxable year.
If the interest, gain or income with respect to a Grantor Trust
Security held by a Non-U.S. Person is effectively connected with the conduct of
a trade or business in the United States by the Non-U.S. Person (although exempt
from the withholding tax previously discussed if the holder provides an
appropriate statement establishing that such income is so effectively
connected), the holder generally will be subject to United States federal income
tax on the interest, gain or income at regular federal income tax rates. In this
regard, real estate acquired by a Grantor Trust as a result of foreclosure or in
lieu of foreclosure could cause a foreign holder to have "effectively connected
income" or a U.S. tax filing obligation even in the absence of such income. In
addition, if the Non-U.S. Person is a foreign corporation, it may be subject to
a branch profits tax equal to 30% of its "effectively connected earnings and
profits," within the meaning of the Code, for the taxable year, as adjusted for
certain items, unless it qualifies for a lower rate under an applicable tax
treaty (as modified by the branch profits tax rules).
BACKUP WITHHOLDING. Distributions made on the Grantor Trust Securities
and proceeds from the sale of the Grantor Trust Securities will be subject to a
"backup" withholding tax of 31 % if, in
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general, the Grantor Trust Securityholder fails to comply with particular
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code and, if necessary, demonstrates such status.
Any amounts so withheld would be refunded by the IRS or allowable as a credit
against the Grantor Trust Securityholder's federal income tax.
PARTNERSHIP TRUST FUNDS AND DISREGARDED TRUST FUNDS
CLASSIFICATION OF TRUST FUNDS
For each series of Partnership Certificates or Debt Securities, McKee
Nelson LLP or Thacher Proffitt & Wood 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 parties to the related
Agreement and related documents.
TAXATION OF DEBT SECURITYHOLDERS
The depositor will agree, and the securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
for each series of Debt Securities, McKee Nelson LLP or Thacher Proffitt & Wood
LLP will deliver its opinion that the Debt Securities will be classified as
indebtedness for federal income tax purposes. The discussion below assumes this
characterization of the Debt Securities is correct.
If, contrary to the opinion of counsel, the Internal Revenue Service
successfully asserted that the Debt Securities were not debt for federal income
tax purposes, the Debt Securities might be treated as equity interests in the
trust fund. If so treated, the trust fund might be treated as a publicly traded
partnership that would be taxable as a corporation unless it met particular
qualifying income tests, and the resulting taxable corporation would not be able
to reduce its taxable income by deductions for interest expense on Debt
Securities recharacterized as equity. Treatment of the Debt Securities as equity
interests in a partnership could have adverse tax consequences to some holders,
even if the trust fund were not treated as a publicly traded partnership taxable
as a corporation. For example, income allocable to foreign holders might be
subject to United States tax and United States tax return filing and withholding
requirements, income allocable to tax-exempt holders might constitute "unrelated
business taxable income" (if some, but not all, of the Debt Securities were
recharacterized as equity in a partnership), individual holders might be subject
to limitations on their ability to deduct their share of trust fund expenses,
and income from the trust fund's assets would be taxable to owners of Debt
Securities without regard to whether cash distributions are made to such owners
and without regard to the owners' method of tax accounting.
Except for the treatment of the allocation of Realized Losses, Debt
Securities generally will be subject to the same rules of taxation as Regular
Securities issued by a REMIC, as described above, except that (1) income
reportable on Debt Securities is not required to be reported under the accrual
method unless the holder otherwise uses the accrual method and (2) the special
110% yield rule treating a portion of the gain on sale or exchange of a Regular
Security as ordinary income is inapplicable to Debt Securities. See "
REMICs--Taxation of Owners of Regular Securities" and "--Sale or Exchange of
Regular Securities."
ALLOCATIONS OF REALIZED LOSSES
The manner in which losses are claimed on the Notes as a result of
defaults by the underlying obligors is complex and differs depending on the
characterization of the person considered the issue or the Notes for federal tax
purposes. Whether the Noes are governed by the loss rules for bad debts
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under Code Section 166 or for worthless securities under Code Section 165
depends on whether the Notes are considered issued by a corporation. If there is
a single corporate holder of the Certificates constituting all of the equity
interests in the issuing Trust Fund, then the issuing Trust will be a
disregarded entity and the Notes will be considered issued by a corporation
subject to the loss rules of Code Section 165 (which effects both timing and
character of loss for corporate taxpayers, and character and possibly timing for
other taxpayers). If the Notes are considered issued by a grantor trust, then
the notes may be treated as issued in proportion to the nature of the
Certificatholders (e.g. if some Certificateholders are natural personas or
partnerships and some are corporations, losses on the Notes would be governed in
part by Code Section 166 and in part by Code Section 165). If the Notes are
considered issued by a partnership then they would be governed by the rules
under Code Section 166 the same as a REMIC. Investors should consult their tax
advisors as to the character and timing of any loss that can be claimed with
respect to a Note.
Further, for federal income tax purposes, (i) Debt Securities held by a
thrift institution taxed as a domestic building and loan association will not
constitute "loans ... secured by an interest in real property" within the
meaning of Section 7701(a)(19)(C)(v) of the Code; (ii) interest on Debt
Securities held by a real estate investment trust will not be treated as
"interest on obligations secured by mortgages on real property or on interests
in real property" within the meaning of Code Section 856(c)(3)(B); (iii) Debt
Securities held by a real estate investment trust will not constitute "real
estate assets" or "Government securities" within the meaning of Section
856(c)(4)(A) of the Code; (iv) Debt Securities held by a regulated investment
company will not constitute "Government securities" within the meaning of
Section 851(b)(3)(A)(i) of the Code; and (v) Debt Securities will not constitute
"qualified mortgages" with in the meaning of Section 860G(a)(3) of the Code for
REMICs.
TAXATION OF OWNERS OF PARTNERSHIP CERTIFICATES
(1) Treatment of the Trust Fund as a Partnership
The correct characterization of a Trust Fund that has issued debt and
is not otherwise taxed as a corporation is uncertain. If the Trust Fund has only
a single class of equity and the Trustee does not have the authority to accept
any additional assets after the initial acquisition of receivables (except with
a certain prescribed pre-funding period not exceeding three months) and has very
limited powers of investment (for example does not hold any reserve fund that
could ultimately flow to the Certificateholders if not need to pay the
Noteholders) the Trust Fund could qualify as a grantor trust with an interest
expense. As a consequence, each Certificateholder would be treated as owning a
pro rata share of the Trust Fund's assets, earning incoming thereon and
incurring the expenses of the Trust Fund (including the interest expense on the
Notes). See "Grantor Trust." If a Trust Fund that issues Notes intends to take
the position that Certificateholders hold interests in a grantor trust it will
be disclosed in the related prospectus supplement. In addition, it is possible
that a Trust Fund that issued Notes could qualify as a partnership eligible to
make an election under Section 761 to not be taxed under the main partnership
provisions of the Code (although certain ancillary provisions, including the
rules relating to audits of partnerships, would continue to apply). Such an
election would cause Certificateholders to be treated essentially the same as
holding an interest in a grantor trust. However, the IRS has recently taken a
narrow interpretation of the type of entities that qualify for this election,
which may not include a Trust Fund. If a Trust Fund that is treated as a
partnership has made an election under Section 761 to be excluded from the main
partnership provisions of the Code this will be disclosed in the related
prospectus supplement along with a description of the consequences of making
such an election. If there is only one Certificateholer in a Trust Fund that
represents all of the equity of the Trust Fund, for federal income tax purposes,
the separate existence of the Trust Fund is disregarded, and the
Certificateholder is treated as the owner of all of the assets of the Trust Fund
and as the issuer of the Notes of the Trust Fund for federal income tax
purposes. For all other Trust Funds the at issue Notes, the Partnership Trust
Fund will agree, and the related owners of Partnership Certificates
("Partnership Certificate Owners") will agree by their purchase of Partnership
Certificates, if there is more than one Partnership Certificate Owner, to treat
the Partnership Trust Fund as a
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partnership for purposes of federal and state income tax, franchise tax and any
other tax measured in whole or in part by income, with the assets of the
partnership being the assets held by the Partnership Trust Fund, the partners of
the partnership being the Partnership Certificate Owners, including, to the
extent relevant, the depositor in its capacity as recipient of distributions
from any reserve fund, and the Debt Securities, if any, being debt of the
partnership, and if there is one Partnership Certificate Owner, to treat the
Partnership Certificate Owner as the owner of the assets of the Partnership
Trust Fund and to treat the Partnership Trust Fund as a disregarded entity.
However, the proper characterization of the arrangement involving the
Partnership Trust Fund, the Partnership Certificates, the Debt Securities and
the depositor is not certain because there is no authority on transactions
closely comparable to that contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
because the Partnership Certificates have certain features characteristic of
debt, the Partnership Certificates might be considered debt of the Partnership
Trust Fund. Generally, provided such Partnership Certificates are issued at or
close to face value, any such characterization would not result in materially
adverse tax consequences to holders of Partnership Certificates as compared to
the consequences from treatment of the Partnership Certificates as equity in a
partnership, described below. The following discussion assumes that the
Partnership Certificates represent equity interests in a partnership. The
following discussion also assumes that all payments on the Partnership
Certificates are denominated in U.S. dollars, none of the Partnership
Certificates have Interest Rates which would qualify as contingent interest
under the Treasury regulations relating to original issue discount, and that a
series of securities includes a single class of Partnership Certificates. If
these conditions are not satisfied with respect to any given series of
Partnership Certificates, additional tax considerations with respect to such
Partnership Certificates will be disclosed in the applicable prospectus
supplement.
(2) Partnership Taxation
As a partnership, the Partnership Trust Fund will not be subject to
federal income tax. Rather, each Partnership Certificate Owner will be required
to take into account separately the Partnership Certificate Owner's allocable
share of income, gains, losses, deductions and credits of the Partnership Trust
Fund, whether or not there is a corresponding cash distribution. The Trust will
generally be required to use an accrual method of accounting and a tax year
based on the tax year of its Certificateholders. Thus, cash basis holders will
in effect be required to report income from the Partnership Certificates on the
accrual basis and Partnership Certificate Owners may become liable for taxes on
Partnership Trust Fund income even if they have not received cash from the
Partnership Trust Fund to pay the taxes. The Partnership Trust Fund's income
will consist primarily of interest and finance charges earned on the related
mortgage loans, including appropriate adjustments for market discount, original
issue discount and bond premium, and any gain upon collection or disposition of
the mortgage loans.
The Partnership Trust Fund's deductions will consist primarily of
interest accruing with respect to the Debt Securities, servicing and other fees,
and losses or deductions upon collection or disposition of mortgage loans.
The tax items of a partnership are allocable to the partners in
accordance with the Code, Treasury regulations and the partnership agreement
(i.e., the Agreement and related documents). To the extent that there is more
than one class of equity (or potentially more than on class of equity) the
related prospectus supplement will describe the manner in which income from the
assets of the Trust Fund will be allocated.
Assuming Debt Securities are also issued, all or substantially all of
the taxable income allocated to a Partnership Certificate Owner that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity,
including an individual retirement account, will constitute "unrelated business
taxable income" generally taxable to the holder under the Code.
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An individual taxpayer's share of expenses of the Partnership Trust
Fund, including fees to the servicer, but not interest expense, would be
miscellaneous itemized deductions and thus deductible only to the extent such
expenses plus all other miscellaneous itemized deductions exceeds two percent of
the individual's adjusted gross income. An individual taxpayer will be allowed
no deduction for his share of expenses of the Partnership Trust Fund, other than
interest, in determining his liability for alternative minimum tax. In addition,
Section 68 of the Code provides that the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds a prescribed threshold amount will be reduced by the lesser of (1) 3% of
the excess of adjusted gross income over the specified threshold amount
(adjusted annually for inflation) or (2) 80% of the amount of itemized
deductions otherwise allowable for the applicable taxable year. Accordingly,
deductions might be disallowed to the individual in whole or in part and might
result in the Partnership Certificate Owner being taxed on an amount of income
that exceeds the amount of cash actually distributed to the holder over the life
of the Partnership Trust Fund. In the case of a partnership that has 100 or more
partners and elects to be treated as an "electing large partnership," 70% of
that partnership's miscellaneous itemized deductions will be disallowed,
although the remaining deductions will generally be allowed at the partnership
level and will not be subject to the 2% floor that would otherwise be applicable
to individual partners.
The Partnership Trust Fund intends to make all tax calculations
relating to income and allocations to Partnership Certificate Owners on an
aggregate basis to the extent relevant. If the IRS were to require that the
calculations be made separately for each mortgage loan, the calculations may
result in some timing and character differences under some circumstances.
(3) Discount and Premium
The purchase price paid by the Partnership Trust Fund for the related
mortgage loans may be greater or less than the remaining principal balance of
the mortgage loans at the time of purchase. If so, the mortgage loans will have
been acquired at a premium or market discount, as the case may be. See
"REMICs--Taxation of Owners of Regular Securities--Acquisition Premium" and
"--Market Discount" above. As indicated above, the Partnership Trust Fund will
make this calculation on an aggregate basis, but it is possible that the IRS
might require that it be recomputed on a mortgage loan-by-mortgage loan basis.
Further, with respect to any asset of the Partnership Trust Fund that is a
Stripped Agency Security or other instrument evidencing ownership of specific
interest and/or principal of a particular bond, it will be subject to the rules
relating to original issue discount with respect to such security or instrument
(in lieu of the rules relating to market discount). See "REMICs--Taxation of
Owners of Regular Securities--Original Issue Discount" above.
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include any market
discount in income currently as it accrues over the life of the mortgage loans
or to offset any premium against interest income on the mortgage loans. As
indicated above, a portion of the market discount income or premium deduction
may be allocated to Partnership Certificate Owners.
(4) Section 708 Termination
Under Section 708 of the Code, the Partnership Trust Fund will be
deemed to terminate for federal income tax purposes if 50% or more of the
capital and profits interests in the Partnership Trust Fund are sold or
exchanged within a 12-month period. If a termination occurs under Section 708 of
the Code, the Partnership Trust Fund will be considered to contribute its assets
to a new Partnership Trust Fund, which would be treated as a new partnership, in
exchange for Partnership Certificates in the new Partnership Trust Fund. The
original Partnership Trust Fund will then be deemed to distribute the
Partnership Certificates in the new Partnership Trust Fund to each of the owners
of Partnership Certificates in the original Partnership Trust Fund in
liquidation of the original Partnership Trust Fund. The Partnership Trust Fund
will not comply with particular technical requirements that might apply
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when a constructive termination occurs. As a result, the Partnership Trust Fund
may be subject to some tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Partnership Trust
Fund might not be able to comply with these requirements due to lack of data.
(5) Disposition of Partnership Certificates
Generally, capital gain or loss will be recognized on a sale of
Partnership Certificates in an amount equal to the difference between the amount
realized and the seller's tax basis in the Partnership Certificates sold. Any
gain or loss would be long-term capital gain or loss if the Partnership
Certificate Owner's holding period exceeded one year. A Partnership Certificate
Owner's tax basis in a Partnership Certificate will generally equal its cost,
increased by its share of Partnership Trust Fund income allocable to the
Partnership Certificate Owner and decreased by any distributions received or
losses allocated with respect to the Partnership Certificate. In addition, both
the tax basis in the Partnership Certificates and the amount realized on a sale
of a Partnership Certificate would include the Partnership Certificate Owner's
share, determined under Treasury Regulations, of the Debt Securities and other
liabilities of the Partnership Trust Fund. A Partnership Certificate Owner
acquiring Partnership Certificates at different prices will generally be
required to maintain a single aggregate adjusted tax basis in the Partnership
Certificates and, upon a sale or other disposition of some of the Partnership
Certificates, allocate a portion of the aggregate tax basis to the Partnership
Certificates sold, rather than maintaining a separate tax basis in each
Partnership Certificate for purposes of computing gain or loss on a sale of that
Partnership Certificate. A portion holding rule is applied, however, if a
Certificateholder has held some of its interest in the Partnership Trust Fund
for one year or less and some of its interest for more than one year and a "by
lot" identification is not permitted.
If a Partnership Certificate Owner is required to recognize an
aggregate amount of income (not including income attributable to disallowed
itemized deductions described above) over the life of the Partnership
Certificates that exceeds the aggregate cash distributions with respect to the
Partnership Certificates, the excess will generally give rise to a capital loss
upon the retirement of the Partnership Certificates.
(6) Allocations Between Transferors and Transferees
In general, the Partnership Trust Fund's taxable income and losses will
be determined each Due Period and the tax items for a particular Due Period will
be apportioned among the Partnership Certificate Owners in proportion to the
principal amount of Partnership Certificates owned by them as of the close of
the last day of that Due Period. As a result, a Partnership Certificate Owner
purchasing Partnership Certificates may be allocated tax items, which will
affect the purchaser's tax liability and tax basis, attributable to periods
before the actual transaction.
The use of a Due Period convention may not be permitted by existing
Treasury regulations. If a Due Period convention is not allowed, or only applies
to transfers of less than all of the partner's interest, taxable income or
losses of the Partnership Trust Fund might be reallocated among the Partnership
Certificate Owners. The Partnership Trust Fund's method of allocation between
transferors and transferees may be revised to conform to a method permitted by
future laws, regulations or other IRS guidance.
(7) Section 731 Distributions
In the case of any distribution to a Partnership Certificate Owner, no
gain will be recognized to that Partnership Certificate Owner to the extent that
the amount of any money distributed for that Partnership Certificate exceeds the
adjusted basis of that Partnership Certificate Owner's interest in the
Partnership Certificate. To the extent that the amount of money distributed
exceeds that Partnership Certificate Owner's adjusted basis, gain will be
currently recognized. In the case of any
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distribution to a Partnership Certificate Owner, no loss will be recognized
except upon a distribution in liquidation of a Partnership Certificate Owner's
interest. Any gain or loss recognized by a Partnership Certificate Owner
generally will be capital gain or loss.
(8) Section 754 Election
In the event that a Partnership Certificate Owner sells its Partnership
Certificates at a profit (or loss), the purchasing Partnership Certificate Owner
will have a higher (or lower) basis in the Partnership Certificates than the
selling Partnership Certificate Owner had. The tax basis of the Partnership
Trust Fund's assets will not be adjusted to reflect that higher (or lower) basis
unless the Partnership Trust Fund were to file an election under Section 754 of
the Code. In order to avoid the administrative complexities that would be
involved in keeping accurate accounting records, as well as potentially onerous
information reporting requirements, the Partnership Trust Fund current does not
intend to make an election under Section 754 of the Code. As a result,
Partnership Certificate Owners might be allocated a greater or lesser amount of
Partnership Trust Fund income than would be appropriate based on their own
purchase price for Partnership Certificates.
(9) Administrative Matters
The trustee is required to keep or cause to be kept complete and
accurate books of the Partnership Trust Fund. Except as disclosed in the related
prospectus supplement, the trustee will file a partnership information return
(IRS Form 1065) with the IRS for each taxable year of the Partnership Trust Fund
and will report each Partnership Certificate Owner's allocable share of items of
Partnership Trust Fund income and expense to Partnership Certificate Owners and
the IRS on Schedule K-1. The Partnership Trust Fund will provide the Schedule
K-1 information to nominees that fail to provide the Partnership Trust Fund with
the information statement described below and the nominees will be required to
forward this information to the beneficial owners of the Partnership
Certificates. Generally, holders must timely file tax returns that are
consistent with the information return filed by the Partnership Trust Fund or be
subject to penalties unless the holder notifies the IRS of all the
inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Certificates as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing specific
information on the nominee, the beneficial owners and the Partnership
Certificates so held. The information includes (1) the name, address and
taxpayer identification number of the nominee and (2) as to each beneficial
owner
o the name, address and identification number of such person,
o whether such person is a United States person, a tax-exempt
entity or a foreign government, an international organization,
or any wholly owned agency or instrumentality of either of the
foregoing, and
o particular information on Partnership Certificates that were
held, bought or sold on behalf of the person throughout the
year.
In addition, brokers and financial institutions that hold Partnership
Certificates through a nominee are required to furnish directly to the
Partnership Trust Fund information as to themselves and their ownership of
Partnership Certificates. A clearing agency registered under Section 17A of the
Exchange Act is not required to furnish any information statement to the
Partnership Trust Fund. The information referred to above for any calendar year
must be furnished to the Partnership Trust Fund on or before the following
January 31. Nominees, brokers and financial institutions that fail to provide
the Partnership Trust Fund with the information described above may be subject
to penalties.
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Unless another designation is made, the depositor will be designated as
the tax matters partner for each Partnership Trust Fund in the pooling and
servicing agreement and, as the tax matters partner, will be responsible for
representing the Partnership Certificate Owners in some specific disputes with
the IRS. The Code provides for administrative examination of a partnership as if
the partnership were a separate and distinct taxpayer. Generally, the statute of
limitations for partnership items does not expire before the later of three
years after the date on which the partnership information return is filed or the
last day for filing the return for the applicable year, determined without
regard to extensions. Any adverse determination following an audit of the return
of the Partnership Trust Fund by the appropriate taxing authorities could result
in an adjustment of the returns of the Partnership Certificate Owners, and,
under some circumstances, a Partnership Certificate Owner may be precluded from
separately litigating a proposed adjustment to the items of the Partnership
Trust Fund. An adjustment could also result in an audit of a Partnership
Certificate Owner's returns and adjustments of items not related to the income
and losses of the Partnership Trust Fund.
A special audit system exists for qualifying large partnerships that
have elected to apply a simplified flow-through reporting system under Sections
771 through 777 of the Code. Unless otherwise specified in the applicable
prospectus supplement, a Partnership Trust Fund will not elect to apply the
simplified flow-through reporting system.
(10) Taxation of Certain Foreign Partnership Certificate Owners
As used below, the term "Non-United States Owner" means a Partnership
Certificate Owner that is not a U.S. Person, as defined under "REMICs--Taxation
of Owners of Residual Securities--Tax Related Restrictions on Transfer of
Residual Securities-Foreign Investors," above.
It is not clear whether the Partnership Trust Fund would be considered
to be engaged in a trade or business in the United States for purposes of
federal withholding taxes with respect to Non-United States Owners because there
is no clear authority dealing with that issue under facts substantially similar
to those described in this Prospectus. Although it is not expected that the
Partnership Trust Fund would be engaged in a trade or business in the United
States for these purposes, the Partnership Trust Fund will withhold as if it
were so engaged in order to protect the Partnership Trust Fund from possible
adverse consequences of a failure to withhold. The Partnership Trust Fund
expects to withhold on the portion of its taxable income that is allocable to
Non-United States Owners pursuant to Section 1446 of the Code, as if the income
were effectively connected to a U.S. trade or business, at a rate of 35% for
Non-United States Owners that are taxable as corporations and 39.6% for all
other Non-United States Owners.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the Partnership Trust Fund to change
its withholding procedures.
Each Non-United States Owner might be required to file a U.S.
individual or corporate income tax return on its share of the income of the
Partnership Trust Fund including, in the case of a corporation, a return in
respect of the branch profits tax. Assuming the Partnership Trust Fund is not
engaged in a U.S. trade or business, a Non-United States Owner would be entitled
to a refund with respect to all or a portion of taxes withheld by the
Partnership Trust Fund if, in particular, the Owner's allocable share of
interest from the Partnership Trust Fund constituted "portfolio interest" under
the Code.
The interest, however, may not constitute "portfolio interest" if,
among other reasons, the underlying obligation is not in registered form or if
the interest is determined without regard to the income of the Partnership Trust
Fund, in the later case, the interest being properly characterized as a
guaranteed payment under Section 707(c) of the Code. If this were the case,
Non-United States Owners would be subject to a United States federal income and
withholding tax at a rate of 30 percent
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on the Partnership Trust Fund's gross income, without any deductions or other
allowances for costs and expenses incurred in producing the income, unless
reduced or eliminated pursuant to an applicable treaty. In this case, a
Non-United States Owner would only be entitled to a refund for that portion of
the taxes, if any, in excess of the taxes that should have been withheld with
respect to the interest.
(11) Backup Withholding
Distributions made on the Partnership Certificates and proceeds from
the sale of the Partnership Certificates will be subject to a "backup"
withholding tax of 31 % if, in general, the Partnership Certificate Owner fails
to comply with particular identification procedures, unless the holder is an
exempt recipient under applicable provisions of the Code and, if necessary,
demonstrates such status. Any amounts so withheld would be refunded by the IRS
or allowable as a credit against the Non-United States Owner's federal income
tax.
CONSEQUENCES FOR PARTICULAR INVESTORS
The federal tax discussions above may not be applicable depending on a
securityholder's particular tax situation. The depositor recommends that
prospective purchasers consult their tax advisors for the tax consequences to
them of the purchase, ownership and disposition of REMIC Securities, FASIT
Securities, Grantor Trust Securities, Partnership Certificates and Debt
Securities, including the tax consequences under state, local, foreign and other
tax laws and the possible effects of changes in federal or other tax laws.
STATE AND OTHER TAX CONSIDERATIONS
In addition to the federal income tax consequences described in
"Material Federal Income Tax Considerations," potential investors should
consider the state and local tax consequences of the acquisition, ownership, and
disposition of the Notes or Certificates, as applicable, offered under this
prospectus. State tax law may differ substantially from the corresponding
federal tax law, and the discussion above does not purport to describe any
aspect of the tax laws of any state or other jurisdiction. Therefore,
prospective investors should consult their own tax advisors for the various tax
consequences of investments in the Notes or Certificates, as applicable, offered
under this prospectus. In particular, individuals should consider the
deductability of the expenses (including interest expense) of a partnership.
ERISA CONSIDERATIONS
GENERAL
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA should consider the fiduciary standards
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
in the context of the plan's particular circumstances before authorizing an
investment of a portion of such plan's assets in the Securities. Accordingly,
pursuant to Section 404 of ERISA, such fiduciary should consider among other
factors (i) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries; (ii) whether the investment satisfies the
applicable diversification requirements; (iii) whether the investment is in
accordance with the documents and instruments governing the plan; and (iv)
whether the investment is prudent, considering the nature of the investment.
Fiduciaries of plans also should consider ERISA's prohibition on improper
delegation of control over, or responsibility for, plan assets.
In addition, employee benefit plans or other retirement arrangements
subject to ERISA, as well as individual retirement accounts, certain types of
Keogh plans not subject to ERISA but subject to Section 4975 of the Code, or any
entity (including insurance company separate or general accounts) whose
underlying assets include plan assets by reason of such plans, arrangements or
accounts
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investing in the entity (each, a "Plan") are prohibited from engaging in a broad
range of transactions involving Plan assets and persons having certain specified
relationships to a Plan ("parties in interest" and "disqualified persons"). Such
transactions are treated as "prohibited transactions" under Sections 406 of
ERISA and excise taxes and/or other penalties are imposed upon such persons
under ERISA and/or Section 4975 of the Code unless an exemption applies. The
depositor, underwriter, each master servicer or other servicer, any insurer, the
trustee, the indenture trustee and certain of their affiliates might be
considered "parties in interest" or "disqualified persons" with respect to a
Plan. If so, the acquisition, holding or disposition of Securities by or on
behalf of such Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless a statutory,
regulatory or administrative exception or exemption is available.
ERISA CONSIDERATIONS RELATING TO CERTIFICATES
PLAN ASSETS
In 29 C.R.F ss.2510.3-101 (the "Plan Asset Regulations"), the U.S.
Department of Labor ("DOL") has defined what constitutes "plan assets" for
purposes of ERISA and Section 4975 of the Code. The Plan Asset Regulations
provide that if a Plan makes an investment in an "equity interest" in an entity,
an undivided portion of the assets of the entity will be considered the assets
of such Plan unless certain exceptions set forth in such Regulations apply. The
Certificates will be deemed an equity interest for purposes of the Plan Asset
Regulations, and the depositor can give no assurance that the Certificates will
qualify for any of the exceptions under the Plan Asset Regulations. As a result,
(i) a Plan may be deemed to have acquired an interest in the Assets of the trust
fund and not merely an interest in the Certificates, (ii) the fiduciary
investment standards of ERISA could apply to such Assets and (iii) transactions
occurring in the course of managing, operating and servicing the trust fund and
its Assets might constitute prohibited transactions, unless a statutory,
regulatory or administrative exemption applies.
PROHIBITED TRANSACTION CLASS EXEMPTION 83-1
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which under certain conditions exempts from
the application of the prohibited transaction rules of ERISA and the excise tax
provisions of Section 4975 of the Code transactions involving a Plan in
connection with the operation of a "mortgage pool" and the purchase, sale and
holding of Certificates which are "mortgage pool pass-through certificates." A
"mortgage pool" is defined as a fixed investment pool consisting solely of
interest-bearing obligations secured by first or second mortgages or deeds of
trust on single-family residential property, property acquired in foreclosure
and undistributed cash. A "mortgage pool pass-through certificate" is defined as
a Certificate which represents a beneficial undivided interest in a mortgage
pool which entitles the holder to pass through payments of principal and
interest from the mortgage loans. PTCE 83-1 requires that: (i) the depositor and
the trustee maintain a system of insurance or other protection for the mortgage
loans, the property securing such mortgage loans and for indemnifying holders of
Certificates against reductions in pass-through payments due to defaults in loan
payments or property damage in an amount at least equal to the greater of (x) 1%
of the aggregate principal balance of the mortgage loans or (y) 1% of the
principal balance of the largest covered pooled mortgage loans; (ii) the trustee
may not be an affiliate of the depositor; and (iii) the payments made to, and
retained by, the depositor in connection with the trust fund, together with all
funds inuring to its benefit for administering the trust fund, represent no more
than "adequate consideration" for selling the mortgage loans, plus reasonable
compensation for services provided to the trust fund. In addition, PTCE 83-1
exempts the initial sale of Certificates to a Plan with respect to which the
depositor, the insurer, the master servicer or other servicer or the trustee is
a party in interest if the Plan does not pay more than fair market value for
such Certificates and the rights and interests evidenced by such Certificates
are not subordinated to the rights and interests evidenced by other Certificates
of the same pool.
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PTCE 83-1 also exempts from the prohibited transaction rules any
transactions in connection with the servicing and operation of the mortgage
pool, provided that any payments made to the master servicer in connection with
the servicing of the trust fund are made in accordance with a binding agreement,
copies of which must be made available to prospective Plan investors. In the
case of any Plan with respect to which the depositor, the master servicer, the
insurer or the trustee is a fiduciary, PTCE 83-1 will only apply if, in addition
to the other requirements: (i) the initial sale, exchange or transfer of
Certificates is expressly approved by an independent fiduciary who has authority
to manage and control those Plan assets being invested in Certificates; (ii) the
Plan pays no more for the Certificates than would be paid in an arm's-length
transaction; (iii) no investment management, advisory or underwriting fee, sales
commission or similar compensation is paid to the depositor with regard to the
sale, exchange or transfer of Certificates to the Plan; (iv) the total value of
the Certificates purchased by such Plan does not exceed 25% of the amount issued
and (v) at least 50% of the aggregate amount of Certificates is acquired by
persons independent of the depositor, the trustee, the master servicer and the
insurer. Before purchasing Certificates, a fiduciary of a Plan should confirm
that the trust fund is a "mortgage pool," that the Certificates constitute
"mortgage pool pass-through certificates" and that the conditions set forth in
PTCE 83-1 would be satisfied. In addition to making its own determination as to
the availability of the exemptive relief provided in PTCE 83-1, the Plan
fiduciary should consider the availability of any other prohibited transaction
exemptions. The Plan fiduciary should also consider its general fiduciary
obligations under ERISA in determining whether to purchase any Certificates on
behalf of a Plan pursuant to PTCE 83-1.
UNDERWRITER EXEMPTION
The DOL has granted to Deutsche Bank Securities Inc. an individual
exemption, Prohibited Transaction Exemption 94-84, and to Deutsche Morgan
Grenfell/C.J. Lawrence Inc., similar approval (FAN 97-03E), which were both
amended by Prohibited Transaction Exemption 97-34 ("PTE 97-34") and further
recently amended pursuant to Prohibited Transaction Exemption 2000-58 ("PTE
2000-58") (collectively, the "Exemption") which is applicable to Certificates
which meet its requirements whenever the underwriter or its affiliate is the
sole underwriter, manager or co-manager of an underwriting syndicate or is the
selling or placement agent. The Exemption generally exempts certain transactions
from the application of certain of the prohibited transaction provisions of
ERISA and the Code provided that the conditions set forth in the Exemption are
satisfied. These transactions include the servicing, managing and operation of
investment trusts holding fixed (generally non-revolving pools) of enumerated
categories of assets which include: single and multi-family residential mortgage
loans, home equity loans or receivables (including cooperative housing loans),
manufactured housing loans and guaranteed government mortgage pool certificates
and the purchase, sale and holding of Certificates which represent beneficial
ownership interests in the assets of such trusts.
GENERAL CONDITIONS OF EXEMPTION
The Exemption sets forth general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of the Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by Plans must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Assets held by the trust fund must be fully secured (other than one-to-four
family residential mortgage loans and home equity loans or receivables backing
certain types of Certificates, as described below). (Mortgage loans, loans,
obligations and receivables will be collectively referred to herein as
"loans."). Third, unless the Certificates are issued in "designated
transactions" (as described below) and are backed by fully-secured loans, they
may not be subordinated. Fourth, the Certificates at the time of acquisition by
the Plan must generally be rated in one of the three (or in the case of
designated transactions, four) highest generic rating categories by Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc., Moody's
Investors Services, Inc. or Fitch, Inc. (each, a "Rating Agency"). Fifth, the
trustee and the indenture trustee generally cannot be affiliates of any member
of the "Restricted Group" which consists of any (i) underwriter as defined in
the Exemption, (ii) the depositor, (iii) the
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master servicer, (iv) each servicer, (v) the insurer, (vi) the counterparty of
any "interest rate swap" (as described below) held as an Asset of the trust fund
and (vii) any obligor with respect to loans constituting more than 5% of the
aggregate unamortized principal balance of the loans held in the trust fund as
of the date of initial issuance of the Certificates. Sixth, the sum of all
payments made to, and retained by, such underwriters must represent not more
than reasonable compensation for underwriting the Certificates; the sum of all
payments made to, and retained by, the depositor pursuant to the assignment of
the loans to the related trust fund must represent not more than the fair market
value of such loans; and the sum of all payments made to, and retained by, the
master servicer and any servicer must represent not more than reasonable
compensation for such person's services under the Agreement and reimbursement of
such person's reasonable expenses in connection therewith. Seventh, (i) the
investment pool must consist only of assets of the type enumerated in the
Exemption and which have been included in other investment pools; (ii)
Certificates evidencing interests in such other investment pools must have been
rated in one of the three (or in the case of designated transactions, four)
highest generic rating categories by one of the Rating Agencies for at least one
year prior to a Plan's acquisition of Certificates; and (iii) Certificates
evidencing interests in such other investment pools must have been purchased by
investors other than Plans for at least one year prior to a Plan's acquisition
of Certificates. Finally, the investing Plan must be an accredited investor as
defined in Rule 501(a)(1) of Regulation D of the Commission under the Securities
Act of 1933, as amended. If Securities are being sold under the Exemptions, the
depositor assumes that only Plans which are accredited investors under the
federal securities laws will be permitted to purchase the Certificates.
RECENT AMENDMENTS TO EXEMPTION
PTE 2000-58 (the "Amendment") recently amended the Exemption to make
the acquisition of Certificates by Plans in an initial offering or in a
secondary market transaction, the holding or transfer of Certificates and the
servicing, management and operation of the trust fund and its Assets on or after
November 13, 2000 eligible for exemptive relief to a broader range of
Certificates. Prior to such amendment, the Exemption generally permitted Plans
to purchase only unsubordindated Certificates rated within the highest three
generic rating categories backed by secured collateral. Such Certificates had to
be issued by a trust fund which was a grantor trust, REMIC or a FASIT whose
corpus could not include certain types of Assets such as interest-rate swaps.
TYPES OF TRUST FUNDS
The Amendment has expanded the types of permitted trust funds to
include owner-trusts, as well as grantor trusts, REMICs and FASITs. Owner-trusts
are subject to certain restrictions in their governing documents to ensure that
their Assets may not be reached by the creditors of the depositor in the event
of bankruptcy or other insolvency and must provide certain legal opinions.
DESIGNATED TRANSACTIONS
In the case where the Certificates are backed by trust fund Assets
which are residential, home equity, manufactured housing or multi-family loans
which are described and defined in the Exemption as designated transactions
("Designated Transactions"), the Amendment permits the Certificates issued by
the trust fund in such transactions to be rated in one of the highest four
generic rating categories by a Rating Agency and/or to be subordinated. The
Assets will qualify for Designated Transaction treatment under the Exemption
unless otherwise specified in the prospectus supplement. In addition, one subset
of Designated Transactions, residential (one- to-four family) and home equity
loans, may be less than fully secured, provided that the rights and interests
evidenced by Certificates issued in such Designated Transactions are: (a) not
subordinated to the rights and interests evidenced by Securities of the same
trust fund; (b) such Certificates acquired by the Plan have received a rating
from a Rating Agency at the time of such acquisition that is in one of the two
highest generic rating categories; and (c) any loan included in the corpus or
Assets of the trust fund is secured by collateral
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whose fair market value on the closing date of the Designated Transactions is at
least equal to 80% of the sum of: (i) the outstanding principal balance due
under the loan which is held by the trust fund and (ii) the outstanding
principal balance(s) of any other loan(s) of higher priority (whether or not
held by the trust fund) which are secured by the same collateral.
INSURANCE COMPANY GENERAL ACCOUNTS
In the event that Certificates do not meet the requirements of the
Exemption solely because they are Subordinate Certificates or fail to meet a
minimum rating requirement under the Exemption, certain Plans may be eligible to
purchase Certificates pursuant to Section III of Prohibited Transaction Class
Exemption 95-60 ("PTCE 95-60") which permits insurance company general accounts
as defined in PTCE 95-60 to purchase such Certificates if they otherwise meet
all of the other requirements of the Exemption.
PERMITTED ASSETS
The Amendment permits an interest-rate swap to be an Asset of a trust
fund which issues Certificates acquired by Plans in an initial offering or in
the secondary market on or after November 13, 2000 and clarifies the
requirements regarding yield supplement agreements. An interest-rate swap (or if
purchased by or on behalf of the trust fund) an interest-rate cap contract
(collectively, a "Swap" or "Swap Agreement") is a permitted trust fund Asset if
it: (a) is an "eligible Swap;" (b) is with an "eligible counterparty;" (c) is
purchased by a "qualified plan investor;" (d) meets certain additional specific
conditions which depend on whether the Swap is a "ratings dependent Swap" or a
"non-ratings dependent Swap" and (e) permits the trust fund to make termination
payments to the Swap counterparty (other than currently scheduled payments)
solely from excess spread or amounts otherwise payable to the servicer or
depositor.
An "eligible Swap" is one which: (a) is denominated in U.S. dollars;
(b) pursuant to which the trust fund pays or receives, on or immediately prior
to the respective payment or distribution date for the class of Certificates to
which the Swap relates, a fixed rate of interest or a floating rate of interest
based on a publicly available index (E.G., LIBOR or the U.S. Federal Reserve's
Cost of Funds Index (COFI)), with the trust fund receiving such payments on at
least a quarterly basis and obligated to make separate payments no more
frequently than the counterparty, with all simultaneous payments being netted
("Allowable Interest Rate"); (c) has a notional amount that does not exceed
either: (i) the principal balance of the class of Certificates to which the Swap
relates, or (ii) the portion of the principal balance of such class represented
by obligations ("Allowable Notional Amount"); (d) is not leveraged (i.e.,
payments are based on the applicable notional amount, the day count fractions,
the fixed or floating rates permitted above, and the difference between the
products thereof, calculated on a one-to-one ratio and not on a multiplier of
such difference) ("Leveraged"); (e) has a final termination date that is either
the earlier of the date on which the issuer terminates or the related class of
Certificates are fully repaid and (f) does not incorporate any provision which
could cause a unilateral alteration in the interest rate requirements described
above or the prohibition against leveraging.
An "eligible counterparty" means a bank or other financial institution
which has a rating at the date of issuance of the Certificates, which is in one
of the three highest long-term credit rating categories or one of the two
highest short-term credit rating categories, utilized by at least one of the
Rating Agencies rating the Certificates; provided that, if a counterparty is
relying on its short-term rating to establish eligibility hereunder, such
counterparty must either have a long-term rating in one of the three highest
long-term rating categories or not have a long-term rating from the applicable
Rating Agency.
A "qualified plan investor" is a Plan or Plans where the decision to
buy such class of Certificates is made on behalf of the Plan by an independent
fiduciary qualified to understand the Swap transaction and the effect the Swap
would have on the rating of the Certificates and such
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fiduciary is either (a) a "qualified professional asset manager" ("QPAM") under
Prohibited Transaction Class Exemption 84-14 ("PTCE 84-14") (see below), (b) an
"in-house asset manager" under Prohibited Transaction Class Exemption 96-23
("PTCE 96-23") (see below) or (c) has total assets (both Plan and non-Plan)
under management of at least $100 million at the time the Certificates are
acquired by the Plan.
In "ratings dependent Swaps" (where the rating of a class of
Certificates is dependent on the terms and conditions of the Swap), the Swap
Agreement must provide that if the credit rating of the counterparty is
withdrawn or reduced by any Rating Agency below a level specified by the Rating
Agency, the servicer must, within the period specified under the Swap Agreement:
(a) obtain a replacement Swap Agreement with an eligible counterparty which is
acceptable to the Rating Agency and the terms of which are substantially the
same as the current Swap Agreement (at which time the earlier Swap Agreement
must terminate); or (b) cause the Swap counterparty to establish any
collateralization or other arrangement satisfactory to the Rating Agency such
that the then current rating by the Rating Agency of the particular class of
Certificates will not be withdrawn or reduced (and the terms of the Swap
Agreement must specifically obligate the counterparty to perform these duties
for any class of Certificates with a term of more than one year). In the event
that the servicer fails to meet these obligations, Plan certificateholders must
be notified in the immediately following periodic report which is provided to
certificateholders but in no event later than the end of the second month
beginning after the date of such failure. Sixty days after the receipt of such
report, the exemptive relief provided under the Exemption will prospectively
cease to be applicable to any class of Certificates held by a Plan which
involves such ratings dependent Swap.
"Non-ratings dependent Swaps" (those where the rating of the
Certificates does not depend on the terms and conditions of the Swap) are
subject to the following conditions. If the credit rating of the counterparty is
withdrawn or reduced below the lowest level permitted above, the servicer will,
within a specified period after such rating withdrawal or reduction: (a) obtain
a replacement Swap Agreement with an eligible counterparty, the terms of which
are substantially the same as the current Swap Agreement (at which time the
earlier Swap Agreement must terminate); (b) cause the counterparty to post
collateral with the trust fund in an amount equal to all payments owed by the
counterparty if the Swap transaction were terminated; or (c) terminate the Swap
Agreement in accordance with its terms.
An "eligible yield supplement agreement" is any yield supplement
agreement or similar arrangement (or if purchased by or on behalf of the trust
fund) an interest rate cap contract to supplement the interest rates otherwise
payable on obligations held by the trust fund ("EYS Agreement"). If the EYS
Agreement has a notional principal amount and/or is written on an International
Swaps and Derivatives Association, Inc. (ISDA) form, the EYS Agreement may only
be held as an Asset of the trust fund with respect to Certificates purchased by
Plans on or after April 7, 1998 if it meets the following conditions: (a) it is
denominated in U.S. dollars; (b) it pays an Allowable Interest Rate; (c) it is
not Leveraged; (d) it does not allow any of these three preceding requirements
to be unilaterally altered without the consent of the trustee; (e) it is entered
into between the trust fund and an eligible counterparty and (f) it has an
Allowable Notional Amount.
PRE-FUNDING ACCOUNTS
The Exemption was amended by PTE 97-34 to extend exemptive relief to
Certificates issued in transactions using pre-funding accounts whereby a portion
of the loans backing the Certificates are transferred to the trust fund within a
specified period following the closing date ("DOL Pre-Funding Period") (see
below) instead of requiring that all such loans be either identified or
transferred on or before the closing date. The relief is effective for
transactions occurring on or after May 23, 1997 provided that the following
conditions are met. First, the ratio of the amount allocated to the Pre-Funding
Account to the total principal amount of the Certificates being offered
("Pre-Funding Limit") must not exceed twenty-five percent (25%). Second, all
loans transferred after the closing date
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(referred to here as "additional loans") must meet the same terms and conditions
for eligibility as the original loans used to create the trust fund, which terms
and conditions have been approved by the Rating Agency. Third, the transfer of
such additional loans to the trust fund during the DOL Pre-Funding Period must
not result in the Certificates receiving a lower credit rating from the Rating
Agency upon termination of the DOL Pre-Funding Period than the rating that was
obtained at the time of the initial issuance of the Certificates by the trust
fund. Fourth, solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate (the "average interest rate") for all of the
loans in the trust fund at the end of the DOL Pre-Funding Period must not be
more than 100 basis points lower than the average interest rate for the loans
which were transferred to the trust fund on the closing date. Fifth, either: (i)
the characteristics of the additional loans must be monitored by an insurer or
other credit support provider which is independent of the depositor; or (ii) an
independent accountant retained by the depositor must provide the depositor with
a letter (with copies provided to the Rating Agency, the underwriter and the
trustee) stating whether or not the characteristics of the additional loans
conform to the characteristics described in the Prospectus, Prospectus
Supplement, Private Placement Memorandum ("Offering Documents") and/or the
Agreement. In preparing such letter, the independent accountant must use the
same type of procedures as were applicable to the loans which were transferred
as of the closing date. Sixth, the DOL Pre-Funding Period must end no later than
three months or 90 days after the closing date or earlier, in certain
circumstances, if the amount on deposit in the Pre-Funding Account is reduced
below the minimum level specified in the Agreement or an event of default occurs
under the Agreement. Seventh, amounts transferred to any Pre-Funding Account
and/or Capitalized Interest Account used in connection with the pre-funding may
be invested only in investments which are permitted by the Rating Agency and (i)
are direct obligations of, or obligations fully guaranteed as to timely payment
of principal and interest by, the United States or any agency or instrumentality
thereof (provided that such obligations are backed by the full faith and credit
of the United States); or (ii) have been rated (or the obligor has been rated)
in one of the three highest generic rating categories by the Rating Agency
("Acceptable Investments"). Eighth, certain disclosure requirements must be met.
REVOLVING POOL FEATURES
The Exemption only covers Certificates backed by "fixed" pools of loans
which require that all the loans must be transferred to the trust fund or
identified at closing (or transferred within the DOL Pre-Funding Period, if
pre-funding meeting the conditions described above is used). Accordingly,
Certificates issued by trust funds which feature revolving pools of Assets will
not be eligible for a purchase by Plans. However, Securities which are Notes
backed by revolving pools of Assets may be eligible for purchase by Plans
pursuant to certain other prohibited transaction exemptions. See discussion
below in "ERISA Considerations Relating to Notes."
LIMITATIONS ON SCOPE OF THE EXEMPTION
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by ERISA and the Code in
connection with the initial acquisition, transfer or holding, and the
acquisition or disposition in the secondary market, of the Certificates by
Plans. However, no exemption is provided from the restrictions of ERISA for the
acquisition or holding of a Certificates on behalf of an "Excluded Plan" by any
person who is a fiduciary with respect to the assets of such Excluded Plan. For
those purposes, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group. Exemptive relief may also be provided for the acquisition,
holding and disposition of Certificates by Plans if the fiduciary or its
affiliate is the obligor with respect to 5% or less of the fair market value of
the Loans in the trust fund provided that: (i) the Plan is not an Excluded Plan,
(ii) each Plan's investment in each class of Certificates does not exceed 25% of
the outstanding Certificates in the class, (iii) after the Plan's acquisition of
the Certificates, no more than 25% of the assets over which the fiduciary has
investment authority are invested in Certificates of a trust containing assets
which are sold or serviced by the same entity and (iv) in the case of initial
issuance (but not secondary market transactions), at least 50% of each class
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of Certificates and at least 50% of the aggregate interests in the trust fund
are acquired by persons independent of the Restricted Group.
ERISA CONSIDERATIONS RELATING TO NOTES
Under the Plan Asset Regulations, the Assets of the trust fund would be
treated as "plan assets" of a Plan for the purposes of ERISA and the Code only
if the Plan acquires an "equity interest" in the trust fund and none of the
exceptions contained in the Plan Asset Regulations is applicable. An equity
interest is defined under the Plan Asset Regulations as an interest other than
an instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Assuming that the Notes are treated as
indebtedness without substantial equity features for purposes of the Plan Asset
Regulations, then such Notes will be eligible for purchase by Plans. However,
without regard to whether the Notes are treated as an "equity interest" for such
purposes, the acquisition or holding of Notes by or on behalf of a Plan could be
considered to give rise to a prohibited transaction if the trust fund or any of
its affiliates is or becomes a party in interest or disqualified person with
respect to such Plan, or in the event that a Note is purchased in the secondary
market and such purchase constitutes a sale or exchange between a Plan and a
party in interest or disqualified person with respect to such Plan. There can be
no assurance that the trust fund or any of its affiliates will not be or become
a party in interest or a disqualified person with respect to a Plan that
acquires Notes.
The Amendment to the Exemption permits trust funds which are grantor
trusts, owner trusts, REMICs or FASITs to issue Notes, as well as Certificates,
provided a legal opinion is received to the effect that the noteholders have a
perfected security interest in the trust fund's Assets. The exemptive relief
provided under the Exemption for any prohibited transactions which could be
caused as a result of the operation, management or servicing of the trust fund
and its Assets would not be necessary with respect to Notes with no substantial
equity features which are issued as obligations of the trust fund. However,
effective for the acquisition, holding or transfer of Notes between a Plan and a
party in interest which occurs on or after November 13, 2000, the Exemption
would provide prohibited transaction exemptive relief, provided that the same
conditions of the Exemption described above relating to Certificates are met
with respect to the Notes. The same limitations of such exemptive relief
relating to acquisitions of Certificates by fiduciaries with respect to Excluded
Plans would also be applicable to the Notes as described herein in "LIMITATIONS
ON SCOPE OF THE EXEMPTION."
In the event that the Exemption is not applicable to the Notes, one or
more other prohibited transactions exemptions may be available to Plans
purchasing or transferring the Notes depending in part upon the type of Plan
fiduciary making the decision to acquire the Notes and the circumstances under
which such decision is made. These exemptions include, but are not limited to,
Prohibited Transaction Class Exemption 90-1 (regarding investments by insurance
company pooled separate accounts), Prohibited Transaction Class Exemption 91-38
(regarding investments by bank collective investments funds), PTCE 84-14
(regarding transactions effected by "qualified professional asset managers"),
PTCE 95-60 (regarding investments by insurance company general accounts) and
PTCE 96-23 (regarding transactions effected by "in-house asset managers")
(collectively, the "Investor-Based Exemptions"). However, even if the conditions
specified in these Investor-Based Exemptions are met, the scope of the relief
provided under such Exemptions might or might not cover all acts which might be
construed as prohibited transactions.
EACH PROSPECTUS SUPPLEMENT WILL CONTAIN INFORMATION CONCERNING
CONSIDERATIONS RELATING TO ERISA AND THE CODE THAT ARE APPLICABLE TO THE RELATED
SECURITIES. BEFORE PURCHASING SECURITIES IN RELIANCE ON PTCE 83-1, THE
EXEMPTION, THE INVESTOR-BASED EXEMPTIONS OR ANY OTHER EXEMPTION, A FIDUCIARY OF
A PLAN SHOULD ITSELF CONFIRM THAT REQUIREMENTS SET FORTH IN SUCH EXEMPTION WOULD
BE SATISFIED.
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ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO
PURCHASE SECURITIES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH
RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE
OF THE ACQUISITION AND OWNERSHIP OF SUCH SECURITIES.
Governmental plans and church plans as defined in ERISA are not subject
to ERISA or Code Section 4975, although they may elect to be qualified under
Section 401 (a) of the Code and exempt from taxation under Section 501 (a) of
the Code and would then be subject to the prohibited transaction rules set forth
in Section 503 of the Code. In addition, governmental plans may be subject to
federal, state and local laws which are to a material extent similar to the
provisions of ERISA or a Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of an
investment in Securities under applicable fiduciary or other investment
standards and the need for the availability of any exemptive relief under any
Similar Law.
LEGAL INVESTMENT
The prospectus supplement will specify which classes of the Notes or
Certificates, as applicable, if any, will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA"). Generally, only classes of Offered Notes or Offered
Certificates, as applicable, that (1) are rated in one of the two highest rating
categories by one or more rating agencies and (2) are part of a series
representing interests in, or secured by, a trust fund consisting of loans
secured by first liens on real property and originated by particular types of
originators specified in SMMEA, will be "mortgage related securities" for
purposes of SMMEA.
Those classes of Offered Notes or Offered Certificates, as applicable,
qualifying as "mortgage related securities" will constitute legal investments
for persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including, but not limited to, state chartered savings
banks, commercial banks, savings and loan associations and insurance companies,
as well as trustees and state government employee retirement systems) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any agency or instrumentality of the United States
constitute legal investments for those entities. Pursuant to SMMEA, a number of
states enacted legislation, on or before the October 3, 1991 cut-off for those
enactments, limiting to varying extents the ability of some entities (in
particular, insurance companies) to invest in mortgage related securities
secured by liens on residential, or mixed residential and commercial,
properties, in most cases by requiring the affected investors to rely solely
upon existing state law, and not SMMEA.
SMMEA also amended the legal investment authority of
federally-chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
"mortgage related securities" without limitation as to the percentage of their
assets represented thereby, federal credit unions may invest in these
securities, and national banks may purchase these securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. ss.24 (Seventh), subject in each case to
regulations that the applicable federal regulatory authority may prescribe. In
this connection, the Office of the Comptroller of the Currency (the "OCC") has
amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with general standards concerning "safety
and soundness" and retention of credit information in 12 C.F.R. ss.1.5), some
"Type IV securities," defined in 12 C.F.R. ss.1.2(l) to include some
"residential mortgage related securities." As so defined, "residential
mortgage-related security" means, in relevant part, "mortgage related security"
within the meaning of SMMEA. The National Credit Union Administration ("NCUA")
has adopted rules,
135
codified at 12 C.F.R. Part 703, which permit federal credit unions to invest in
"mortgage related securities" under some limited circumstances, other than
stripped mortgage related securities, residual interests in mortgage related
securities, and commercial mortgage related securities, unless the credit union
has obtained written approval from the NCUA to participate in the "investment
pilot program" described in 12 C.F.R. ss.703.140. Thrift institutions that are
subject to the jurisdiction of the Office of Thrift Supervision (the "OTS")
should consider the OTS' Thrift Bulletin 13a (December 1, 1998), "Management of
Interest Rate Risk, Investment Securities, and Derivatives Activities," before
investing in any of the Offered Notes or Offered Certificates, as applicable.
All depository institutions considering an investment in the
Certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 Policy Statement") of
the Federal Financial Institutions Examination Council ("FFIEC"), which has been
adopted by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the OCC and the OTS, effective May 26, 1998, and
by the NCUA, effective October 1, 1998. The 1998 Policy Statement sets forth
general guidelines which depository institutions must follow in managing risks
(including market, credit, liquidity, operational (transaction), and legal
risks) applicable to all securities (including mortgage pass-through securities
and mortgage-derivative products) used for investment purposes.
If specified in the prospectus supplement, other classes of Offered
Notes or Offered Certificates, as applicable, offered pursuant to this
prospectus will not constitute "mortgage related securities" under SMMEA. The
appropriate characterization of those classes under various legal investment
restrictions, and thus the ability of investors subject to these restrictions to
purchase these Offered Notes or Offered Certificates, as applicable, may be
subject to significant interpretive uncertainties.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by those authorities before purchasing any Offered
Notes or Offered Certificates, as applicable, as some classes or subclasses may
be deemed unsuitable investments, or may otherwise be restricted, under those
rules, policies or guidelines (in some instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits provisions that
may restrict or prohibit investment in securities that are not "interest
bearing" or "income paying," and with regard to any Offered Notes or Offered
Certificates, as applicable, issued in book-entry form, provisions that may
restrict or prohibit investments in securities that are issued in book-entry
form.
Except as to the status of some classes of Offered Notes or Offered
Certificates, as applicable, as "mortgage related securities," no representation
is made as to the proper characterization of the Offered Notes or Offered
Certificates, as applicable, for legal investment, financial institution
regulatory, or other purposes, or as to the ability of particular investors to
purchase any Offered Notes or Offered Certificates, as applicable, under
applicable legal investment restrictions. The uncertainties described above (and
any unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Offered Notes or Offered
Certificates, as applicable,) may adversely affect the liquidity of the Offered
Notes or Offered Certificates, as applicable.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Notes or Offered
Certificates, as applicable, of any class constitute legal investments for them
or are subject to investment, capital or other restrictions, and, if applicable,
whether SMMEA has been overridden in any jurisdiction relevant to that investor.
136
METHODS OF DISTRIBUTION
The Notes or Certificates, as applicable, offered by this prospectus
and by the supplements to this prospectus will be offered in series. The
distribution of the Notes or Certificates, as applicable, may be effected from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. If specified in the prospectus
supplement, the Notes or Certificates, as applicable, will be distributed in a
firm commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Deutsche Bank Securites Inc. ("DBS") acting as
underwriter with other underwriters, if any, named in the underwriting
agreement. In that event, the prospectus supplement may also specify that the
underwriters will not be obligated to pay for any Notes or Certificates, as
applicable, agreed to be purchased by purchasers pursuant to purchase agreements
acceptable to the depositor. In connection with the sale of the Notes or
Certificates, as applicable, underwriters may receive compensation from the
depositor or from purchasers of the Notes or Certificates, as applicable, in the
form of discounts, concessions or commissions. The prospectus supplement will
describe any compensation paid by the depositor.
Alternatively, the prospectus supplement may specify that the Notes or
Certificates, as applicable, will be distributed by DBS acting as agent or in
some cases as principal with respect to Notes or Certificates, as applicable,
that it has previously purchased or agreed to purchase. If DBS acts as agent in
the sale of Notes or Certificates, as applicable, DBS will receive a selling
commission for each series of Notes or Certificates, as applicable, depending on
market conditions, expressed as a percentage of the total principal balance of
the related mortgage loans as of the Cut-off Date. The exact percentage for each
series of Notes or Certificates, as applicable, will be disclosed in the
prospectus supplement. To the extent that DBS elects to purchase Notes or
Certificates, as applicable, as principal, DBS may realize losses or profits
based upon the difference between its purchase price and the sales price. The
prospectus supplement for any series offered other than through underwriters
will contain information regarding the nature of that offering and any
agreements to be entered into between the depositor and purchasers of Notes or
Certificates, as applicable, of that series.
The depositor will indemnify DBS and any underwriters against
particular civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments DBS and any underwriters may be required to
make in respect of these civil liabilities.
In the ordinary course of business, DBS and the depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the depositor's mortgage loans pending the sale
of those mortgage loans or interests in those mortgage loans, including the
Notes or Certificates, as applicable. DBS performs management services for the
depositor.
The depositor anticipates that the Notes or Certificates, as
applicable, will be sold primarily to institutional investors. Purchasers of
Notes or Certificates, as applicable, including dealers, may, depending on the
facts and circumstances of those purchases, be deemed to be "underwriters"
within the meaning of the Securities Act of 1933 in connection with reoffers and
sales by them of Notes or Certificates, as applicable. Securityholders should
consult with their legal advisors in this regard before any reoffer or sale of
Notes or Certificates, as applicable.
As to each series of Notes or Certificates, as applicable, only those
classes rated in one of the four highest rating categories by any rating agency
will be offered by this prospectus. Any lower rated or unrated class may be
initially retained by the depositor, and may be sold by the depositor at any
time to one or more institutional investors.
137
ADDITIONAL INFORMATION
The Depositor has filed with the Commission a registration statement on
Form S-3 under the Securities Act of 1933, as amended, with respect to the Notes
or Certificates, as applicable, (the "Registration Statement"). This prospectus,
which forms a part of the Registration Statement, omits some of the information
contained in the Registration Statement pursuant to the rules and regulations of
the Commission. The Registration Statement and the exhibits to the Registration
Statement can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at Regional Offices in the following locations:
o Chicago Regional Office, 175 West Jackson Boulevard, Suite
900, Chicago, Illinois 60604; and
o New York Regional Office, 233 Broadway, New York, New York
10279.
Copies of these materials can also be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
The Commission also maintains a site on the world wide web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system.
The Depositor has filed the Registration Statement, including all exhibits to
the Registration Statement, through the EDGAR system and therefore these
materials should be available by logging onto the Commission's web site. The
Commission maintains computer terminals providing access to the EDGAR system at
each of the offices referred to above.
Copies of the most recent Fannie Mae prospectus for Fannie Mae
certificates and Fannie Mae's annual report and quarterly financial statements
as well as other financial information are available from the Director of
Investor Relations of Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C.
20016 (202-752-7115). The Depositor did not participate in the preparation of
Fannie Mae's prospectus or its annual or quarterly reports or other financial
information and, accordingly, makes no representation as to the accuracy or
completeness of the information in those documents.
Copies of the most recent Offering Circular for Freddie Mac
certificates as well as Freddie Mac's most recent Information Statement and
Information Statement supplement and any quarterly report made available by
Freddie Mac may be obtained by writing or calling the Investor Inquiry
Department of Freddie Mac at 8200 Jones Branch Drive, McLean, Virginia 22102
(outside Washington, D.C. metropolitan area, telephone 800-336-3672; within
Washington, D.C. metropolitan area, telephone 703-759-8160). The Depositor did
not participate in the preparation of Freddie Mac's Offering Circular,
Information Statement or any supplement to the Information Statement or any
quarterly report of the Information Statement and, accordingly, makes no
representation as to the accuracy or completeness of the information in those
documents.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the trust fund
referred to in the prospectus supplement with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this prospectus
and prior to the termination of any offering of the Notes or Certificates, as
applicable, issued by that trust fund will be deemed to be incorporated by
reference in this prospectus and to be a part of this prospectus from the date
of the filing of those documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference in this prospectus will
be deemed to be modified or superseded for all purposes of this prospectus to
the extent that a statement contained in this prospectus (or in the prospectus
supplement) or in any other subsequently filed document that also is or is
deemed to be incorporated by reference modifies or
138
replaces that statement. Any statement so modified or superseded will not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus.
The Trustee on behalf of any trust fund will provide without charge to
each person to whom this prospectus is delivered, upon request, a copy of any or
all of the documents referred to above that have been or may be incorporated by
reference in this prospectus (not including exhibits to the information that is
incorporated by reference unless the exhibits are specifically incorporated by
reference into the information that this prospectus incorporates). Requests for
information should be directed to the corporate trust office of the Trustee
specified in the prospectus supplement.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
securityholders of an investment in the Notes or Certificates, as applicable, of
a series, will be passed upon for the depositor by McKee Nelson LLP, Washington,
D.C., Sidley Austin Brown & Wood LLP, New York, NY and Thacher Proffitt & Wood
LLP, New York, NY.
FINANCIAL INFORMATION
A new trust fund will be formed for each series of Notes or
Certificates, as applicable, and no trust fund will engage in any business
activities or have any assets or obligations before the issuance of the related
series of Notes or Certificates, as applicable. Accordingly, financial
statements for a trust fund will generally not be included in this prospectus or
in the prospectus supplement.
RATING
As a condition to the issuance of any class of Offered Notes or Offered
Certificates, as applicable, they must not be rated lower than investment grade;
that is, they must be rated in one of the four highest rating categories, by a
rating agency.
Ratings on mortgage pass-through certificates and mortgage-backed notes
address the likelihood of receipt by securityholders of all distributions on the
underlying mortgage loans. These ratings address the structural, legal and
issuer-related aspects associated with the Notes or Certificates, as applicable,
the nature of the underlying assets and the credit quality of the guarantor, if
any. Ratings on mortgage pass-through certificates, mortgage-backed notes and
other asset backed securities do not represent any assessment of the likelihood
of principal prepayments by borrowers or of the degree by which prepayments
might differ from those originally anticipated. As a result, securityholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped interest certificates in extreme cases might fail to recoup their
initial investments.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating.
139
INDEX OF DEFINED TERMS
1986 Act .....................................................................90
1997 Act ....................................................................118
1998 Policy Statement........................................................136
Accrual Period ...............................................................18
Accrual Securities............................................................24
Accrued Security Interest.....................................................27
Adjustable Rate Assets.........................................................3
Agency Securities .............................................................3
Agreement ....................................................................39
ARM Loans .....................................................................6
Asset Conservation Act........................................................77
Asset Group ..................................................................25
Asset Seller ..................................................................3
Available Distribution Amount.................................................25
Balloon Payment Assets.........................................................4
Bankruptcy Code ..............................................................74
Beneficial Owner .............................................................33
Bi-weekly Assets ..............................................................4
Book-Entry Securities.........................................................25
Buy Down Assets ...............................................................3
Buydown Mortgage Loans........................................................21
Buydown Period ...............................................................21
Capitalized Interest Account..................................................16
Cash Flow Agreement...........................................................17
CERCLA .......................................................................75
Certificates .................................................................24
Charter Act ..................................................................12
Code .........................................................................84
Collection Account............................................................43
Commission ....................................................................7
contract borrower ............................................................69
contract lender ..............................................................69
Convertible Assets.............................................................4
Cooperative ..................................................................68
Cooperative Corporation.......................................................35
Cooperative Loans ............................................................68
Cooperatives ..................................................................5
Covered Trust ................................................................63
CPR ..........................................................................20
Crime Control Act ............................................................80
Cut-off Date ..................................................................6
Definitive Securities.........................................................25
Determination Date............................................................25
Distribution Date ............................................................18
DTC ..........................................................................33
ERISA .......................................................................127
Euroclear ....................................................................33
Euroclear Operator............................................................35
European Depositaries.........................................................36
Exchange Act .................................................................34
Fannie Mae ....................................................................3
FASIT Ownership Security.....................................................108
FASIT Regular Securities.....................................................108
FDIC .........................................................................43
FHA ...........................................................................5
Freddie Mac ...................................................................3
Freddie Mac Act ..............................................................13
Freddie Mac Certificate Group.................................................13
Garn-St. Germain Act..........................................................77
GEM Assets ....................................................................4
Ginnie Mae ....................................................................3
GPM Assets ....................................................................4
Grantor Trust Fund Stripped Bond.............................................117
Grantor Trust Fund Stripped Coupon...........................................117
Home Equity Loans .............................................................5
Housing Act ..................................................................11
HUD ..........................................................................52
Increasing Payment Asset.......................................................4
Increasing Payment Assets......................................................3
Indirect Participants.........................................................34
Insurance Proceeds............................................................26
Interest Rate ................................................................27
Interest Reduction Assets......................................................4
land sale contract............................................................69
Land Sale Contracts............................................................5
Level Payment Assets...........................................................3
Liquidation Proceeds..........................................................26
Lock-out Date .................................................................7
Mortgaged Properties...........................................................5
Mortgages .....................................................................5
Nonrecoverable Advance........................................................30
Notes ........................................................................24
Offered Securities............................................................25
OID Regulations ..............................................................85
Participants .................................................................34
Partnership Certificate Owners...............................................121
PCBs .........................................................................75
Permitted Investments.........................................................44
Pre-Funded Amount ............................................................16
Pre-Funding Account...........................................................16
Pre-Funding Period............................................................16
Prepayment Premium.............................................................7
Purchase Price ...............................................................41
RCRA .........................................................................76
Record Date ..................................................................25
Regular Securities............................................................86
Regular Securityholder........................................................89
Relief Act ...................................................................80
REMIC Regulations ............................................................85
REMIC Securities .............................................................39
REO Property .................................................................31
Residual Holders .............................................................97
Residual Securities...........................................................86
Retained Interest ............................................................53
140
Revolving Credit Line Loans....................................................8
RICO .........................................................................80
Rules ........................................................................36
Securities ...................................................................24
Security Balance .............................................................27
Senior Securities ............................................................24
Servicemen's Readjustment Act.................................................16
Servicing Standard............................................................47
Shortfall Amount ............................................................117
Single Family Property.........................................................5
SPA ..........................................................................20
Special servicer .............................................................56
Step-up Rate Assets............................................................4
Strip Securities .............................................................24
Stripped Agency Securities....................................................14
Subordinate Securities........................................................24
Subsequent Assets ............................................................16
Superliens ...................................................................75
Taxable Mortgage Pools........................................................86
Terms and Conditions..........................................................35
Tiered REMICs ................................................................89
Title V ......................................................................79
Title VIII ...................................................................79
UCC ..........................................................................34
UST ..........................................................................76
VA ............................................................................5
VA Guaranty Policy............................................................53
Value .........................................................................6
Warranting Party .............................................................42
Yield Considerations..........................................................27
141
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$515,160,000 (APPROXIMATE)
ACE SECURITIES CORP.
DEPOSITOR
ACE SECURITIES CORP. HOME EQUITY LOAN
TRUST, SERIES 2004-HE2
ASSET BACKED PASS-THROUGH CERTIFICATES
PROSPECTUS SUPPLEMENT
DATED SEPTEMBER 16, 2004
OCWEN FEDERAL BANK FSB
SERVICER
WELLS FARGO BANK, NATIONAL ASSOCIATION
MASTER SERVICER
DEUTSCHE BANK SECURITIES
UNDERWRITER
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
We are not offering the certificates offered by this prospectus supplement in
any state where the offer is not permitted.
Dealers will be required to deliver a prospectus supplement and prospectus when
acting as underwriters of the certificates and with respect to their unsold
allotments or subscriptions. In addition, all dealers selling the Offered
Certificates, whether or not participating in this offering, may be required to
deliver a prospectus supplement and prospectus until 90 days after the date of
this prospectus supplement.
SEPTEMBER 16, 2004