Filed Pursuant to Rule 424B5
Registration No. 333-131727-09
Prospectus Supplement dated July 19, 2006 (to Prospectus dated April 18, 2006)
$809,240,000 (APPROXIMATE)
ACE SECURITIES CORP. HOME EQUITY LOAN TRUST, SERIES 2006-CW1
ASSET BACKED PASS-THROUGH CERTIFICATES
ACE SECURITIES CORP. HOME EQUITY LOAN TRUST, SERIES 2006-CW1
Issuing Entity
DB STRUCTURED PRODUCTS, INC.
Sponsor
ACE SECURITIES CORP.
Depositor
COUNTYWIDE HOME LOANS SERVICING LP
Servicer
WELLS FARGO BANK, NATIONAL ASSOCIATION
Master Servicer
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YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-12 IN THIS
PROSPECTUS SUPPLEMENT.
This prospectus supplement may be used to offer and sell the Offered
Certificates only if accompanied by the prospectus. The Offered Certificates
represent an interest solely in the Issuing Entity and do not represent
interests in or obligations of the Sponsor, the Depositor, or any of their
affiliates.
Distributions on the Offered Certificates will be made on the 25th day of each
month, or, if such day is not a business day, on the next succeeding business
day, beginning in August 2006.
- --------------------------------------------------------------------------------
OFFERED CERTIFICATES The trust created for the Series 2006-CW1 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 fourteen 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, subordination
and an interest rate swap agreement. 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.
INITIAL CERTIFICATE THE ASSUMED FINAL DISTRIBUTION
CLASS PRINCIPAL BALANCE(1) PASS-THROUGH RATE DATE
- ------------ -------------------- ----------------------------- -------------
A-1......... $ 348,483,000 One-Month LIBOR + 0.14%(2)(3) July 25, 2036
A-2A........ $ 152,935,000 One-Month LIBOR + 0.05%(2)(3) July 25, 2036
A-2B........ $ 47,569,000 One-Month LIBOR + 0.10%(2)(3) July 25, 2036
A-2C........ $ 75,530,000 One-Month LIBOR + 0.14%(2)(3) July 25, 2036
A-2D........ $ 42,114,000 One-Month LIBOR + 0.26%(2)(3) July 25, 2036
M-1......... $ 29,956,000 One-Month LIBOR + 0.26%(2)(3) July 25, 2036
M-2......... $ 27,425,000 One-Month LIBOR + 0.32%(2)(3) July 25, 2036
M-3......... $ 16,033,000 One-Month LIBOR + 0.36%(2)(3) July 25, 2036
M-4......... $ 13,923,000 One-Month LIBOR + 0.38%(2)(3) July 25, 2036
M-5......... $ 13,923,000 One-Month LIBOR + 0.42%(2)(3) July 25, 2036
M-6......... $ 12,236,000 One-Month LIBOR + 0.48%(2)(3) July 25, 2036
M-7......... $ 11,814,000 One-Month LIBOR + 0.95%(2)(3) July 25, 2036
M-8......... $ 9,704,000 One-Month LIBOR + 1.10%(2)(3) July 25, 2036
M-9......... $ 7,595,000 One-Month LIBOR + 1.90%(2)(3) July 25, 2036
- ----------
(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, Class A-2C and Class A-2D 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, Class M-6, Class M-7, Class M-8 and Class
M-9 Certificates will increase by the lesser of (i) the product of the
applicable margin and 50% and (ii) 0.50%.
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.............................................S-1
RISK FACTORS................................................................S-12
USE OF PROCEEDS.............................................................S-22
THE MORTGAGE POOL...........................................................S-22
YIELD ON THE CERTIFICATES...................................................S-65
DESCRIPTION OF THE CERTIFICATES.............................................S-96
THE ORIGINATOR.............................................................S-137
STATIC POOL INFORMATION....................................................S-137
ISSUING ENTITY.............................................................S-137
THE DEPOSITOR..............................................................S-138
THE SPONSOR................................................................S-138
SERVICING OF THE MORTGAGE LOANS............................................S-139
THE SECURITIES ADMINISTRATOR, THE MASTER SERVICER AND THE CUSTODIAN........S-147
THE TRUSTEE................................................................S-150
THE CREDIT RISK MANAGER....................................................S-152
POOLING AND SERVICING AGREEMENT............................................S-152
FEDERAL INCOME TAX CONSEQUENCES............................................S-157
METHOD OF DISTRIBUTION.....................................................S-161
SECONDARY MARKET...........................................................S-161
LEGAL MATTERS..............................................................S-162
RATINGS....................................................................S-162
LEGAL PROCEEDINGS..........................................................S-163
AFFILIATIONS, RELATIONSHIPS AND RELATED TRANSACTIONS.......................S-163
LEGAL INVESTMENT...........................................................S-163
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS..................................S-165
AVAILABLE INFORMATION......................................................S-167
REPORTS TO CERTIFICATEHOLDERS..............................................S-167
INCORPORATION OF INFORMATION BY REFERENCE..................................S-168
ANNEX I......................................................................I-1
ii
EUROPEAN ECONOMIC AREA
In relation to each Member State of the European Economic Area which has
implemented the Prospectus Directive (each, a "Relevant Member State"), the
Underwriter has represented and agreed that with effect from and including the
date on which the Prospectus Directive is implemented in that Relevant Member
State (the "Relevant Implementation Date") it has not made and will not make an
offer of certificates to the public in that Relevant Member State prior to the
publication of a prospectus in relation to the certificates which has been
approved by the competent authority in that Relevant Member State or, where
appropriate, approved in another Relevant Member State and notified to the
competent authority in that Relevant Member State, all in accordance with the
Prospectus Directive, except that it may, with effect from and including the
Relevant Implementation Date, make an offer of certificates to the public in
that Relevant Member State at any time:
(a) to legal entities which are authorized or regulated to operate in the
financial markets or, if not so authorized or regulated, whose corporate purpose
is solely to invest in securities;
(b) to any legal entity which has two or more of (1) an average of at least
250 employees during the last financial year; (2) a total balance sheet of more
than (euro)43,000,000 and (3) an annual net turnover of more than
(euro)50,000,000, as shown in its last annual or consolidated accounts; or
(c) in any other circumstances which do not require the publication by the
Issuing Entity of a prospectus pursuant to Article 3 of the Prospectus
Directive.
For the purposes of this provision, the expression an "offer of certificates to
the public" in relation to any certificates in any Relevant Member State means
the communication in any form and by any means of sufficient information on the
terms of the offer and the certificates to be offered so as to enable an
investor to decide to purchase or subscribe the certificates, as the same may be
varied in that Member State by any measure implementing the Prospectus Directive
in that Member State and the expression "Prospectus Directive" means Directive
2003/71/EC and includes any relevant implementing measure in each Relevant
Member State.
UNITED KINGDOM
The Underwriter has represented and agreed that:
(a) it has only communicated or caused to be communicated and will only
communicate or cause to be communicated an invitation or inducement to engage in
investment activity (within the meaning of Section 21 of the Financial Services
and Markets Act) received by it in connection with the issue or sale of the
certificates in circumstances in which Section 21(1) of the Financial Services
and Markets Act does not apply to the Issuing Entity; and
(b) it has complied and will comply with all applicable provisions of the
Financial Services and Markets Act with respect to anything done by it in
relation to the certificates in, from or otherwise involving the United Kingdom.
iii
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is a brief discussion of the important features of
the certificates offered by this prospectus supplement and the accompanying
prospectus but 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.
Issuing Entity............. ACE Securities Corp. Home Equity Loan Trust,
Series 2006-CW1.
Title of Series............ ACE Securities Corp. Home Equity Loan Trust,
Series 2006-CW1 Asset Backed Pass-Through
Certificates.
Cut-off Date............... July 1, 2006.
Closing Date............... On or about July 25, 2006.
Depositor.................. ACE Securities Corp., a Delaware corporation. SEE
"THE DEPOSITOR" IN THIS PROSPECTUS SUPPLEMENT.
Originator................. Countrywide Home Loans, Inc., a New York
corporation. SEE "THE ORIGINATOR" IN THIS
PROSPECTUS SUPPLEMENT.
Sponsor.................... DB Structured Products, Inc., a Delaware
corporation. SEE "THE SPONSOR" IN THIS PROSPECTUS
SUPPLEMENT.
Master Servicer............ Wells Fargo Bank, National Association, a national
banking association. SEE "THE SECURITIES
ADMINISTRATOR, THE MASTER SERVICER AND THE
CUSTODIAN" IN THIS PROSPECTUS SUPPLEMENT.
Servicer................... Countrywide Home Loans Servicing LP, a New York
limited partnership. SEE "SERVICING OF THE
MORTGAGE LOANS" IN THIS PROSPECTUS SUPPLEMENT.
Trustee.................... HSBC Bank USA, National Association, a national
banking association, will be the trustee of the
trust and the supplemental interest trust. SEE
"THE TRUSTEE" IN THIS PROSPECTUS SUPPLEMENT.
Securities Administrator... Wells Fargo Bank, National Association. SEE "THE
SECURITIES ADMINISTRATOR, THE MASTER SERVICER AND
THE CUSTODIAN" IN THIS PROSPECTUS SUPPLEMENT.
Custodian.................. Wells Fargo Bank, National Association. SEE "THE
SECURITIES ADMINISTRATOR, THE MASTER SERVICER AND
THE CUSTODIAN" IN THIS PROSPECTUS SUPPLEMENT.
Cap Provider............... The Royal Bank of Scotland plc. SEE "DESCRIPTION
OF THE CERTIFICATES-THE CAP PROVIDER AND THE SWAP
PROVIDER--THE CAP AGREEMENTS" IN THIS PROSPECTUS
SUPPLEMENT.
S-1
Swap Provider.............. The Royal Bank of Scotland plc. SEE "DESCRIPTION
OF THE CERTIFICATES-THE CAP PROVIDER AND THE SWAP
PROVIDER--THE SWAP AGREEMENT" IN THIS PROSPECTUS
SUPPLEMENT.
Credit Risk Manager........ Clayton Fixed Income Services Inc. (formerly known
as The Murrayhill Company). SEE "THE CREDIT RISK
MANAGER" IN THIS PROSPECTUS SUPPLEMENT.
Distribution Dates......... Distributions on the Offered Certificates will be
made on the 25th day of each month, or, if that
day is not a business day, on the next succeeding
business day, beginning in August 2006. The
assumed final Distribution Date for the Offered
Certificates is the Distribution Date in July
2036.
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 Master Servicer, the Securities Administrator and the Trustee.
There are nineteen 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 Class A Certificates and Mezzanine Certificates will be made
only from payments received in connection with the mortgage loans, payments made
by the Swap Provider under the interest rate swap agreement and payments made by
the Cap Provider under the cap agreements.
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 4,910 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 the Class A-2A, Class A-2B, Class A-2C and Class A-2D
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, Class M-6, Class M-7,
Class M-8, Class M-9, Class M-10 and Class M-11 Certificates (collectively, the
"Mezzanine Certificates") represent interests in all of the Mortgage Loans.
S-2
The Group I Mortgage Loans consist of 2,771 mortgage loans and have an aggregate
principal balance of approximately $441,118,026 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: 4.875% to 14.375%.
Weighted average mortgage rate: 8.238%.
Range of gross margins: 2.900% to 12.100%.
Weighted average gross margin: 6.907%.
Range of minimum mortgage rates: 4.875% to 14.375%
Weighted average minimum mortgage rate: 8.156%.
Range of maximum mortgage rates: 11.875% to 21.375%.
Weighted average maximum mortgage rate: 15.056%
Weighted average remaining term to stated maturity: 352 months.
Range of principal balances: $11,983 to $488,700.
Average principal balance: $159,191.
Range of original combined loan-to-value ratios: 11.24% to 100.00%.
Weighted average original combined loan-to value ratio: 79.21%.
Weighted average next adjustment date: April 15, 2008.
The Group II Mortgage Loans consist of 2,139 mortgage loans and have an
aggregate principal balance of approximately $402,719,496 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: 5.250% to 15.250%.
Weighted average mortgage rate: 8.113%.
Range of gross margins: 4.650% to 10.490%.
Weighted average gross margin: 6.965%.
Range of minimum mortgage rates: 5.250% to 12.875%.
Weighted average minimum mortgage rate: 8.118%.
Range of maximum mortgage rates: 12.250% to 19.875%.
Weighted average maximum mortgage rate: 15.047%.
Weighted average remaining term to stated maturity: 347 months.
Range of principal balances: $12,671 to $840,037.
Average principal balance: $188,275.
Range of original combined loan-to-value ratios: 8.98% to 100.00%.
Weighted average original combined loan-to value ratio: 80.18%.
Weighted average next adjustment date: April 12, 2008.
The Mortgage Loans consist of 4,910 mortgage loans and in the aggregate have a
principal balance of approximately $843,837,521 as of the Cut-off Date and have
the following characteristics as of the Cut-off Date:
Range of mortgage rates: 4.875% to 15.250%.
Weighted average mortgage rate: 8.178%.
Range of gross margins: 2.900% to 12.100%.
Weighted average gross margin: 6.929%.
Range of minimum mortgage rates: 4.875% to 14.375%.
Weighted average minimum mortgage rate: 8.141%.
Range of maximum mortgage rates: 11.875% to 21.375%.
Weighted average maximum mortgage rate: 15.053%.
Weighted average remaining term to stated maturity: 350 months.
Range of principal balances: $11,983 to $840,037.
Average principal balance: $171,861.
Range of original combined loan-to-value ratios: 8.98% to 100.00%.
Weighted average original combined loan-to value ratio: 79.67%.
Weighted average next adjustment date: April 14, 2008.
The mortgage rate on each adjustable-rate Mortgage Loan will adjust
semi-annually each adjustment date to equal the sum of (A) Six-Month LIBOR (as
defined in this prospectus supplement) and (B) the related gross margin, subject
to periodic and lifetime limitations, as described under "The Mortgage Pool" in
this
S-3
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 six months or two, three or five years from
the date of origination, as more fully described under "The Mortgage Pool" in
this prospectus supplement.
FOR ADDITIONAL INFORMATION REGARDING THE MORTGAGE LOANS, SEE "THE MORTGAGE POOL"
IN THIS PROSPECTUS SUPPLEMENT.
REMOVAL AND SUBSTITUTION OF A MORTGAGE LOAN
The Trustee will acknowledge the sale, transfer and assignment of the trust fund
to it by the Depositor and receipt of, subject to further review and the
exceptions, the Mortgage Loans. If the Trustee has actual knowledge that any
Mortgage Loan is defective on its face due to a breach of the representations
and warranties with respect to that Mortgage Loan made in the transaction
agreements, the Trustee shall promptly notify the Sponsor of such defect. The
Sponsor must then correct or cure any such defect within 90 days from the date
of notice from the Trustee of the defect and if the Sponsor fails to correct or
cure such defect within such period and such defect materially and adversely
affects the interests of the Certificateholders in the related Mortgage Loan,
the Sponsor will, in accordance with the terms of the pooling and servicing
agreement, within 90 days of the date of notice, provide the Trustee with a
substitute Mortgage Loan (if within two years of the Closing Date); provided
that, if such defect would cause the Mortgage Loan to be other than a "qualified
mortgage" as defined in Section 860G(a)(3) of the Internal Revenue Code, any
such cure or substitution must occur within 90 days from the date such breach
was discovered.
THE CERTIFICATES
OFFERED CERTIFICATES. The Class A Certificates and the Class M-1, Class M-2,
Class M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8 and Class M-9
Certificates are the only classes of certificates offered by this prospectus
supplement and are referred to in this prospectus supplement as the "Offered
Certificates". 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, in the case of the Class A-1 Certificates and Class A-2 Certificates,
calculated as the weighted average mortgage rate of the Mortgage Loans in the
related loan group, less the fee rates payable to the Servicer and the Credit
Risk Manager (collectively, the "Administration Costs") and an amount, expressed
as a per annum rate, equal to (x) the product of (i) the sum of the net swap
payment payable to the Swap Provider and any swap termination payment payable to
the Swap Provider which is not payable as a result of the occurrence of a Swap
Provider trigger event allocable to the related loan group and (ii) 12, divided
by (y) the aggregate principal balance of the Mortgage Loans in the related loan
group as of the last day of the immediately preceding Due Period (or as of the
Cut-off Date with respect to the first Distribution Date), in each case,
adjusted for the actual number of days which have elapsed in the related
interest accrual period and, in the case of the Mezzanine Certificates,
calculated as the weighted average of the rate caps of the Class A-1
Certificates and Class A-2 Certificates, 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. The initial
spread relating to the Class A-1 Certificates is 0.14% per annum. The initial
spread relating to the Class A-2A Certificates is 0.05% per annum. The initial
spread relating to the Class A-2B Certificates is 0.10% per annum. The initial
spread relating to the Class A-2C Certificates is 0.14% per annum. The initial
spread relating
S-4
to the Class A-2D Certificates is 0.26% per annum. The initial spread relating
to the Class M-1 Certificates is 0.26% per annum. The initial spread relating to
the Class M-2 Certificates is 0.32% per annum. The initial spread relating to
the Class M-3 Certificates is 0.36% per annum. The initial spread relating to
the Class M-4 Certificates is 0.38% per annum. The initial spread relating to
the Class M-5 Certificates is 0.42% per annum. The initial spread relating to
the Class M-6 Certificates is 0.48% per annum. The initial spread relating to
the Class M-7 Certificates is 0.95% per annum. The initial spread relating to
the Class M-8 Certificates is 1.10% per annum. The initial spread relating to
the Class M-9 Certificates is 1.90% 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 in this prospectus supplement) in Europe and will be issued in minimum
dollar denominations of $25,000 and integral multiples of $1.00 in excess
thereof. SEE "DESCRIPTION OF THE CERTIFICATES-BOOK-ENTRY CERTIFICATES" IN THIS
PROSPECTUS SUPPLEMENT.
CLASS M-10 CERTIFICATES AND CLASS M-11 CERTIFICATES. The Class M-10 Certificates
and Class M-11 Certificates are not offered by this prospectus supplement. The
Class M-10 Certificates will have an initial certificate principal balance of
approximately $4,641,000 and the Class M-11 Certificates will have an initial
certificate principal balance of approximately $8,438,000. The pass-through
rates on the Class M-10 Certificates and Class M-11 Certificates are variable
rates 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 for the Class M-10 Certificates and Class M-11
Certificates is a rate per annum based on one-month LIBOR plus an applicable
spread, subject to a rate cap calculated as the weighted average of the rate
caps of the Class A-1 Certificates and Class A-2 Certificates, 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. The initial spread relating to the Class M-10 Certificates is
2.50% per annum. The initial spread relating to the Class M-11 Certificates is
2.50% per annum. The spreads applicable to the Class M-10 Certificates and Class
M-11 Certificates are subject to increase as more fully described under
"Description of the Certificates-Pass-Through Rates" in this prospectus
supplement. The Class M-10 Certificates and Class M-11 Certificates initially
evidence an aggregate interest of approximately 0.55% and 1.00%, respectively,
in the trust.
CLASS CE CERTIFICATES. The Class CE Certificates are not offered by this
prospectus supplement. The Class CE Certificates will have an initial
certificate principal balance of approximately $21,518,421, which represents
approximately 2.55% of the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date.
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 (the "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 Class A
Certificates and Mezzanine Certificates consists of excess interest,
overcollateralization, subordination and an
S-5
interest rate swap agreement, each as described in this section and under
"Description of the Certificates-Credit Enhancement", "-THE SWAP AGREEMENT" and
"-Overcollateralization Provisions" in this prospectus supplement. In addition,
the Class A Certificates and the Mezzanine Certificates will have the benefit of
two separate cap agreements as described under "DESCRIPTION OF THE
CERTIFICATES-THE CAP PROVIDER AND THE SWAP PROVIDER--THE CAP AGREEMENTS" 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 Class A Certificates and Mezzanine Certificates and to pay
certain fees and expenses of the trust and the supplemental interest trust
(including any net swap payment payable to the Swap Provider and any swap
termination payment payable to the Swap Provider which is not payable as a
result of the occurrence of a Swap Provider trigger event). Any excess interest
from the Mortgage Loans each month will be available to absorb realized losses
on the Mortgage Loans and to maintain or restore overcollateralization at
required levels.
SUBORDINATION. The rights of the holders of the Mezzanine Certificates and the
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 M-7, Class M-8, Class M-9, Class M-10, Class M-11 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 M-7, Class M-8, Class M-9, Class M-10, Class M-11 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
M-7, Class M-8, Class M-9, Class M-10, Class M-11 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 M-7, Class
M-8, Class M-9, Class M-10, Class M-11 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 M-7, Class M-8, Class
M-9, Class M-10, Class M-11 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 M-7, Class M-8, Class M-9, Class
M-10, Class M-11 and Class CE Certificates will be subordinated to the rights of
the holders of the Class M-6 Certificates;
o the rights of the holders of the Class M-8, Class M-9, Class M-10, Class
M-11 and Class CE Certificates will be subordinated to the rights of the holders
of the Class M-7 Certificates;
o the rights of the holders of the Class M-9, Class M-10, Class M-11 and
Class CE Certificates will be subordinated to the rights of the holders of the
Class M-8 Certificates;
o the rights of the holders of the Class M-10, Class M-11 and Class CE
Certificates will be subordinated to the rights of the holders of the Class M-9
Certificates;
o the rights of the holders of the Class M-11 Certificates and Class CE
Certificates will be subordinated to the rights of the holders of the Class M-10
Certificates; and
o the rights of the holders of the Class CE Certificates will be
subordinated to the rights of the holders of the Class M-11 Certificates.
S-6
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, Mezzanine and Class P Certificates on the Closing Date by
approximately $21,518,421, which is equal to the initial Certificate Principal
Balance of the Class CE Certificates. This amount represents approximately 2.55%
of the aggregate principal balance of the Mortgage Loans as of the Cut-off Date,
and is the initial amount of overcollateralization required to be provided by
the mortgage pool under the pooling and servicing agreement. SEE "DESCRIPTION OF
THE CERTIFICATES-OVERCOLLATERALIZATION PROVISIONS" IN THIS PROSPECTUS
SUPPLEMENT.
CAP AGREEMENTS. For each Distribution Date commencing in August 2006 and ending
in January 2007, the Class A-1 Certificates and the Mezzanine Certificates will
have the benefit of a cap agreement (the "Group I Cap Agreement") provided by
the Cap Provider, 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 as described in this prospectus supplement.
For each Distribution Date commencing in August 2006 and ending in January 2007,
the Class A-2 Certificates and the Mezzanine Certificates will have the benefit
of a cap agreement (the "Group II Cap Agreement") provided by the Cap Provider,
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 as
described in this prospectus supplement.
Cap payments, if any, made by the Cap Provider will be deposited into a reserve
fund and will be available for distribution on the related Class A Certificates
and Mezzanine 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" IN THIS PROSPECTUS SUPPLEMENT.
INTEREST RATE SWAP AGREEMENT. The Class A Certificates and the Mezzanine
Certificates will have the benefit of an Interest Rate Swap Agreement (the
"Interest Rate Swap Agreement") provided by the Swap Provider for each
Distribution Date commencing in February 2007 and terminating on the
Distribution Date in November 2010, unless terminated earlier in accordance with
the provisions of the Interest Rate Swap Agreement.
Pursuant to the Interest Rate Swap Agreement, on each Distribution Date, (i) the
Securities Administrator (on behalf of a supplemental interest trust and from
funds of such trust) will be obligated to pay to the Swap Provider, a fixed
amount as described in this prospectus supplement (the "Securities Administrator
Swap Payment"); and (ii) the Swap Provider will be obligated to pay to the
supplemental interest trust for the benefit of the holders of the Class A
Certificates and the Mezzanine Certificates (the "Swap Provider Payment"), a
floating amount as described in this prospectus supplement.
A net payment will be required to be made on each Distribution Date (each such
net payment, a "Net Swap Payment") (a) by the Securities Administrator to the
Swap Provider, to the extent that the Securities Administrator Payment exceeds
the corresponding Swap Provider Payment, or (b) by the Swap Provider to the
Securities Administrator, to the extent the Swap Provider Payment exceeds the
corresponding Securities Administrator Payment.
On each Distribution Date, if the Swap Provider is required to make a Net Swap
Payment, such amount will be deposited into a reserve fund and will be available
for distribution to the Class A Certificates and the Mezzanine Certificates in
respect of any interest and principal shortfall amounts and
S-7
any realized losses allocated to the Class A Certificates and Mezzanine
Certificates as described in this prospectus supplement. If, on any Distribution
Date, the Net Swap Payment with respect to the Class A Certificates and
Mezzanine Certificates exceeds the amount of the interest and principal
shortfall amounts and any realized losses allocated to the Class A Certificates
and Mezzanine Certificates for such Distribution Date, after making the
distributions set forth under "Description of the Certificates--The Swap
Agreement" in this prospectus supplement, any remaining amounts will be
distributed to the Class CE Certificates. See "DESCRIPTION OF THE
CERTIFICATES-THE CAP PROVIDER AND THE SWAP PROVIDER--THE SWAP AGREEMENT" in this
prospectus supplement.
Upon early termination of the Interest Rate Swap Agreement, the Securities
Administrator (on behalf of a supplemental interest trust and from funds of such
trust) or the Swap Provider may be liable to make a termination payment (the
"Swap Termination Payment") to the other party (regardless of which party caused
the termination). The Swap Termination Payment will be computed in accordance
with the procedures set forth in the Interest Rate Swap Agreement. In the event
that the Securities Administrator is required to make a Swap Termination
Payment, that payment will be paid on the related Distribution Date, and on any
subsequent Distribution Dates until paid in full, generally prior to any
distribution to certificateholders. See "DESCRIPTION OF THE CERTIFICATES-THE CAP
PROVIDER AND THE SWAP PROVIDER--THE SWAP AGREEMENT" in this prospectus
supplement.
Amounts payable by the Securities Administrator in respect of Net Swap Payments
and Swap Termination Payments which are not payable as a result of the
occurrence of a Swap Provider trigger event will be paid to the Swap Provider on
each Distribution Date before distributions to certificateholders and will first
be deposited to the supplemental interest trust before payment to the Swap
Provider.
ALLOCATION OF LOSSES. If, on any Distribution Date, there is not sufficient
excess interest, overcollateralization (represented by the Class CE
Certificates) or Net Swap Payments to absorb realized losses on the Mortgage
Loans as described under "Description of the Certificates--Overcollateralization
Provisions" in this prospectus supplement, then realized losses on the Mortgage
Loans will be allocated to the Class M-11, Class M-10, Class M-9, Class M-8,
Class M-7, Class M-6, Class M-5, Class M-4, Class M-3, Class M-2 and Class M-1
Certificates, 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. SEE "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF LOSSES;
SUBORDINATION" IN THIS PROSPECTUS SUPPLEMENT.
Unless the Servicer collects subsequent recoveries on Mortgage Loans for which
realized losses were allocated to the Mezzanine Certificates, once realized
losses are allocated to 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 Mezzanine Certificates may be
distributed to the holders of those certificates according to the priorities set
forth under "Description of the Certificates--Overcollateralization Provisions"
and "DESCRIPTION OF THE CERTIFICATES-THE CAP PROVIDER AND THE SWAP PROVIDER--THE
SWAP AGREEMENT" 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 will be obligated to make any required delinquency advance if
the Servicer fails in its obligation to do so, to the extent provided in
S-8
the 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 "SERVICING OF THE MORTGAGE
LOANS--P&I ADVANCES" IN THIS PROSPECTUS SUPPLEMENT AND "DESCRIPTION OF THE
SECURITIES--ADVANCES IN RESPECT OF DELINQUENCIES" IN THE PROSPECTUS.
SERVICING FEE
With respect to each Mortgage Loan, the amount of the annual servicing fee that
shall be paid to the Servicer is, for a period of one full month, equal to
one-twelfth of the product of (a) 0.50% and (b) the outstanding principal
balance of such Mortgage Loan. Such fee shall be payable monthly, computed on
the basis of the same principal amount and period respecting which any related
interest payment on such Mortgage Loan is computed. The obligation to pay the
servicing fee is limited to, and the servicing fee is payable from the interest
portion of such monthly payments collected; provided, however, that accrued and
unpaid servicing fees applicable to liquidated mortgage loans may be payable out
of amounts on deposit in the collection account as further described in
servicing agreement.
OPTIONAL TERMINATION
At its option and subject to certain conditions, the Master Servicer 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 as of the last day of the
related due period has been reduced to less than or equal to 10% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date. In the
event the Master Servicer does not exercise such optional termination right
within two years of the date on which the Master Servicer was first able to
effect such optional termination, the Servicer may have the right, subject to
certain conditions, to exercise such optional termination right. SEE "POOLING
AND SERVICING AGREEMENT--TERMINATION" IN THIS PROSPECTUS SUPPLEMENT AND
"DESCRIPTION OF THE SECURITIES--TERMINATION" IN THE PROSPECTUS.
FEDERAL INCOME TAX CONSEQUENCES
Multiple elections will be made to treat designated portions of the trust
(exclusive of the reserve fund, the Cap Agreements, payments from the
supplemental interest trust or the obligation to make payments to the
supplemental interest trust) 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
Ratings Service, 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 A-2D AAA Aaa
Class M-1 AA+ Aa1
Class M-2 AA Aa2
Class M-3 AA- Aa3
Class M-4 A+ A1
Class M-5 A A2
Class M-6 A- A3
Class M-7 BBB+ Baa1
Class M-8 BBB Baa2
Class M-9 BBB- Baa3
S-9
A security rating does not address the frequency of prepayments on the Mortgage
Loans or the corresponding effect on yield to investors. SEE "YIELD ON THE
CERTIFICATES" AND "RATINGS" IN THIS PROSPECTUS SUPPLEMENT AND "YIELD
CONSIDERATIONS" IN THE PROSPECTUS.
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984. 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, or with the
assets of, employee benefit plans subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or plans or arrangements (each, a
"Plan") subject to section 4975 of the Internal Revenue Code of 1986, as amended
(the "Code"). Prior to the termination of the supplemental interest trust, Plans
or persons using assets of a Plan may purchase the Offered Certificates if the
purchase and holding meets the requirements of an investor-based class exemption
issued by the Department of Labor. SEE "CONSIDERATIONS FOR BENEFIT PLAN
INVESTORS" IN THIS PROSPECTUS SUPPLEMENT AND "ERISA CONSIDERATIONS" IN THE
PROSPECTUS.
S-10
TRANSACTION STRUCTURE
-----------------------------
originate MORTGAGORS loan
loans / \ payments
/ ----------------------------- \
/ /\ \
/ / \
\/ / \/
------------------------ / ------------------------------
/
Countrywide Home amount Countrywide Home Loans
Loans, Inc. financed Servicing LP ------------------
ORIGINATORS Servicer |
Collect loan payments and make |
------------------------ P&I Advances |
| / \ ------------------------------ |
purchase | | loan |
loans | | purchase |
| | price |
\ / | |
- ---------------------------- |
DB Structured Products, Inc. |
SPONSOR |
Purchases loans |
Forms pool |
|
- ---------------------------- |
| / \ |
asset | | net offering |
pool | | proceeds |
\ / | net offering |
- ---------------------------- proceeds ------------------------------- |
ACE Securities Corp. <------------------- Deutsche Bank Securities Inc. |
DEPOSITOR UNDERWRITER |
Creates issuing entity -------------------> Sells certificates to investors --------------| |
certificates ------------------------------- <------------ | |
- ---------------------------- offering | | |
| / \ proceeds | | |
asset | | certificates | | |
pool | | | | |
| | ------------------------------- | | |
\ / | Wells Fargo Bank National | | |
- -------------------------------- Association | | |
ACE Securities Corp. Home Equity MASTER SERVICER AND SECURITIES | | |
Loan Trust, Series 2006-CW1 / ADMINISTRATOR | | |
ISSUING ENTITY <-------- / Aggregates collections <-----------|-|--|
Holds pool / Calculates cashflows | | monthly
Issues certificates / Remits to investors | |distributions
/ ------------------------------ | |
- -------------------------------- / | Monthly distributions/Certain proceeds | |
Monthly report / | payable under Cap Agreements and the | |
/ | Interest Rate Swap Agreement | |
- -------------------------------- / ------\ / | |
HSBC Bank USA, National / <-------------------------------------|-|
Association \/ INVESTORS certificates |
TRUSTEE AND SUPPLEMENTAL INTEREST ------> --------------------------------------|
TRUSTEE
- ------------------------------ -------
/ \
|
|
---- Represents investors
interests
S-11
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 Originator 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 Originator
considers, 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 Originator do not conform to Fannie Mae and
Freddie Mac guidelines.
In addition, mortgage loans originated by the Originator 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 36.66% of the Group I Mortgage Loans and approximately
30.17% 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 80.00%.
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-12
DEVELOPMENTS IN SPECIFIED STATES COULD HAVE A DISPROPORTIONATE EFFECT ON THE
MORTGAGE LOANS DUE TO THE GEOGRAPHIC CONCENTRATION OF THE MORTGAGED PROPERTIES.
Approximately 15.21%, 13.18% and 5.46% of the Group I Mortgage Loans, by
aggregate principal balance as of the Cut-off Date, are secured by mortgaged
properties located in the State of California, Florida and Illinois,
respectively. Approximately 31.63% and 17.81% of the Group II Mortgage Loans, by
aggregate principal balance as of the Cut-off Date, are secured by mortgaged
properties located in the State of California and Florida, respectively.
Approximately 0.38% of the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date, are located in a single California zip code. If the
California residential real estate market should experience an overall decline
in property values after the dates of origination of the Mortgage Loans, the
rates of delinquencies, foreclosures, bankruptcies and losses on the Mortgage
Loans may increase over historical levels of comparable type loans, and may
increase substantially. In addition, properties located in California and
Florida 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.
SECOND LIEN MORTGAGE LOANS RISK.
Approximately 1.78% of the Group I Mortgage Loans and approximately
4.84% of the Group II Mortgage Loans, in each case by the related aggregate
principal balance as of the Cut-off Date, are secured by 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 that lump sum
payment, you may suffer a loss. Approximately 2.11% of the Group I Mortgage
Loans and approximately 4.70% of the Group II Mortgage Loans, in each case by
the related aggregate principal balance as of the Cut-off Date, are balloon
loans.
INTEREST ONLY MORTGAGE LOAN RISK.
Approximately 25.94% of the Group I Mortgage Loans and approximately
33.42% of the Group II Mortgage Loans, in each case by the 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 or five 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 or five years following origination, the
certificateholders will receive smaller principal distributions during such
period than they would
S-13
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, Class M-6, Class M-7, Class
M-8, Class M-9, Class M-10 and Class M-11 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 Net
Swap Payments received from the Swap Provider in respect of the Interest Rate
Swap Agreement, 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" and "Description of the
Certificates--The Cap Provider and the Swap Provider--The Swap Agreement" in
this prospectus supplement.
THE MEZZANINE CERTIFICATES GENERALLY WILL NOT BE ENTITLED TO RECEIVE PRINCIPAL
PAYMENTS UNTIL AUGUST 2009 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 August 2009 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 Certificates"
in this prospectus supplement. As a result, the weighted average lives of the
Mezzanine Certificates will be longer than would be the case if distributions of
principal were allocated among all of the certificates at the same time. As a
result of the longer weighted average lives of the Mezzanine Certificates, the
holders of these certificates have a greater risk of suffering a loss on their
investments. Further, because such certificates might not receive any principal
if the delinquency levels set forth under "Description of the
Certificates--Principal Distributions on the 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 ISSUING
ENTITY 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 Originator, 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 Originator, the Trustee or any of
S-14
their respective affiliates. Proceeds of the assets included in the trust and
the supplemental interest trust will be the sole source of payments on the
Offered Certificates, and there will be no recourse to the Depositor, the
Servicer, the Originator, the Master Servicer, the Securities Administrator, the
Trustee or any other entity in the event that these proceeds are insufficient or
otherwise unavailable to make all payments provided for under the Offered
Certificates.
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
63.83% 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 and the supplemental interest trust (including any Net
Swap Payment payable to the Swap Provider and any swap termination payment
payable to the Swap Provider which is not payable as a result of the occurrence
of a Swap Provider trigger event), could adversely affect the yield to maturity
on such certificates. In addition, the rate cap will decrease if Mortgage Loans
with relatively high mortgage rates prepay at a faster rate than Mortgage Loans
with relatively low mortgage rates.
If the pass-through rates on the Class A Certificates or the Mezzanine
Certificates are limited for any Distribution Date, the resulting interest
shortfalls may be recovered by the holders of these certificates on the same
Distribution Date or on future Distribution Dates on a subordinated basis to the
extent that the Cap Provider is required to make any cap payments on such
Distribution Date and to the extent that on such Distribution Date or future
Distribution Dates there are available funds remaining after certain other
distributions on the Class A Certificates and Mezzanine Certificates and the
payment of certain fees and expenses of the trust and the supplemental interest
trust (including any Net Swap Payment payable to the Swap Provider and any swap
termination payment payable to the Swap Provider which is not payable as a
result of the occurrence of a Swap Provider trigger event). The ratings on the
Offered Certificates will not address the likelihood of any recovery of interest
shortfalls by holders of the Offered Certificates from amounts collected on the
Mortgage Loans. SEE "YIELD ON THE CERTIFICATES--SPECIAL YIELD CONSIDERATIONS" IN
THIS PROSPECTUS SUPPLEMENT.
Amounts used to pay such interest shortfalls on the Class A Certificates
and Mezzanine Certificates may be supplemented by the Interest Rate Swap
Agreement to the extent that the floating payment required to be made by the
Swap Provider exceeds the fixed payment required to be made by the Securities
Administrator (on behalf of the supplemental interest trust) on any Distribution
Date and such amount is available in the priority described in this prospectus
supplement. However, the amount received from the Swap Provider under the
Interest Rate Swap Agreement may be insufficient to pay the holders of the Class
A Certificates and Mezzanine Certificates the full amount of interest which they
would have received absent the limitations of the rate cap.
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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 Certificates"
in this prospectus supplement. As is the case with mortgage backed pass-through
certificates generally, the Class A Certificates and Mezzanine Certificates are
subject to substantial inherent cash-flow uncertainties because the Mortgage
Loans may be prepaid at any time. However, with respect to approximately 75.77%
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 the 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 TABLES 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;
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; and
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o payments due from the supplemental interest trust in respect of
payments received from the Swap Provider under the Interest Rate
Swap Agreement.
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 100% PPC (based on the assumed prepayment rates set forth under
"Yield on the Certificates--Weighted Average Lives" in this prospectus
supplement) with respect to the adjustable-rate Mortgage Loans and a prepayment
assumption of 100% PPC (based on the assumed prepayment rates set forth under
"Yield on the Certificates--Weighted Average Lives" in this prospectus
supplement) with respect to the fixed-rate Mortgage Loans, 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, Net Swap Payments received under
the Interest Rate Swap Agreement or allocated 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 Originator. In
addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the Mortgage Loans.
The Mortgage Loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the mortgagors
regarding the terms of the Mortgage Loans;
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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
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 related Mortgage Loans and in addition could subject the trust
to damages and administrative enforcement. In particular, the failure of the
Originator 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 Originator 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.
Under the anti-predatory lending laws of some states, the mortgagor is
required to meet a net tangible benefits test in connection with the origination
of the related mortgage loan. This test may be highly subjective and open to
interpretation. As a result, a court may determine that a mortgage loan does not
meet the test even if the Originator reasonably believed that the test was
satisfied. Any determination by a court that a Mortgage Loan included in the
trust fund does not meet the test will result in a violation of the state
anti-predatory lending law, in which case the Sponsor will be required to
purchase that Mortgage Loan from the trust fund.
The Sponsor 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 Sponsor will be obligated to
cure such breach or repurchase or replace the affected Mortgage Loan in the
manner described in the prospectus. If the Sponsor is unable or otherwise fails
to satisfy such obligations, the yield on the Offered Certificates may be
materially and adversely affected.
YOUR DISTRIBUTIONS COULD BE ADVERSELY AFFECTED BY THE BANKRUPTCY OR INSOLVENCY
OF CERTAIN PARTIES.
The Sponsor will treat the transfer of the Mortgage Loans to the
Depositor as a sale of the Mortgage Loans. However, if the Sponsor becomes
bankrupt, the trustee in bankruptcy may argue that the Mortgage Loans were not
sold but were only pledged to secure a loan to the Sponsor. If that argument is
made, you could experience delays or reductions in payments on the certificates.
If that argument is successful, the bankruptcy trustee could elect to sell the
Mortgage Loans and pay down the certificates early. Thus, you could lose the
right to future payments of interest, and might suffer reinvestment loss in a
lower interest rate environment.
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In addition, if the Master Servicer becomes bankrupt, a bankruptcy
trustee or receiver may have the power to prevent the appointment of a successor
Master Servicer. Any related delays in servicing could result in increased
delinquencies or losses on the Mortgage Loans.
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 Class A Certificates and Mezzanine Certificates and
to pay certain fees and expenses of the trust and the supplemental interest
trust (including any Net Swap Payment payable to the Swap Provider and any swap
termination payment payable to the Swap Provider which is not payable as a
result of the occurrence of a Swap Provider trigger event). 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 Class A Certificates
and Mezzanine 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
Class A Certificates and Class M Certificates, and the fixed-rate
Mortgage Loans have mortgage rates that do not adjust. As a result,
the pass-through rates on the Class A Certificates and Mezzanine
Certificates may increase relative to mortgage rates on the Mortgage
Loans, requiring that a greater portion of the interest generated by
the Mortgage Loans be applied to cover interest on such
certificates.
INTEREST PAYMENTS ON THE MORTGAGE LOANS MAY BE INSUFFICIENT TO PAY INTEREST ON
YOUR CERTIFICATES.
When a Mortgage Loan is prepaid in full, the mortgagor is charged
interest only up to the date on which payment is made, rather than for an entire
month. This may result in a shortfall in interest collections available for
payment on the next Distribution Date. The Servicer is required to cover a
portion of the shortfall in interest collections that are attributable to
voluntary prepayments in full on the Mortgage Loans during the related
Prepayment Period, but only up to the servicing fee payable to the Servicer for
the related due period. In addition, if the Servicer fails to pay all or a
portion of these amounts, the Master Servicer is required to pay such amounts up
to the compensation payable to the Master Servicer for the related due period.
If the credit enhancement is insufficient to cover this shortfall in excess of
the amount the Servicer or the Master Servicer covers, you may incur a loss. In
addition, the Servicer will not be required to cover shortfalls in
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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 or the Master Servicer will be allocated, FIRST, to the Class CE
Certificates, SECOND, to the Class M-11 Certificates, THIRD, to the Class M-10
Certificates, FOURTH, to the Class M-9 Certificates, FIFTH, to the Class M-8
Certificates, SIXTH, to the Class M-7 Certificates, seventh, to the Class M-6
Certificates, EIGHTH, to the Class M-5 Certificates, NINTH, to the Class M-4
Certificates, TENTH, to the Class M-3 Certificates, ELEVENTH, to the Class M-2
Certificates, TWELFTH, to the Class M-1 Certificates and THIRTEENTH, 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 Class A Certificates and Mezzanine Certificates will be
entitled to reimbursement for any such interest shortfalls but only to the
extent of available funds and amounts payable by the Swap Provider under the
Interest Rate Swap Agreement, and in the order of priority set forth under
"Description of the Certificates--Overcollateralization Provisions" and
"Description of the Certificates--The Cap Provider and the Swap Provider--The
Swap Agreement" in this prospectus supplement. If these shortfalls are allocated
to the Class A Certificates or Mezzanine 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 Cap Provider to make certain payments for the benefit of the holders of the
Class A Certificates and Mezzanine Certificates. To the extent that
distributions on the Class A Certificates or Mezzanine Certificates depend in
part on payments to be received by the Securities Administrator under the Cap
Agreements, the ability of the Securities Administrator to make such
distributions on the Class A Certificates and Mezzanine Certificates will be
subject to the credit risk of the Cap Provider. Although there is a mechanism in
place to facilitate replacement of the Cap Agreements upon the default or credit
impairment of the Cap Provider, there can be no assurance that any such
mechanism will result in the ability of the Trustee to obtain suitable
replacement cap agreements.
THE INTEREST RATE SWAP AGREEMENT AND THE SWAP PROVIDER.
Any amounts received from the Swap Provider under the Interest Rate Swap
Agreement will be applied as described in this prospectus supplement to pay
interest shortfalls, cover realized losses on the Mortgage Loans allocated to
the Mezzanine Certificates and maintain or restore overcollateralization.
However, no amounts will be payable by the Swap Provider unless the floating
amount owed by the Swap Provider on a Distribution Date exceeds the fixed amount
owed to the Swap Provider on such Distribution Date. This will generally not
occur except in
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periods when one-month LIBOR (as determined pursuant to the Interest Rate Swap
Agreement) exceeds 5.480%. No assurance can be made that any amounts will be
received under the Interest Rate Swap Agreement, or that any such amounts that
are received will be sufficient to cover interest shortfalls and realized losses
on the Mortgage Loans which are allocated to the Mezzanine Certificates or
maintain or restore the required level of overcollateralization. Any Net Swap
Payment payable to the Swap Provider under the terms of the Interest Rate Swap
Agreement will reduce amounts available for distribution to certificateholders,
and may reduce the pass-through rates of the certificates. The combination of a
rapid rate of prepayment and low prevailing interest rates could adversely
affect the yields on the Class A Certificates and Mezzanine Certificates. In
addition, any swap termination payment payable to the Swap Provider in the event
of early termination of the Interest Rate Swap Agreement which was not caused by
the occurrence of a Swap Provider trigger event will reduce amounts available
for distribution to certificateholders.
Upon early termination of the Interest Rate Swap Agreement, the
Securities Administrator (on behalf of the supplemental interest trust) or the
Swap Provider may be liable to make a Swap Termination Payment to the other
party (regardless of which party caused the termination). The Swap Termination
Payment will be computed in accordance with the procedures set forth in the
Interest Rate Swap Agreement. In the event that the Securities Administrator (on
behalf of the supplemental interest trust) is required to make a Swap
Termination Payment, that payment will be paid on the related Distribution Date,
and on any subsequent Distribution Dates, until paid in full, generally prior to
distributions to certificateholders. This feature may result in losses on the
certificates. Due to the priority of the application of the available
distribution amount, the Mezzanine Certificates will bear the effects of any
shortfalls resulting from a Net Swap Payment or Swap Termination Payment by the
Securities Administrator before such effects are borne by the Class A
Certificates and therefore, one or more classes of Mezzanine Certificates may
suffer a loss as a result of such payment.
To the extent that distributions on the Class A Certificates and
Mezzanine Certificates depend in part on payments to be received by the
Securities Administrator (on behalf of the supplemental interest trust) under
the Interest Rate Swap Agreement, the ability of the Securities Administrator to
make such distributions on the Class A Certificates and Mezzanine Certificates
will be subject to the credit risk of the Swap Provider. Although there is a
mechanism in place to facilitate replacement of the Interest Rate Swap Agreement
upon the default or credit impairment of the Swap Provider, there can be no
assurance that any such mechanism will result in the ability of the trustee to
obtain a suitable replacement interest rate swap agreement. The credit ratings
of the Swap Provider as of the date of this prospectus supplement are lower than
the ratings assigned to the Class A Certificates. See "Description of the
Certificates--The Cap Provider and the Swap Provider--The Swap Agreement" in
this prospectus supplement.
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 the Master Servicer and the Servicer
will not 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,
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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.
FICO SCORES ARE NOT AN INDICATOR OF FUTURE PERFORMANCE OF MORTGAGORS.
Investors are encouraged to be aware that FICO scores are based on past
payment history of the mortgagor. Investors are encouraged not to rely on FICO
scores as an indicator of future borrower performance. See "The Mortgage
Pool--Underwriting Standards" in this prospectus supplement.
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 "Sponsor"), 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 Sponsor. 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 Sponsor for the Mortgage
Loans. The Mortgage Loans were previously purchased by the Sponsor directly from
the Originator.
THE MORTGAGE POOL
GENERAL
The pool of mortgage loans (the "Mortgage Pool") will consist of 4,910
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") having an aggregate principal balance as
of the Cut-off Date of approximately $843,837,521 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 30 years. For purposes of calculating
interest and principal distributions on the Class A
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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 2,771 fixed-rate and adjustable-rate
mortgage loans having an aggregate principal balance as of the Cut-off Date of
approximately $441,118,026 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 2,139 fixed-rate and adjustable-rate mortgage loans having an
aggregate principal balance as of the Cut-off Date of approximately $402,719,496
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 67.14% 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 3.35% 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 29.51% 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 or five 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 96.76% 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 3.24% 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 generally 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 36.17% of the Mortgage Loans are fixed-rate mortgage
loans and approximately 63.83% of the Mortgage Loans are adjustable-rate
mortgage loans. The adjustable-rate mortgage loans are referred to in this
prospectus supplement 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 six months or 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"). As to each Mortgage Loan, the Servicer will be responsible for
calculating and implementing Mortgage Rate adjustments. On each Adjustment Date,
the Mortgage Rate on each ARM Loan will be adjusted generally to equal the sum
of the
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Index, as applicable 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 "Initial
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 1.753% per annum
and 1.419% 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 75.77% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment charge (a "Prepayment Charge") in limited
circumstances on certain prepayments as provided in the related mortgage note.
Each such Mortgage Loan provides for payment of a Prepayment Charge on certain
partial prepayments and all prepayments in full made within a certain period of
time 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. 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 servicing agreement, the
Servicer may waive the payment of any otherwise applicable Prepayment Charge
with respect to the related 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
Originator 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 amendment of the Parity Act
may have on the prepayment performance of the Mortgage Loans. However, the
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, decisions by the Servicer with respect to
the waiver of the Prepayment Charges and the 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 amendment
to the Parity Act, may have on the prepayment performance of the Mortgage Loans.
See "Certain Legal Aspects of the Mortgage Loans- Prepayment Charges and Late
Fees; Debt-Acceleration Clauses" in the prospectus.
In addition, the Servicer may waive the collection of any otherwise
applicable Prepayment Charge, but only if: (i) such waiver is standard and
customary in servicing similar Mortgage Loans
S-24
and such waiver is related to a default or reasonably foreseeable default and
would, in the reasonable judgment of the Servicer maximize recovery of total
proceeds taking into account the value of such Prepayment Charge and the related
Mortgage Loan and, if such waiver is made in connection with a refinancing of
the related Mortgage Loan, such refinancing is related to a default or a
reasonably foreseeable default, (ii) such Prepayment Charge is unenforceable in
accordance with applicable law or the collection of such related Prepayment
Charge would otherwise violate applicable law or (iii) the collection of such
Prepayment Charge would be considered "predatory" pursuant to written guidance
published or issued by any applicable federal, state or local regulatory
authority acting in its official capacity and having jurisdiction over such
matters.
No Mortgage Loan will be more than 60 days delinquent as of the Cut-off
Date. A Mortgage Loan is considered to be delinquent when a payment due on any
due date remains unpaid as of the close of business on the last business day
immediately prior to the next monthly due date. The determination as to whether
a Mortgage Loan falls into this category is made as of the close of business on
the last business day of each month.
The following table sets forth the historical delinquency experience of
the Mortgage Loans. The historical delinquency information is based on the
delinquency of each such Mortgage Loan since the origination of such Mortgage
Loan.
HISTORICAL DELINQUENCY SINCE ORIGINATION
NUMBER OF AGGREGATE % OF AGGREGATE
MORTGAGE REMAINING REMAINING
HISTORICAL DELINQUENCY LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- --------- ----------------- -----------------
Never Delinquent ............... 4,659 $801,092,341 94.93%
30 Days Delinquent ............. 249 42,327,266 5.02
60 Days Delinquent ............. 2 417,914 0.05
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
For a further description of the underwriting or selection criteria used
to purchase the mortgage pool assets, please see "The Mortgage Pool --
Underwriting Standards" and "The Sponsor" in this prospectus supplement.
MORTGAGE LOAN CHARACTERISTICS
The average principal balance of the Mortgage Loans at origination was
approximately $172,142. No Mortgage Loan had a principal balance at origination
greater than approximately $841,500 or less than approximately $12,000. The
average principal balance of the Mortgage Loans as of the Cut-off Date was
approximately $171,861. No Mortgage Loan had a principal balance as of the
Cut-off Date greater than approximately $840,037 or less than approximately
$11,983.
The Mortgage Loans had Mortgage Rates as of the Cut-off Date ranging
from approximately 4.875% per annum to approximately 15.250% per annum, and the
weighted average Mortgage Rate was approximately 8.178% per annum. As of the
Cut-off Date, the ARM Loans had Gross Margins ranging from approximately 2.900%
per annum to approximately 12.100% per annum, Minimum Mortgage Rates ranging
from approximately 4.875% per annum to approximately 14.375% per annum and
Maximum Mortgage Rates ranging from approximately 11.875% per annum to
approximately 21.375% per annum. As of the Cut-off Date, the weighted average
Gross Margin was approximately 6.929% the weighted average Minimum Mortgage Rate
was approximately 8.141% per annum and the weighted average Maximum Mortgage
Rate was approximately 15.053% per annum. The latest first Adjustment Date
following the Cut-off Date on
S-25
any ARM Loan occurs on May 1, 2011 and the weighted average next Adjustment Date
for all of the ARM Loans following the Cut-off Date is April 14, 2008.
The weighted average combined loan-to-value ratio of the Mortgage Loans
at origination was approximately 79.67%. At origination, no Mortgage Loan had a
combined loan-to-value ratio greater than approximately 100.00% or less than
approximately 8.98%.
The weighted average remaining term to stated maturity of the Mortgage
Loans was approximately 350 months as of the Cut-off Date. None of the Mortgage
Loans will have a first due date prior to February 1, 2006 or after July 1, 2006
or will have a remaining term to stated maturity of less than 174 months or
greater than 359 months as of the Cut-off Date. The latest maturity date of any
Mortgage Loan is June 1, 2036.
As of the Cut-off Date, the weighted average FICO Score for the Mortgage
Loans that were scored is approximately 618. No Mortgage Loan which was scored
had a FICO Score as of the Cut-off Date greater than 790 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-26
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 - 15 Year ................ 66 $ 7,519,158 0.89%
Fixed - 20 Year ................ 23 966,089 0.11
Fixed - 30 Year ................ 1,362 234,445,168 27.78
Fixed - 30 Year IO ............. 142 36,283,421 4.30
Balloon - 15/30 ................ 538 26,031,988 3.08
ARM - 6 Month .................. 33 8,048,828 0.95
ARM - 2 Year/6 Month ........... 1,742 296,217,594 35.10
ARM - 2 Year/6 Month IO ........ 831 201,060,495 23.83
ARM - 2 Year/6 Month
30/40 Balloon ................ 9 1,969,986 0.23
ARM - 3 Year/6 Month ........... 113 17,968,112 2.13
ARM - 3 Year/6 Month IO ........ 45 11,678,039 1.38
ARM - 3 Year/6 Month
30/40 Balloon ................ 1 226,738 0.03
ARM - 5 Year/6 Month ........... 5 1,421,904 0.17
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
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 ..................... 4,338 $816,474,033 96.76%
Second Lien .................... 572 27,363,488 3.24
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
S-27
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE MORTGAGE OUTSTANDING AT OUTSTANDING AT
AT ORIGINATION ($) LOANS ORIGINATION ORIGINATION
- -------------------------------- --------- ----------------- -----------------
0.01 - 50,000.00 ........ 369 $ 12,191,233 1.44%
50,000.01 - 100,000.00 ........ 973 74,402,296 8.80
100,000.01 - 150,000.00 ........ 1,086 135,346,733 16.01
150,000.01 - 200,000.00 ........ 856 150,524,483 17.81
200,000.01 - 250,000.00 ........ 631 140,337,106 16.60
250,000.01 - 300,000.00 ........ 440 120,268,695 14.23
300,000.01 - 350,000.00 ........ 243 79,143,176 9.36
350,000.01 - 400,000.00 ........ 165 61,928,445 7.33
400,000.01 - 450,000.00 ........ 56 23,857,946 2.82
450,000.01 - 500,000.00 ........ 56 26,628,223 3.15
500,000.01 - 550,000.00 ........ 13 6,747,586 0.80
550,000.01 - 600,000.00 ........ 10 5,722,200 0.68
600,000.01 - 650,000.00 ........ 6 3,787,400 0.45
650,000.01 - 700,000.00 ........ 3 2,000,514 0.24
700,000.01 - 750,000.00 ........ 2 1,488,108 0.18
800,000.01 - 850,000.00 ........ 1 841,500 0.10
----- ------------ -------
Total: ......................... 4,910 $845,215,645 100.00%
===== ============ =======
PRINCIPAL BALANCES OF THE MORTGAGE LOANS
AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
AS OF THE CUT-OFF DATE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
0.01 - 50,000.00 ........ 373 $ 12,371,181 1.47%
50,000.01 - 100,000.00 ........ 975 74,651,196 8.85
100,000.01 - 150,000.00 ........ 1,084 135,075,019 16.01
150,000.01 - 200,000.00 ........ 853 149,853,133 17.76
200,000.01 - 250,000.00 ........ 635 141,167,839 16.73
250,000.01 - 300,000.00 ........ 436 119,152,649 14.12
300,000.01 - 350,000.00 ........ 244 79,436,803 9.41
350,000.01 - 400,000.00 ........ 164 61,547,362 7.29
400,000.01 - 450,000.00 ........ 56 23,870,603 2.83
450,000.01 - 500,000.00 ........ 55 26,143,851 3.10
500,000.01 - 550,000.00 ........ 13 6,742,179 0.80
550,000.01 - 600,000.00 ........ 10 5,714,703 0.68
600,000.01 - 650,000.00 ........ 6 3,783,983 0.45
650,000.01 - 700,000.00 ........ 3 2,000,260 0.24
700,000.01 - 750,000.00 ........ 2 1,486,722 0.18
800,000.01 - 850,000.00 ........ 1 840,037 0.10
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
S-28
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 ..................... 747 $194,464,690 23.05%
Florida ........................ 717 129,851,279 15.39
Texas .......................... 479 53,176,020 6.30
Illinois ....................... 233 38,426,900 4.55
Arizona ........................ 204 34,909,416 4.14
Washington ..................... 177 29,776,898 3.53
Virginia ....................... 152 29,690,195 3.52
New York ....................... 123 29,630,256 3.51
Nevada ......................... 123 26,751,916 3.17
Maryland ....................... 113 24,320,022 2.88
Georgia ........................ 191 23,169,341 2.75
New Jersey ..................... 114 22,914,075 2.72
Michigan ....................... 116 13,657,722 1.62
Pennsylvania ................... 96 12,733,820 1.51
Colorado ....................... 75 12,196,512 1.45
Tennessee ...................... 98 11,754,170 1.39
Hawaii ......................... 36 11,070,941 1.31
Oregon ......................... 61 10,315,513 1.22
Massachusetts .................. 61 9,891,544 1.17
North Carolina ................. 81 9,631,768 1.14
Minnesota ...................... 56 9,537,044 1.13
Connecticut .................... 50 8,276,690 0.98
Ohio ........................... 77 8,167,945 0.97
Missouri ....................... 68 7,005,165 0.83
Alabama ........................ 59 5,521,177 0.65
Utah ........................... 40 5,518,953 0.65
Idaho .......................... 38 5,275,077 0.63
Indiana ........................ 49 5,103,559 0.60
Mississippi .................... 40 4,975,197 0.59
South Carolina ................. 42 4,947,945 0.59
New Hampshire .................. 25 4,819,418 0.57
Wisconsin ...................... 38 4,604,894 0.55
Kentucky ....................... 41 3,969,777 0.47
New Mexico ..................... 30 3,931,159 0.47
District of Columbia ........... 16 3,790,620 0.45
Louisiana ...................... 32 3,646,674 0.43
Kansas ......................... 26 3,227,587 0.38
Oklahoma ....................... 33 3,177,477 0.38
Delaware ....................... 18 3,024,951 0.36
Alaska ......................... 15 2,804,527 0.33
Rhode Island ................... 17 2,698,440 0.32
Arkansas ....................... 20 2,185,350 0.26
Montana ........................ 14 1,922,611 0.23
Maine .......................... 10 1,377,272 0.16
West Virginia .................. 12 1,279,338 0.15
Iowa ........................... 14 1,207,330 0.14
Wyoming ........................ 11 1,169,686 0.14
Nebraska ....................... 10 885,845 0.10
Vermont ........................ 3 588,031 0.07
North Dakota ................... 5 471,805 0.06
South Dakota ................... 4 392,981 0.05
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
S-29
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 ................ 1 $ 215,433 0.03%
5.000 - 5.499 ................ 3 684,999 0.08
5.500 - 5.999 ................ 11 2,369,643 0.28
6.000 - 6.499 ................ 141 34,662,096 4.11
6.500 - 6.999 ................ 395 93,906,643 11.13
7.000 - 7.499 ................ 481 103,743,894 12.29
7.500 - 7.999 ................ 920 187,644,223 22.24
8.000 - 8.499 ................ 663 128,610,775 15.24
8.500 - 8.999 ................ 739 124,250,653 14.72
9.000 - 9.499 ................ 366 55,059,564 6.52
9.500 - 9.999 ................ 370 46,980,528 5.57
10.000 - 10.499 ................ 157 19,428,826 2.30
10.500 - 10.999 ................ 169 16,315,569 1.93
11.000 - 11.499 ................ 117 8,786,603 1.04
11.500 - 11.999 ................ 158 10,847,799 1.29
12.000 - 12.499 ................ 103 5,377,348 0.64
12.500 - 12.999 ................ 62 2,683,452 0.32
13.000 - 13.499 ................ 31 1,401,074 0.17
13.500 - 13.999 ................ 20 705,851 0.08
14.000 - 14.499 ................ 2 121,167 0.01
15.000 - 15.499 ................ 1 41,383 0.00
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
ORIGINAL TERM OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL TERM MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
(MONTHS) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
180 ............................ 604 $ 33,551,146 3.98%
240 ............................ 23 966,089 0.11
360 ............................ 4,283 809,320,286 95.91
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
REMAINING TERM TO STATED MATURITY OF
THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
REMAINING TERM TO MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
STATED MATURITY (MONTHS) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
121 - 180 ...................... 604 $ 33,551,146 3.98%
181 - 240 ...................... 23 966,089 0.11
301 - 360 ...................... 4,283 809,320,286 95.91
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
S-30
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 ........ 3,605 $606,773,156 71.91%
PUD ............................ 869 160,919,080 19.07
Condominium .................... 335 54,212,818 6.42
2-4 Family ..................... 101 21,932,467 2.60
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL COMBINED MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
Lesser than or equal to 50.00 .. 166 $ 24,268,202 2.88%
50.01 - 55.00 ................. 62 9,993,897 1.18
55.01 - 60.00 ................. 103 20,396,967 2.42
60.01 - 65.00 ................. 173 34,896,820 4.14
65.01 - 70.00 ................. 209 40,022,615 4.74
70.01 - 75.00 ................. 348 70,397,874 8.34
75.01 - 80.00 ................. 1,911 360,665,423 42.74
80.01 - 85.00 ................. 386 80,512,546 9.54
85.01 - 90.00 ................. 596 115,765,235 13.72
90.01 - 95.00 ................. 245 33,409,521 3.96
95.01 - 100.00 ................. 711 53,508,422 6.34
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
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
- -------------------------------- --------- ----------------- -----------------
Full Documentation ............. 3,263 $518,296,643 61.42%
Stated Documentation ........... 1,647 325,540,879 38.58
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
S-31
FICO SCORE FOR THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
FICO SCORE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
500 - 524 ...................... 151 $ 24,183,838 2.87%
525 - 549 ...................... 284 46,715,191 5.54
550 - 574 ...................... 501 90,104,715 10.68
575 - 599 ...................... 868 143,350,278 16.99
600 - 624 ...................... 1,037 171,285,024 20.30
625 - 649 ...................... 899 151,330,580 17.93
650 - 674 ...................... 628 114,638,064 13.59
675 - 699 ...................... 313 57,248,684 6.78
700 - 724 ...................... 124 24,655,712 2.92
725 - 749 ...................... 67 13,838,000 1.64
750 - 774 ...................... 29 5,166,126 0.61
775 - 799 ...................... 9 1,321,310 0.16
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
LOAN PURPOSE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
Refinance - Cashout ............ 2,294 $446,406,868 52.90%
Purchase ....................... 2,269 345,015,956 40.89
Refinance - Rate Term .......... 347 52,414,697 6.21
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
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 ........................ 4,739 $815,056,536 96.59%
Investment ..................... 137 22,607,427 2.68
Second Home .................... 34 6,173,558 0.73
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
The occupancy status of a Mortgaged Property is as represented by the mortgagor
in its loan application.
S-32
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
- -------------------------------- --------- ----------------- -----------------
August 2006 .................... 2 $ 611,577 0.11%
October 2006 ................... 23 5,789,218 1.07
November 2006 .................. 8 1,648,032 0.31
January 2008 ................... 25 4,931,607 0.92
February 2008 .................. 59 11,764,742 2.18
March 2008 ..................... 246 48,058,498 8.92
April 2008 ..................... 1,942 375,686,766 69.75
May 2008 ....................... 298 56,604,750 10.51
June 2008 ...................... 12 2,201,713 0.41
January 2009 ................... 14 2,899,283 0.54
February 2009 .................. 10 1,573,333 0.29
March 2009 ..................... 20 3,070,693 0.57
April 2009 ..................... 96 18,588,311 3.45
May 2009 ....................... 18 3,473,424 0.64
June 2009 ...................... 1 267,846 0.05
April 2011 ..................... 4 1,145,096 0.21
May 2011 ....................... 1 276,809 0.05
----- ------------ -------
Total: ......................... 2,779 $538,591,697 100.00%
===== ============ =======
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
- -------------------------------- --------- ----------------- -----------------
2.500 - 2.999 ................. 1 $ 167,718 0.03%
3.000 - 3.499 ................. 1 311,228 0.06
3.500 - 3.999 ................. 2 309,329 0.06
4.000 - 4.499 ................. 8 1,537,064 0.29
4.500 - 4.999 ................. 25 4,664,454 0.87
5.000 - 5.499 ................. 64 11,360,136 2.11
5.500 - 5.999 ................. 202 45,774,483 8.50
6.000 - 6.499 ................. 481 99,426,493 18.46
6.500 - 6.999 ................. 660 136,311,737 25.31
7.000 - 7.499 ................. 516 97,160,607 18.04
7.500 - 7.999 ................. 465 84,990,073 15.78
8.000 - 8.499 ................. 175 30,401,175 5.64
8.500 - 8.999 ................. 101 16,827,735 3.12
9.000 - 9.499 ................. 35 4,202,678 0.78
9.500 - 9.999 ................. 33 4,175,998 0.78
10.000 -10.499 ................. 4 455,995 0.08
10.500 -10.999 ................. 3 248,133 0.05
11.000 -11.499 ................. 1 151,774 0.03
11.500 -11.999 ................. 1 50,914 0.01
12.000 -12.499 ................. 1 63,971 0.01
----- ------------ -------
Total: ......................... 2,779 $538,591,697 100.00%
===== ============ =======
S-33
MAXIMUM MORTGAGE RATES OF THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MAXIMUM MORTGAGE RATE (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
11.500 - 11.999 ................ 1 $ 215,433 0.04%
12.000 - 12.499 ................ 5 1,144,414 0.21
12.500 - 12.999 ................ 34 7,870,406 1.46
13.000 - 13.499 ................ 101 25,410,213 4.72
13.500 - 13.999 ................ 231 56,325,018 10.46
14.000 - 14.499 ................ 296 65,727,591 12.20
14.500 - 14.999 ................ 581 120,133,399 22.31
15.000 - 15.499 ................ 451 87,340,059 16.22
15.500 - 15.999 ................ 453 80,052,159 14.86
16.000 - 16.499 ................ 241 38,877,831 7.22
16.500 - 16.999 ................ 178 28,389,524 5.27
17.000 - 17.499 ................ 85 12,554,912 2.33
17.500 - 17.999 ................ 73 9,308,977 1.73
18.000 - 18.499 ................ 19 2,239,223 0.42
18.500 - 18.999 ................ 19 2,088,998 0.39
19.000 - 19.499 ................ 4 390,274 0.07
19.500 - 19.999 ................ 3 230,682 0.04
20.000 - 20.499 ................ 2 170,999 0.03
20.500 - 20.999 ................ 1 50,371 0.01
21.000 - 21.499 ................ 1 71,214 0.01
----- ------------ -------
Total: ......................... 2,779 $538,591,697 100.00%
===== ============ =======
MINIMUM MORTGAGE RATES OF THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MINIMUM MORTGAGE RATE (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
4.500 - 4.999 ................. 1 $ 215,433 0.04%
5.000 - 5.499 ................. 4 745,987 0.14
5.500 - 5.999 ................. 18 3,734,454 0.69
6.000 - 6.499 ................. 80 20,562,518 3.82
6.500 - 6.999 ................. 198 48,756,913 9.05
7.000 - 7.499 ................. 280 62,633,218 11.63
7.500 - 7.999 ................. 578 123,570,707 22.94
8.000 - 8.499 ................. 469 92,595,913 17.19
8.500 - 8.999 ................. 479 84,472,256 15.68
9.000 - 9.499 ................. 248 40,152,918 7.46
9.500 - 9.999 ................. 203 32,372,845 6.01
10.000 - 10.499 ................ 92 13,252,490 2.46
10.500 - 10.999 ................ 77 9,717,813 1.80
11.000 - 11.499 ................ 22 2,805,694 0.52
11.500 - 11.999 ................ 19 2,088,998 0.39
12.000 - 12.499 ................ 4 390,274 0.07
12.500 - 12.999 ................ 3 230,682 0.04
13.000 - 13.499 ................ 2 170,999 0.03
13.500 - 13.999 ................ 1 50,371 0.01
14.000 - 14.499 ................ 1 71,214 0.01
----- ------------ -------
Total: ......................... 2,779 $538,591,697 100.00%
===== ============ =======
S-34
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
- -------------------------------- --------- ----------------- -----------------
1.000 .......................... 37 $ 8,634,808 1.60%
1.400 .......................... 1 234,000 0.04
1.500 .......................... 2,231 434,263,971 80.63
2.000 .......................... 13 2,648,127 0.49
3.000 .......................... 497 92,810,792 17.23
----- ------------ -------
Total: ......................... 2,779 $538,591,697 100.00%
===== ============ =======
SUBSEQUENT PERIODIC RATE CAPS OF THE ARM LOANS INCLUDED IN THE MORTGAGE POOL
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
SUBSEQUENT NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PERIODIC RATE CAP (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
1.000 .......................... 463 $ 88,203,530 16.38%
1.500 .......................... 2,315 450,219,117 83.59
3.000 .......................... 1 169,050 0.03
----- ------------ -------
Total: ......................... 2,779 $538,591,697 100.00%
===== ============ =======
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
- -------------------------------- --------- ----------------- -----------------
5.000 - 5.499 .................. 1 $ 196,281 0.04%
6.000 - 6.499 .................. 412 77,048,838 14.31
6.500 - 6.999 .................. 3 438,242 0.08
7.000 - 7.499 .................. 2,363 460,908,336 85.58
----- ------------ -------
Total: ......................... 2,779 $538,591,697 100.00%
===== ============ =======
S-35
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
- -------------------------------- --------- ----------------- -----------------
None ........................... 1,377 $204,502,388 24.23%
2 ............................. 1 140,114 0.02
6 ............................. 1 124,200 0.01
12 ............................. 178 40,212,598 4.77
24 ............................. 2,089 380,314,716 45.07
30 ............................. 1 181,326 0.02
36 ............................. 486 79,606,143 9.43
60 ............................. 777 138,756,036 16.44
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
ORIGINATOR OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINATOR LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
Countrywide .................... 4,910 $843,837,521 100.00%
----- ------------ -------
Total: ......................... 4,910 $843,837,521 100.00%
===== ============ =======
S-36
GROUP I MORTGAGE LOAN CHARACTERISTICS
Approximately 24.92% of the Group I Mortgage Loans are fixed-rate
mortgage loans and approximately 75.08 % of the Group I Mortgage Loans are ARM
Loans (the "Group I ARM Loans"), in each case, by aggregate principal balance of
the Group IA Mortgage Loans as of the Cut-off Date.
Approximately 98.22% of the Group I Mortgage Loans are First Lien
Mortgage Loans and approximately 1.78% of the Group I Mortgage Loans are Second
Lien Mortgage Loans.
Approximately 2.11% of the Group I Mortgage Loans are Balloon Loans and
approximately 25.94% 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 $159,460. No Group I Mortgage Loan had a principal
balance at origination greater than approximately $488,700 or less than
approximately $12,000. The average principal balance of the Group I Mortgage
Loans as of the Cut-off Date was approximately $159,191. No Group I Mortgage
Loan had a principal balance as of the Cut-off Date greater than approximately
$488,700 or less than approximately $11,983.
The Group I Mortgage Loans had Mortgage Rates as of the Cut-off Date
ranging from approximately 4.875% per annum to approximately 14.375% per annum,
and the weighted average Mortgage Rate was approximately 8.238% per annum. As of
the Cut-off Date, the Group I ARM Loans had Gross Margins ranging from
approximately 2.900% per annum to approximately 12.100% per annum, Minimum
Mortgage Rates ranging from approximately 4.875% per annum to approximately
14.375% per annum and Maximum Mortgage Rates ranging from approximately 11.875%
per annum to approximately 21.375% per annum. As of the Cut-off Date, the
weighted average Gross Margin was approximately 6.907%, the weighted average
Minimum Mortgage Rate was approximately 8.156% per annum and the weighted
average Maximum Mortgage Rate was approximately 15.056% per annum. The latest
first Adjustment Date following the Cut-off Date on any Group I ARM Loan occurs
on April 1, 2011 and the weighted average next Adjustment Date for all of the
Group I Mortgage Loans following the Cut-off Date is April 15, 2008.
The weighted average combined loan-to-value ratio of the Group I
Mortgage Loans at origination was approximately 79.21% At origination, no Group
I Mortgage Loan had a combined loan-to-value ratio greater than approximately
100.00% or less than approximately 11.24%.
The weighted average remaining term to stated maturity of the Group I
Mortgage Loans was approximately 352 months as of the Cut-off Date. None of the
Group I Mortgage Loans will have a first due date prior to February 1, 2006 or
after July 1, 2006 or will have a remaining term to stated maturity of less than
359 months or greater than 174 months as of the Cut-off Date. The latest
maturity date of any Group I Mortgage Loan is June 1, 2036.
As of the Cut-off Date, the weighted average FICO Score for the Group I
Mortgage Loans that were scored is approximately 608. No Group I Mortgage Loan
which was scored had a FICO Score as of the Cut-off Date greater than 784 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-37
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 - 15 Year ................ 35 $ 3,721,310 0.84%
Fixed - 20 Year ................ 12 437,632 0.10
Fixed - 30 Year ................ 535 88,547,324 20.07
Fixed - 30 Year IO ............. 43 9,803,999 2.22
Balloon - 15/30 ................ 203 7,432,385 1.68
ARM - 6 Month .................. 27 5,547,308 1.26
ARM - 2 Year/6 Month ........... 1,309 204,021,041 46.25
ARM - 2 Year/6 Month IO ........ 472 97,462,397 22.09
ARM - 2 Year/6 Month
30/40 Balloon ................ 8 1,646,375 0.37
ARM - 3 Year/6 Month ........... 94 14,781,246 3.35
ARM - 3 Year/6 Month IO ........ 30 7,147,080 1.62
ARM - 3 Year/6 Month
30/40 Balloon ................ 1 226,738 0.05
ARM - 5 Year/6 Month ........... 2 343,190 0.08
----- ------------ -------
Total: ......................... 2,771 $441,118,026 100.00%
===== ============ =======
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 ..................... 2,553 $433,247,580 98.22%
Second Lien .................... 218 7,870,445 1.78
----- ------------ -------
Total: ......................... 2,771 $441,118,026 100.00%
===== ============ =======
PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE MORTGAGE OUTSTANDING AT OUTSTANDING AT
AT ORIGINATION ($) LOANS ORIGINATION ORIGINATION
- -------------------------------- --------- ----------------- -----------------
0.01 - 50,000.00 ........ 192 $ 6,096,289 1.38%
50,000.01 - 100,000.00 ........ 587 45,564,533 10.31
100,000.01 - 150,000.00 ........ 703 87,415,291 19.78
150,000.01 - 200,000.00 ........ 523 91,624,171 20.74
200,000.01 - 250,000.00 ........ 308 68,210,932 15.44
250,000.01 - 300,000.00 ........ 229 62,462,978 14.14
300,000.01 - 350,000.00 ........ 133 43,376,741 9.82
350,000.01 - 400,000.00 ........ 79 29,861,519 6.76
400,000.01 - 450,000.00 ........ 13 5,371,700 1.22
450,000.01 - 500,000.00 ........ 4 1,880,700 0.43
----- ------------ -------
Total: ......................... 2,771 $441,864,855 100.00%
===== ============ =======
S-38
PRINCIPAL BALANCES OF THE GROUP I MORTGAGE LOANS
AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
AS OF THE CUT-OFF DATE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
0.01 - 50,000.00 ........ 195 $ 6,235,405 1.41%
50,000.01 - 100,000.00 ........ 587 45,624,762 10.34
100,000.01 - 150,000.00 ........ 703 87,398,283 19.81
150,000.01 - 200,000.00 ........ 520 91,011,237 20.63
200,000.01 - 250,000.00 ........ 310 68,604,128 15.55
250,000.01 - 300,000.00 ........ 228 62,171,631 14.09
300,000.01 - 350,000.00 ........ 132 43,015,069 9.75
350,000.01 - 400,000.00 ........ 79 29,817,079 6.76
400,000.01 - 450,000.00 ........ 13 5,361,209 1.22
450,000.01 - 500,000.00 ........ 4 1,879,223 0.43
----- ------------ -------
Total: .......................... 2,771 $441,118,026 100.00%
===== ============ =======
S-39
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 ..................... 265 $ 67,076,528 15.21%
Florida ........................ 330 58,132,771 13.18
Illinois ....................... 156 24,065,465 5.46
Texas .......................... 244 23,905,935 5.42
Arizona ........................ 120 20,389,208 4.62
New York ....................... 83 19,561,411 4.43
Washington ..................... 106 17,729,681 4.02
Maryland ....................... 86 17,561,657 3.98
Georgia ........................ 147 17,531,239 3.97
Virginia ....................... 87 17,138,449 3.89
New Jersey ..................... 69 13,080,291 2.97
Nevada ......................... 58 12,755,438 2.89
Michigan ....................... 97 11,131,949 2.52
Pennsylvania ................... 64 8,720,521 1.98
Minnesota ...................... 49 7,723,108 1.75
Massachusetts .................. 43 7,076,288 1.60
Tennessee ...................... 61 7,005,764 1.59
Colorado ....................... 44 6,594,447 1.49
North Carolina ................. 58 6,519,876 1.48
Oregon ......................... 38 6,493,998 1.47
Connecticut .................... 34 5,552,520 1.26
Missouri ....................... 42 4,386,265 0.99
Ohio ........................... 43 4,091,180 0.93
South Carolina ................. 33 4,012,664 0.91
Hawaii ......................... 16 3,671,725 0.83
Wisconsin ...................... 27 3,557,311 0.81
Mississippi .................... 25 3,256,562 0.74
Indiana ........................ 31 3,230,636 0.73
Kentucky ....................... 32 3,198,252 0.73
Utah ........................... 24 2,999,943 0.68
District of Columbia ........... 13 2,801,499 0.64
New Mexico ..................... 21 2,753,255 0.62
Alabama ........................ 30 2,700,784 0.61
Kansas ......................... 24 2,685,778 0.61
Idaho .......................... 20 2,611,187 0.59
Delaware ....................... 15 2,556,287 0.58
New Hampshire .................. 13 2,353,107 0.53
Alaska ......................... 10 1,887,781 0.43
Montana ........................ 12 1,671,208 0.38
Arkansas ....................... 17 1,597,751 0.36
Rhode Island ................... 8 1,561,811 0.35
Louisiana ...................... 13 1,455,611 0.33
Oklahoma ....................... 15 1,259,865 0.29
Iowa ........................... 13 1,182,358 0.27
Maine .......................... 8 1,095,507 0.25
Wyoming ........................ 7 754,826 0.17
Nebraska ....................... 7 691,685 0.16
West Virginia .................. 6 543,204 0.12
Vermont ........................ 2 328,585 0.07
South Dakota ................... 3 286,633 0.06
North Dakota ................... 2 188,221 0.04
----- ------------ -------
Total: ......................... 2,771 $441,118,026 100.00%
===== ============ =======
S-40
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 ................ 1 $ 215,433 0.05%
5.000 - 5.499 ................ 2 430,999 0.10
5.500 - 5.999 ................ 9 1,580,367 0.36
6.000 - 6.499 ................ 57 13,028,020 2.95
6.500 - 6.999 ................ 211 47,332,906 10.73
7.000 - 7.499 ................ 252 51,394,958 11.65
7.500 - 7.999 ................ 526 98,166,370 22.25
8.000 - 8.499 ................ 361 59,895,403 13.58
8.500 - 8.999 ................ 465 71,670,046 16.25
9.000 - 9.499 ................ 235 33,183,902 7.52
9.500 - 9.999 ................ 232 28,362,337 6.43
10.000 - 10.499 ................ 104 12,452,335 2.82
10.500 - 10.999 ................ 115 11,445,679 2.59
11.000 - 11.499 ................ 52 3,862,745 0.88
11.500 - 11.999 ................ 64 4,514,724 1.02
12.000 - 12.499 ................ 43 1,954,174 0.44
12.500 - 12.999 ................ 26 1,029,647 0.23
13.000 - 13.499 ................ 9 376,626 0.09
13.500 - 13.999 ................ 6 150,141 0.03
14.000 - 14.499 ................ 1 71,214 0.02
----- ------------ -------
Total: ......................... 2,771 $441,118,026 100.00%
===== ============ =======
ORIGINAL TERM OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL TERM MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
(MONTHS) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
180 ............................ 238 $ 11,153,695 2.53%
240 ............................ 12 437,632 0.10
360 ............................ 2,521 429,526,698 97.37
----- ------------ -------
Total: ......................... 2,771 $441,118,026 100.00%
===== ============ =======
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
REMAINING TERM TO MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
STATED MATURITY (MONTHS) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
121 - 180 ...................... 238 $ 11,153,695 2.53%
181 - 240 ...................... 12 437,632 0.10
301 - 360 ...................... 2,521 429,526,698 97.37
----- ------------ -------
Total: ......................... 2,771 $441,118,026 100.00%
===== ============ =======
S-41
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 ........ 2,109 $330,191,652 74.85%
PUD ............................ 413 70,330,694 15.94
Condominium .................... 185 27,363,747 6.20
2-4 Family ..................... 64 13,231,933 3.00
----- ------------ -------
Total: ......................... 2,771 $441,118,026 100.00%
===== ============ =======
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL COMBINED MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
Lesser than or equal to 50.00 .. 98 $ 14,091,801 3.19%
50.01 - 55.00 ................. 36 5,511,258 1.25
55.01 - 60.00 ................. 58 10,142,083 2.30
60.01 - 65.00 ................. 119 23,942,681 5.43
65.01 - 70.00 ................. 131 24,661,961 5.59
70.01 - 75.00 ................. 225 42,484,054 9.63
75.01 - 80.00 ................. 1,005 158,576,575 35.95
80.01 - 85.00 ................. 248 48,506,704 11.00
85.01 - 90.00 ................. 407 73,597,278 16.68
90.01 - 95.00 ................. 144 19,364,839 4.39
95.01 - 100.00 ................. 300 20,238,792 4.59
----- ------------ -------
Total: ......................... 2,771 $441,118,026 100.00%
===== ============ =======
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 Documentation ............. 1,940 $287,148,894 65.10%
Stated Documentation ........... 831 153,969,131 34.90
----- ------------ -------
Total: ......................... 2,771 $441,118,026 100.00%
===== ============ =======
S-42
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
- -------------------------------- --------- ----------------- -----------------
500 - 524 ...................... 115 $ 19,203,705 4.35%
525 - 549 ...................... 213 33,672,432 7.63
550 - 574 ...................... 334 58,720,162 13.31
575 - 599 ...................... 519 80,725,580 18.30
600 - 624 ...................... 584 92,097,793 20.88
625 - 649 ...................... 458 71,300,741 16.16
650 - 674 ...................... 291 46,423,025 10.52
675 - 699 ...................... 141 20,960,143 4.75
700 - 724 ...................... 67 10,492,469 2.38
725 - 749 ...................... 33 5,534,581 1.25
750 - 774 ...................... 12 1,475,627 0.33
775 - 799 ...................... 4 511,768 0.12
----- ------------ -------
Total: ......................... 2,771 $441,118,026 100.00%
===== ============ =======
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
- -------------------------------- --------- ----------------- -----------------
Refinance - Cashout ............ 1,570 $293,351,097 66.50%
Purchase ....................... 968 111,184,187 25.21
Refinance - Rate Term .......... 233 36,582,741 8.29
----- ------------ -------
Total: ......................... 2,771 $441,118,026 100.00%
===== ============ =======
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 ........................ 2,637 $418,929,558 94.97%
Investment ..................... 109 17,263,732 3.91
Second Home .................... 25 4,924,736 1.12
----- ------------ -------
Total: ......................... 2,771 $441,118,026 100.00%
===== ============ =======
The occupancy status of a Mortgaged Property is as represented by the mortgagor
in its loan application.
S-43
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
- -------------------------------- --------- ----------------- -----------------
August 2006 .................... 1 $ 163,494 0.05%
October 2006 ................... 19 4,085,519 1.23
November 2006 .................. 7 1,298,296 0.39
January 2008 ................... 16 3,016,614 0.91
February 2008 .................. 39 7,035,611 2.12
March 2008 ..................... 165 29,234,987 8.83
April 2008 ..................... 1,351 228,267,386 68.93
May 2008 ....................... 211 34,467,060 10.41
June 2008 ...................... 7 1,108,155 0.33
January 2009 ................... 9 1,647,824 0.50
February 2009 .................. 9 1,374,474 0.42
March 2009 ..................... 19 2,736,389 0.83
April 2009 ..................... 73 13,738,343 4.15
May 2009 ....................... 14 2,390,187 0.72
June 2009 ...................... 1 267,846 0.08
April 2011 ..................... 2 343,190 0.10
----- ------------ -------
Total: ......................... 1,943 $331,175,375 100.00%
===== ============ =======
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
- -------------------------------- --------- ----------------- -----------------
2.500 - 2.999 ................ 1 $ 167,718 0.05%
3.000 - 3.499 ................ 1 311,228 0.09
3.500 - 3.999 ................ 2 309,329 0.09
4.000 - 4.499 ................ 8 1,537,064 0.46
4.500 - 4.999 ................ 20 3,828,684 1.16
5.000 - 5.499 ................ 52 8,746,810 2.64
5.500 - 5.999 ................ 150 30,833,965 9.31
6.000 - 6.499 ................ 313 56,934,759 17.19
6.500 - 6.999 ................ 467 86,134,319 26.01
7.000 - 7.499 ................ 344 54,773,595 16.54
7.500 - 7.999 ................ 328 52,018,087 15.71
8.000 - 8.499 ................ 127 19,534,928 5.90
8.500 - 8.999 ................ 64 8,873,623 2.68
9.000 - 9.499 ................ 29 3,109,516 0.94
9.500 - 9.999 ................ 29 3,369,865 1.02
10.000 - 10.499 ................ 2 177,093 0.05
10.500 - 10.999 ................ 3 248,133 0.07
11.000 - 11.499 ................ 1 151,774 0.05
11.500 - 11.999 ................ 1 50,914 0.02
12.000 - 12.499 ................ 1 63,971 0.02
----- ------------ -------
Total: ......................... 1,943 $331,175,375 100.00%
===== ============ =======
S-44
MAXIMUM MORTGAGE RATES OF THE GROUP I ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MAXIMUM MORTGAGE RATE (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
11.500 - 11.999 ................ 1 $ 215,433 0.07%
12.000 - 12.499 ................ 4 890,414 0.27
12.500 - 12.999 ................ 31 6,854,622 2.07
13.000 - 13.499 ................ 68 15,308,522 4.62
13.500 - 13.999 ................ 177 39,070,696 11.80
14.000 - 14.499 ................ 190 37,947,384 11.46
14.500 - 14.999 ................ 404 73,325,876 22.14
15.000 - 15.499 ................ 278 44,334,657 13.39
15.500 - 15.999 ................ 322 50,085,223 15.12
16.000 - 16.499 ................ 181 26,260,567 7.93
16.500 - 16.999 ................ 121 16,786,546 5.07
17.000 - 17.499 ................ 64 8,675,414 2.62
17.500 - 17.999 ................ 62 7,431,602 2.24
18.000 - 18.499 ................ 15 1,528,868 0.46
18.500 - 18.999 ................ 16 1,725,780 0.52
19.000 - 19.499 ................ 4 390,274 0.12
19.500 - 19.999 ................ 1 50,914 0.02
20.000 - 20.499 ................ 2 170,999 0.05
20.500 - 20.999 ................ 1 50,371 0.02
21.000 - 21.499 ................ 1 71,214 0.02
----- ------------ -------
Total: ......................... 1,943 $331,175,375 100.00%
===== ============ =======
MINIMUM MORTGAGE RATES OF THE GROUP I ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MINIMUM MORTGAGE RATE (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
4.500 - 4.999 ................ 1 $ 215,433 0.07%
5.000 - 5.499 ................ 3 491,987 0.15
5.500 - 5.999 ................ 15 2,624,078 0.79
6.000 - 6.499 ................ 60 13,580,194 4.10
6.500 - 6.999 ................ 155 35,371,314 10.68
7.000 - 7.499 ................ 173 35,041,874 10.58
7.500 - 7.999 ................ 399 74,802,507 22.59
8.000 - 8.499 ................ 288 47,326,832 14.29
8.500 - 8.999 ................ 344 53,797,629 16.24
9.000 - 9.499 ................ 184 26,609,360 8.03
9.500 - 9.999 ................ 143 20,006,973 6.04
10.000 - 10.499 ................ 71 9,354,779 2.82
10.500 - 10.999 ................ 65 7,621,165 2.30
11.000 - 11.499 ................ 17 1,871,698 0.57
11.500 - 11.999 ................ 16 1,725,780 0.52
12.000 - 12.499 ................ 4 390,274 0.12
12.500 - 12.999 ................ 1 50,914 0.02
13.000 - 13.499 ................ 2 170,999 0.05
13.500 - 13.999 ................ 1 50,371 0.02
14.000 - 14.499 ................ 1 71,214 0.02
----- ------------ -------
Total: ......................... 1,943 $331,175,375 100.00%
===== ============ =======
S-45
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
- -------------------------------- --------- ----------------- -----------------
1.000 .......................... 31 $ 6,133,289 1.85%
1.400 .......................... 1 234,000 0.07
1.500 .......................... 1,514 256,903,799 77.57
2.000 .......................... 11 2,179,365 0.66
3.000 .......................... 386 65,724,923 19.85
----- ------------ -------
Total: ......................... 1,943 $331,175,375 100.00%
===== ============ =======
SUBSEQUENT PERIODIC RATE CAPS OF THE GROUP I ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
SUBSEQUENT NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PERIODIC RATE CAP (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
1.000 .......................... 365 $ 63,197,786 19.08%
1.500 .......................... 1,577 267,808,539 80.87
3.000 .......................... 1 169,050 0.05
----- ------------ -------
Total: ......................... 1,943 $331,175,375 100.00%
===== ============ =======
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
- -------------------------------- --------- ----------------- -----------------
5.000 - 5.499 ................. 1 $ 196,281 0.06%
6.000 - 6.499 ................. 320 54,400,513 16.43
6.500 - 6.999 ................. 2 315,921 0.10
7.000 - 7.499 ................. 1,620 276,262,660 83.42
----- ------------ -------
Total: ......................... 1,943 $331,175,375 100.00%
===== ============ =======
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
- -------------------------------- --------- ----------------- -----------------
None ........................... 919 $128,665,748 29.17%
2 ............................. 1 140,114 0.03
6 ............................. 1 124,200 0.03
12 ............................. 119 26,445,107 6.00
24 ............................. 1,377 228,904,701 51.89
30 ............................. 1 181,326 0.04
36 ............................. 353 56,656,829 12.84
----- ------------ -------
Total: ......................... 2,771 $441,118,026 100.00%
===== ============ =======
S-46
ORIGINATOR OF THE GROUP I MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINATOR LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
Countrywide .................... 2,771 $441,118,026 100.00%
----- ------------ -------
Total: ......................... 2,771 $441,118,026 100.00%
===== ============ =======
S-47
GROUP II MORTGAGE LOAN CHARACTERISTICS
Approximately 48.50% of the Group II Mortgage Loans are fixed-rate
mortgage loans and approximately 51.50% 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 95.16% of the Group II Mortgage Loans are First Lien
Mortgage Loans and approximately 4.84% 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 4.70% of the Group II Mortgage Loans are Balloon Loans and
approximately 33.42% 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 $188,570. No Group II Mortgage Loan had a
principal balance at origination greater than approximately $841,500 or less
than approximately $12,730. The average principal balance of the Group II
Mortgage Loans as of the Cut-off Date was approximately $188,275. No Group II
Mortgage Loan had a principal balance as of the Cut-off Date greater than
approximately $840,037 or less than approximately $12,671.
The Group II Mortgage Loans had Mortgage Rates as of the Cut-off Date
ranging from approximately 5.250% per annum to approximately 15.250% per annum,
and the weighted average Mortgage Rate was approximately 8.113% per annum. As of
the Cut-off Date, the Group II ARM Loans had Gross Margins ranging from
approximately 4.650% per annum to approximately 10.490% per annum, Minimum
Mortgage Rates ranging from approximately 5.250% per annum to approximately
12.875% per annum and Maximum Mortgage Rates ranging from approximately 12.250%
per annum to approximately 19.875% per annum. As of the Cut-off Date, the
weighted average Gross Margin was approximately 6.965% the weighted average
Minimum Mortgage Rate was approximately 8.118% per annum and the weighted
average Maximum Mortgage Rate was approximately 15.047% per annum. The latest
first Adjustment Date following the Cut-off Date on any Group II ARM Loan occurs
on May 1, 2011, and the weighted average next Adjustment Date for all of the
Group II ARM Loans following the Cut-off Date is April 13, 2008.
The weighted average combined loan-to-value ratio of the Group II
Mortgage Loans at origination was approximately 80.18%. At origination, no Group
II Mortgage Loan had a combined loan-to-value ratio greater than approximately
100.00% or less than approximately 8.98%.
The weighted average remaining term to stated maturity of the Group II
Mortgage Loans was approximately 347 months as of the Cut-off Date. None of the
Group II Mortgage Loans will have a first due date prior to February 1, 2006 or
after July 1, 2006 or will have a remaining term to stated maturity of less than
174 months or greater than 359 months as of the Cut-off Date. The latest
maturity date of any Group II Mortgage Loan is June 1, 2036.
As of the Cut-off Date, the weighted average FICO Score for the Group II
Mortgage Loans that were scored is approximately 629. No Group II Mortgage Loan
had a FICO Score as of the Cut-off Date greater than 790 or less than 501.
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-48
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 - 15 Year ................ 31 $ 3,797,847 0.94%
Fixed - 20 Year ................ 11 528,457 0.13
Fixed - 30 Year ................ 827 145,897,844 36.23
Fixed - 30 Year IO ............. 99 26,479,422 6.58
Balloon - 15/30 ................ 335 18,599,603 4.62
ARM - 6 Month .................. 6 2,501,519 0.62
ARM - 2 Year/6 Month ........... 433 92,196,553 22.89
ARM - 2 Year/6 Month IO ........ 359 103,598,098 25.72
ARM - 2 Year/6 Month
30/40 Balloon ................ 1 323,611 0.08
ARM - 3 Year/6 Month ........... 19 3,186,867 0.79
ARM - 3 Year/6 Month IO ........ 15 4,530,959 1.13
ARM - 5 Year/6 Month ........... 3 1,078,714 0.27
----- ------------ -------
Total: ......................... 2,139 $402,719,496 100.00%
===== ============ =======
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 ..................... 1,785 $383,226,452 95.16%
Second Lien .................... 354 19,493,043 4.84
----- ------------ -------
Total: ......................... 2,139 $402,719,496 100.00%
===== ============ =======
S-49
PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE MORTGAGE OUTSTANDING AT OUTSTANDING AT
AT ORIGINATION ($) LOANS ORIGINATION ORIGINATION
- -------------------------------- --------- ----------------- -----------------
0.01 - 50,000.00 ........ 177 $ 6,094,944 1.51%
50,000.01 - 100,000.00 ........ 386 28,837,763 7.15
100,000.01 - 150,000.00 ........ 383 47,931,442 11.88
150,000.01 - 200,000.00 ........ 333 58,900,312 14.60
200,000.01 - 250,000.00 ........ 323 72,126,174 17.88
250,000.01 - 300,000.00 ........ 211 57,805,717 14.33
300,000.01 - 350,000.00 ........ 110 35,766,435 8.87
350,000.01 - 400,000.00 ........ 86 32,066,926 7.95
400,000.01 - 450,000.00 ........ 43 18,486,246 4.58
450,000.01 - 500,000.00 ........ 52 24,747,523 6.14
500,000.01 - 550,000.00 ........ 13 6,747,586 1.67
550,000.01 - 600,000.00 ........ 10 5,722,200 1.42
600,000.01 - 650,000.00 ........ 6 3,787,400 0.94
650,000.01 - 700,000.00 ........ 3 2,000,514 0.50
700,000.01 - 750,000.00 ........ 2 1,488,108 0.37
800,000.01 - 850,000.00 ........ 1 841,500 0.21
----- ------------ -------
Total: ........................ 2,139 $403,350,790 100.00%
===== ============ =======
PRINCIPAL BALANCES OF THE GROUP II MORTGAGE LOANS
AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
AS OF THE CUT-OFF DATE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
0.01 - 50,000.00 ........ 178 $ 6,135,776 1.52%
50,000.01 - 100,000.00 ........ 388 29,026,434 7.21
100,000.01 - 150,000.00 ........ 381 47,676,736 11.84
150,000.01 - 200,000.00 ........ 333 58,841,897 14.61
200,000.01 - 250,000.00 ........ 325 72,563,711 18.02
250,000.01 - 300,000.00 ........ 208 56,981,018 14.15
300,000.01 - 350,000.00 ........ 112 36,421,734 9.04
350,000.01 - 400,000.00 ........ 85 31,730,283 7.88
400,000.01 - 450,000.00 ........ 43 18,509,393 4.60
450,000.01 - 500,000.00 ........ 51 24,264,628 6.03
500,000.01 - 550,000.00 ........ 13 6,742,179 1.67
550,000.01 - 600,000.00 ........ 10 5,714,703 1.42
600,000.01 - 650,000.00 ........ 6 3,783,983 0.94
650,000.01 - 700,000.00 ........ 3 2,000,260 0.50
700,000.01 - 750,000.00 ........ 2 1,486,722 0.37
800,000.01 - 850,000.00 ........ 1 840,037 0.21
----- ------------ -------
Total: ........................ 2,139 $402,719,496 100.00%
===== ============ =======
S-50
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 ..................... 482 $127,388,162 31.63%
Florida ........................ 387 71,718,508 17.81
Texas .......................... 235 29,270,085 7.27
Arizona ........................ 84 14,520,208 3.61
Illinois ....................... 77 14,361,436 3.57
Nevada ......................... 65 13,996,478 3.48
Virginia ....................... 65 12,551,746 3.12
Washington ..................... 71 12,047,217 2.99
New York ....................... 40 10,068,845 2.50
New Jersey ..................... 45 9,833,785 2.44
Hawaii ......................... 20 7,399,216 1.84
Maryland ....................... 27 6,758,365 1.68
Georgia ........................ 44 5,638,102 1.40
Colorado ....................... 31 5,602,065 1.39
Tennessee ...................... 37 4,748,405 1.18
Ohio ........................... 34 4,076,764 1.01
Pennsylvania ................... 32 4,013,299 1.00
Oregon ......................... 23 3,821,515 0.95
North Carolina ................. 23 3,111,892 0.77
Alabama ........................ 29 2,820,394 0.70
Massachusetts .................. 18 2,815,256 0.70
Connecticut .................... 16 2,724,170 0.68
Idaho .......................... 18 2,663,890 0.66
Missouri ....................... 26 2,618,900 0.65
Michigan ....................... 19 2,525,772 0.63
Utah ........................... 16 2,519,010 0.63
New Hampshire .................. 12 2,466,311 0.61
Louisiana ...................... 19 2,191,063 0.54
Oklahoma ....................... 18 1,917,612 0.48
Indiana ........................ 18 1,872,923 0.47
Minnesota ...................... 7 1,813,935 0.45
Mississippi .................... 15 1,718,635 0.43
New Mexico ..................... 9 1,177,904 0.29
Rhode Island ................... 9 1,136,629 0.28
Wisconsin ...................... 11 1,047,583 0.26
District of Columbia ........... 3 989,121 0.25
South Carolina ................. 9 935,281 0.23
Alaska ......................... 5 916,746 0.23
Kentucky ....................... 9 771,525 0.19
West Virginia .................. 6 736,134 0.18
Arkansas ....................... 3 587,598 0.15
Kansas ......................... 2 541,809 0.13
Delaware ....................... 3 468,664 0.12
Wyoming ........................ 4 414,860 0.10
North Dakota ................... 3 283,584 0.07
Maine .......................... 2 281,765 0.07
Vermont ........................ 1 259,446 0.06
Montana ........................ 2 251,403 0.06
Nebraska ....................... 3 194,160 0.05
South Dakota ................... 1 106,348 0.03
Iowa ........................... 1 24,972 0.01
----- ------------ -------
Total: ......................... 2,139 $402,719,496 100.00%
===== ============ =======
S-51
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
- -------------------------------- --------- ----------------- -----------------
5.000 - 5.499 ................ 1 $ 254,000 0.06%
5.500 - 5.999 ................ 2 789,275 0.20
6.000 - 6.499 ................ 84 21,634,076 5.37
6.500 - 6.999 ................ 184 46,573,736 11.56
7.000 - 7.499 ................ 229 52,348,936 13.00
7.500 - 7.999 ................ 394 89,477,853 22.22
8.000 - 8.499 ................ 302 68,715,372 17.06
8.500 - 8.999 ................ 274 52,580,608 13.06
9.000 - 9.499 ................ 131 21,875,662 5.43
9.500 - 9.999 ................ 138 18,618,191 4.62
10.000 - 10.499 ................ 53 6,976,491 1.73
10.500 - 10.999 ................ 54 4,869,889 1.21
11.000 - 11.499 ................ 65 4,923,858 1.22
11.500 - 11.999 ................ 94 6,333,075 1.57
12.000 - 12.499 ................ 60 3,423,174 0.85
12.500 - 12.999 ................ 36 1,653,805 0.41
13.000 - 13.499 ................ 22 1,024,448 0.25
13.500 - 13.999 ................ 14 555,710 0.14
14.000 - 14.499 ................ 1 49,953 0.01
15.000 - 15.499 ................ 1 41,383 0.01
----- ------------ -------
Total: ......................... 2,139 $402,719,496 100.00%
===== ============ =======
ORIGINAL TERM OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL TERM MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
(MONTHS) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
180 ............................ 366 $ 22,397,451 5.56%
240 ............................ 11 528,457 0.13
360 ............................ 1,762 379,793,588 94.31
----- ------------ -------
Total: ......................... 2,139 $402,719,496 100.00%
===== ============ =======
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
REMAINING TERM TO MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
STATED MATURITY (MONTHS) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
121 - 180 ...................... 366 $ 22,397,451 5.56%
181 - 240 ...................... 11 528,457 0.13
301 - 360 ...................... 1,762 379,793,588 94.31
----- ------------ -------
Total: ......................... 2,139 $402,719,496 100.00%
===== ============ =======
S-52
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 ........ 1,496 $276,581,504 68.68%
PUD ............................ 456 90,588,386 22.49
Condominium .................... 150 26,849,071 6.67
2-4 Family ..................... 37 8,700,534 2.16
----- ------------ -------
Total: ......................... 2,139 $402,719,496 100.00%
===== ============ =======
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL COMBINED MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN-TO-VALUE RATIO (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
Lesser than or equal to 50.00 .. 68 $ 10,176,401 2.53%
50.01 - 55.00 ................. 26 4,482,640 1.11
55.01 - 60.00 ................. 45 10,254,883 2.55
60.01 - 65.00 ................. 54 10,954,139 2.72
65.01 - 70.00 ................. 78 15,360,654 3.81
70.01 - 75.00 ................. 123 27,913,820 6.93
75.01 - 80.00 ................. 906 202,088,848 50.18
80.01 - 85.00 ................. 138 32,005,843 7.95
85.01 - 90.00 ................. 189 42,167,957 10.47
90.01 - 95.00 ................. 101 14,044,682 3.49
95.01 - 100.00 ................. 411 33,269,629 8.26
----- ------------ -------
Total: ......................... 2,139 $402,719,496 100.00%
===== ============ =======
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
- -------------------------------- --------- ----------------- -----------------
Full Documentation ............. 1,323 $231,147,748 57.40%
Stated Documentation ........... 816 171,571,747 42.60
----- ------------ -------
Total: ......................... 2,139 $402,719,496 100.00%
===== ============ =======
S-53
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 ...................... 36 $ 4,980,133 1.24%
525 - 549 ...................... 71 13,042,759 3.24
550 - 574 ...................... 167 31,384,553 7.79
575 - 599 ...................... 349 62,624,698 15.55
600 - 624 ...................... 453 79,187,231 19.66
625 - 649 ...................... 441 80,029,839 19.87
650 - 674 ...................... 337 68,215,039 16.94
675 - 699 ...................... 172 36,288,541 9.01
700 - 724 ...................... 57 14,163,242 3.52
725 - 749 ...................... 34 8,303,419 2.06
750 - 774 ...................... 17 3,690,499 0.92
775 - 799 ...................... 5 809,542 0.20
----- ------------ -------
Total: ......................... 2,139 $402,719,496 100.00%
===== ============ =======
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 ....................... 1,301 $233,831,769 58.06%
Refinance - Cashout ............ 724 153,055,770 38.01
Refinance - Rate Term .......... 114 15,831,956 3.93
----- ------------ -------
Total: ......................... 2,139 $402,719,496 100.00%
===== ============ =======
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 ........................ 2,102 $396,126,978 98.36%
Investment ..................... 28 5,343,695 1.33
Second Home .................... 9 1,248,822 0.31
----- ------------ -------
Total: ......................... 2,139 $402,719,496 100.00%
===== ============ =======
The occupancy status of a Mortgaged Property is as represented by the mortgagor
in its loan application.
S-54
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
- -------------------------------- --------- ----------------- -----------------
August 2006 .................... 1 $ 448,083 0.22%
October 2006 ................... 4 1,703,699 0.82
November 2006 .................. 1 349,736 0.17
January 2008 ................... 9 1,914,993 0.92
February 2008 .................. 20 4,729,131 2.28
March 2008 ..................... 81 18,823,511 9.08
April 2008 ..................... 591 147,419,380 71.07
May 2008 ....................... 87 22,137,690 10.67
June 2008 ...................... 5 1,093,558 0.53
January 2009 ................... 5 1,251,459 0.60
February 2009 .................. 1 198,858 0.10
March 2009 ..................... 1 334,304 0.16
April 2009 ..................... 23 4,849,968 2.34
May 2009 ....................... 4 1,083,237 0.52
April 2011 ..................... 2 801,905 0.39
May 2011 ....................... 1 276,809 0.13
----- ------------ -------
Total: ......................... 836 $207,416,322 100.00%
===== ============ =======
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
- -------------------------------- --------- ----------------- -----------------
4.500 - 4.999 ................ 5 $ 835,770 0.40%
5.000 - 5.499 ................ 12 2,613,326 1.26
5.500 - 5.999 ................ 52 14,940,519 7.20
6.000 - 6.499 ................ 168 42,491,734 20.49
6.500 - 6.999 ................ 193 50,177,419 24.19
7.000 - 7.499 ................ 172 42,387,012 20.44
7.500 - 7.999 ................ 137 32,971,986 15.90
8.000 - 8.499 ................ 48 10,866,247 5.24
8.500 - 8.999 ................ 37 7,954,113 3.83
9.000 - 9.499 ................ 6 1,093,161 0.53
9.500 - 9.999 ................ 4 806,133 0.39
10.000 - 10.499 ................ 2 278,902 0.13
----- ------------ -------
Total: ......................... 836 $207,416,322 100.00%
===== ============ =======
S-55
MAXIMUM MORTGAGE RATES OF THE GROUP II ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MAXIMUM MORTGAGE RATE (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
12.000 - 12.499 ................ 1 $ 254,000 0.12%
12.500 - 12.999 ................ 3 1,015,784 0.49
13.000 - 13.499 ................ 33 10,101,691 4.87
13.500 - 13.999 ................ 54 17,254,322 8.32
14.000 - 14.499 ................ 106 27,780,207 13.39
14.500 - 14.999 ................ 177 46,807,523 22.57
15.000 - 15.499 ................ 173 43,005,402 20.73
15.500 - 15.999 ................ 131 29,966,936 14.45
16.000 - 16.499 ................ 60 12,617,264 6.08
16.500 - 16.999 ................ 57 11,602,978 5.59
17.000 - 17.499 ................ 21 3,879,497 1.87
17.500 - 17.999 ................ 11 1,877,375 0.91
18.000 - 18.499 ................ 4 710,354 0.34
18.500 - 18.999 ................ 3 363,218 0.18
19.500 - 19.999 ................ 2 179,769 0.09
----- ------------ -------
Total: ......................... 836 $207,416,322 100.00%
===== ============ =======
MINIMUM MORTGAGE RATES OF THE GROUP II ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
MINIMUM MORTGAGE RATE (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
5.000 - 5.499 ................ 1 $ 254,000 0.12%
5.500 - 5.999 ................ 3 1,110,375 0.54
6.000 - 6.499 ................ 20 6,982,325 3.37
6.500 - 6.999 ................ 43 13,385,599 6.45
7.000 - 7.499 ................ 107 27,591,344 13.30
7.500 - 7.999 ................ 179 48,768,200 23.51
8.000 - 8.499 ................ 181 45,269,081 21.83
8.500 - 8.999 ................ 135 30,674,626 14.79
9.000 - 9.499 ................ 64 13,543,558 6.53
9.500 - 9.999 ................ 60 12,365,873 5.96
10.000 - 10.499 ................ 21 3,897,711 1.88
10.500 - 10.999 ................ 12 2,096,647 1.01
11.000 - 11.499 ................ 5 933,996 0.45
11.500 - 11.999 ................ 3 363,218 0.18
12.500 - 12.999 ................ 2 179,769 0.09
----- ------------ -------
Total: ......................... 836 $207,416,322 100.00%
===== ============ =======
S-56
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
- -------------------------------- --------- ----------------- -----------------
1.000 .......................... 6 $ 2,501,519 1.21%
1.500 .......................... 717 177,360,172 85.51
2.000 .......................... 2 468,762 0.23
3.000 .......................... 111 27,085,869 13.06
----- ------------ -------
Total: ......................... 836 $207,416,322 100.00%
===== ============ =======
SUBSEQUENT PERIODIC RATE CAPS OF THE GROUP II ARM LOANS
AGGREGATE % OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
SUBSEQUENT NUMBER OF OUTSTANDING AS OF OUTSTANDING AS OF
PERIODIC RATE CAP (%) ARM LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
1.000 .......................... 98 $ 25,005,744 12.06%
1.500 .......................... 738 182,410,578 87.94
----- ------------ -------
Total: ......................... 836 $207,416,322 100.00%
===== ============ =======
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
- -------------------------------- --------- ----------------- -----------------
6.000 - 6.499 .................. 92 $ 22,648,325 10.92%
6.500 - 6.999 .................. 1 122,321 0.06
7.000 - 7.499 .................. 743 184,645,676 89.02
----- ------------ -------
Total: ......................... 836 $207,416,322 100.00%
===== ============ =======
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
- -------------------------------- --------- ----------------- -----------------
None ........................... 458 $ 75,836,640 18.83%
12 ............................. 59 13,767,491 3.42
24 ............................. 712 151,410,014 37.60
36 ............................. 133 22,949,314 5.70
60 ............................. 777 138,756,036 34.45
----- ------------ -------
Total: ......................... 2,139 $402,719,496 100.00%
===== ============ =======
S-57
ORIGINATOR OF THE GROUP II MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINATOR LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- -------------------------------- --------- ----------------- -----------------
Countrywide .................... 2,139 $402,719,496 100.00%
----- ------------ -------
Total: ......................... 2,139 $402,719,496 100.00%
===== ============ =======
S-58
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"). The Index figure used for each Adjustment
Date will be the most recently available Index as of the Adjustment Date. 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
The information set forth in this section has been provided to the
Depositor by Countrywide Home Loans, Inc. ("Countrywide" or the "Originator").
UNDERWRITING STANDARDS
GENERAL
CREDIT BLEMISHED MORTGAGE LOANS. The following is a description of the
underwriting procedures customarily employed by Countrywide Home Loans with
respect to first lien credit-blemished mortgage loans and second lien
credit-blemished mortgage loans (collectively, "Credit-Blemished Mortgage
Loans"). Countrywide Home Loans has been originating first lien credit-blemished
mortgage loans since 1995, and second lien credit-blemished mortgage loans since
1997. Countrywide Home Loans produces its Credit-Blemished Mortgage Loans
through its Consumer Markets, Full Spectrum Lending, Correspondent Lending and
Wholesale Lending Divisions. Prior to the funding of any Credit-Blemished
Mortgage Loan, Countrywide Home Loans underwrites the related mortgage loan in
accordance with the underwriting standards established by Countrywide Home
Loans. In general, the mortgage loans are underwritten centrally by a
specialized group of underwriters who are familiar with the unique
characteristics of Credit-Blemished Mortgage Loans. In general, Countrywide Home
Loans does not purchase any Credit-Blemished Mortgage Loan that it has not
itself underwritten.
Countrywide Home Loans' underwriting standards are primarily intended to
evaluate the value and adequacy of the mortgaged property as collateral for the
proposed mortgage loan and the borrower's credit standing and repayment ability.
On a case by case basis, Countrywide Home Loans may determine that, based upon
compensating factors, a prospective borrower not strictly qualifying under the
underwriting risk category guidelines described below warrants an underwriting
exception. Compensating factors may include low loan-to-value ratio or combined
loan-to-value ratio, as applicable, low debt-to-income ratio, stable employment,
time in the same residence or other factors. It is expected that a significant
number of the Mortgage Loans will have been originated based on these types of
underwriting exceptions.
Each prospective borrower completes an application for credit which
includes information with respect to the applicant's assets, liabilities, income
and employment history, as well as certain other personal information.
Countrywide Home Loans requires an independent credit bureau report on the
credit history of each applicant in order to evaluate the applicant's prior
willingness and/or ability to repay. The report typically contains information
relating to credit history with local and national merchants and lenders,
installment debt payments and any record of defaults, bankruptcy, repossession,
suits or judgments, among other matters.
S-59
After obtaining all applicable employment, credit and property
information, Countrywide Home Loans uses a debt-to-income ratio to assist in
determining whether the prospective borrower has sufficient monthly income
available to support the payments of principal and interest on the mortgage loan
in addition to other monthly credit obligations. The "DEBT-TO-INCOME RATIO" is
the ratio of the borrower's total monthly credit obligations to the borrower's
gross monthly income. The maximum monthly debt-to-income ratio varies depending
upon a borrower's credit grade and documentation level (as described below) but
does not generally exceed 55%. Variations in the monthly debt-to-income ratios
limit are permitted based on compensating factors.
Countrywide Home Loans' underwriting standards are applied in accordance
with applicable federal and state laws and regulations and require an
independent appraisal of the mortgaged property prepared on a Uniform
Residential Appraisal Report (Form 1004) or other appraisal form as applicable
to the specific mortgaged property type. Each appraisal includes a market data
analysis based on recent sales of comparable homes in the area and, where deemed
appropriate, replacement cost analysis based on the current cost of constructing
a similar home and generally is required to have been made not earlier than 180
days prior to the date of origination of the mortgage loan. Every independent
appraisal is reviewed by a representative of Countrywide Home Loans before the
loan is funded, and an additional review appraisal is generally performed in
connection with appraisals not provided by Landsafe Appraisals, Inc., a wholly
owned subsidiary of Countrywide Home Loans. In most cases, properties that are
not at least in average condition (including properties requiring major deferred
maintenance) are not acceptable as collateral for a Credit-Blemished Mortgage
Loan. The maximum loan amount varies depending upon a borrower's credit grade,
Credit Bureau Risk Score, and documentation level but does not generally exceed
$1,000,000 for first lien credit-blemished mortgage loans, or $175,000 for
second lien credit-blemished mortgage loans. Variations in maximum loan amount
limits are permitted based on compensating factors.
Countrywide Home Loans' underwriting standards permit first lien
credit-blemished mortgage loans with loan-to-value ratios at origination of up
to 100% and second lien credit-blemished mortgage loans with combined
loan-to-value ratios at origination of up to 100% depending on the program, type
and use of the property, documentation level, creditworthiness of the borrower,
debt-to-income ratio and loan amount.
Countrywide Home Loans requires title insurance on all Credit-Blemished
Mortgage Loans. Countrywide Home Loans also requires that fire and extended
coverage casualty insurance be maintained on the mortgaged property in an amount
at least equal to the principal balance or the replacement cost of the mortgaged
property, whichever is less.
Countrywide Home Loans' Credit-Blemished Mortgage Loan underwriting
standards are more flexible than the standards generally acceptable to
Countrywide Home Loans for its non-credit blemished mortgage loans with regard
to the borrower's credit standing and repayment ability. While more flexible,
Countrywide Home Loans' underwriting guidelines still place primary reliance on
a borrower's ability to repay; however Countrywide Home Loans may require lower
loan-to-value ratios or combined loan-to-value ratios, as applicable, than for
loans underwritten to more traditional standards. Borrowers who qualify
generally have payment histories and debt-to-income ratios which would not
satisfy more traditional underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior bankruptcies.
Countrywide Home Loans' Credit-Blemished Mortgage Loan underwriting guidelines
establish the maximum permitted loan-to-value ratio or combined loan-to-value
ratio, as applicable, for each loan type based upon these and other risk factors
with more risk factors resulting in lower ratios.
Countrywide Home Loans underwrites or originates Credit-Blemished
Mortgage Loans pursuant to alternative sets of underwriting criteria under its
Full Documentation Loan Program
S-60
(the "FULL DOC Program"), and Stated Income Loan Program (the "STATED INCOME
PROGRAM"). Under each of the underwriting programs, Countrywide Home Loans
verifies the loan applicant's sources and amounts of income (except under the
Stated Income Program where the amount of income is not verified), calculates
the amount of income from all sources indicated on the loan application, reviews
the credit history of the applicant, calculates the debt-to-income ratio to
determine the applicant's ability to repay the loan, and reviews the appraisal
of the mortgaged property for compliance with Countrywide Home Loans'
underwriting standards.
Under the Stated Income Program, the borrower's employment and income
sources and amounts must be stated on the borrower's application for credit. The
borrower's income as stated must be reasonable for the related occupation and
the determination as to reasonableness is subject to the loan underwriter's
discretion. However, the borrower's income as stated on the application is not
independently verified. With respect to first lien credit-blemished mortgage
loans, maximum loan-to-value ratios are generally lower than those permitted
under the Full Doc Program. Except as otherwise stated above, the same mortgage
credit, consumer credit and collateral related underwriting guidelines apply.
Under the Full Doc and Stated Income Programs, various risk categories
are used to grade the likelihood that the borrower will satisfy the repayment
conditions of the mortgage loan. These risk categories establish the maximum
permitted loan-to-value ratio or combined loan-to-value ratio, as applicable,
debt-to-income ratio and loan amount, given the borrower's credit history, the
occupancy status of the mortgaged property and the type of mortgaged property.
In general, more (or more recent) derogatory credit items such as delinquent
mortgage payments or prior bankruptcies result in a loan being assigned to a
higher credit risk category.
Countrywide Home Loans' underwriting guidelines for Credit-Blemished
Mortgage Loans utilize credit grade categories to grade the likelihood that the
borrower will satisfy the repayment conditions of the mortgage loans. In
general, a credit grade category is assigned by evaluating a borrower's mortgage
history, time since bankruptcy, and time since foreclosure or notice of default.
In the case of borrowers with less than twelve months mortgage history, credit
grade category is assigned by evaluating, time since bankruptcy, and time since
foreclosure or notice of default. The credit grade categories establish
guidelines for determining maximum allowable loan-to-value ratios or combined
loan-to-value ratios, as applicable, and loan amounts given the borrower's
Credit Bureau Risk Score, and maximum allowable debt-to-income ratios for a
given mortgage loan. A summary of the credit grade categories is set forth
below.
FIRST LIEN CREDIT GRADE CATEGORY "A"
- ------------------------------------
Credit Grade Category: "A"
LOAN-TO-VALUE RATIO: Maximum of 100%
DEBT-TO-INCOME RATIO: Maximum of 55%
LOAN AMOUNT: Maximum of $1,000,000.
CREDIT BUREAU RISK SCORE: Minimum of --
500 for loan amounts up to $700,000,
560 for loan amounts of $700,001 to $750,000,
580 for loan amounts of $750,001 to $850,000, or
600 for loan amounts of $850,001 to $1,000,000.
MORTGAGE HISTORY: No more than 1 non-consecutive delinquency of 30 days
during the past 12 months.
BANKRUPTCY: At least 1 day since discharge or 2 years since dismissal of
Chapter 7 or 13 Bankruptcy.
FORECLOSURE/NOTICE OF DEFAULT: At least 3 years since foreclosure/notice
of default released.
S-61
SECOND LIEN CREDIT GRADE CATEGORY "A"
- -------------------------------------
Credit Grade Category: "A"
COMBINED LOAN-TO-VALUE RATIO ("CLTV"): Maximum of 100%
DEBT-TO-INCOME RATIO: Maximum of 55% LOAN AMOUNT: Maximum of $175,000.
CREDIT BUREAU RISK SCORE: Minimum of--
560 for loan amounts up to $100,000,
580 for loan amounts of $100,001 to $125,000,
600 for loan amounts of $125,001 to $137,500,
620 for loan amounts of $137,501 to $162,500, and
640 for loan amounts of $162,501 to $175,000.
MORTGAGE HISTORY: No more than 1 non-consecutive delinquency of 30 days
during the past 12 months.
BANKRUPTCY: At least 1 day since discharge or 2 years since dismissal of
Chapter 7 or 13 Bankruptcy.
FORECLOSURE/NOTICE OF DEFAULT: At least 3 years since foreclosure/notice
of default released.
FIRST LIEN CREDIT GRADE CATEGORY "A-"
- -------------------------------------
Credit Grade Category: "A-"
LOAN-TO-VALUE RATIO: Maximum of 90%
DEBT-TO-INCOME RATIO: Maximum of 55%
LOAN AMOUNT: Maximum of $850,000.
CREDIT BUREAU RISK SCORE: Minimum of --
500 for loan amounts up to $650,000,
580 for loan amounts of $650,001 to $750,000, or
620 for loan amounts of $750,001 to $850,000.
MORTGAGE HISTORY: No more than 2 non-consecutive delinquencies of 30
days during the past 12 months.
BANKRUPTCY: At least 1 day since discharge or 2 years since dismissal of
Chapter 7 or 13 Bankruptcy.
FORECLOSURE/NOTICE OF DEFAULT: At least 3 years since foreclosure/notice
of default released.
SECOND LIEN CREDIT GRADE CATEGORY "A-"
- --------------------------------------
Credit Grade Category: "A-"
COMBINED LOAN-TO-VALUE RATIO: Maximum of 85%
DEBT-TO-INCOME RATIO: Maximum of 55%
LOAN AMOUNT: Maximum of $100,000.
CREDIT BUREAU RISK SCORE: Minimum of 560.
MORTGAGE HISTORY: No more than 2 non-consecutive delinquencies of 30
days during the past 12 months.
BANKRUPTCY: At least 1 day since discharge or 2 years since dismissal of
Chapter 7 or 13 Bankruptcy.
FORECLOSURE/NOTICE OF DEFAULT: At least 3 years since foreclosure/notice
of default released.
FIRST LIEN CREDIT GRADE CATEGORY "B"
- ------------------------------------
Credit Grade Category: "B"
LOAN-TO-VALUE RATIO: Maximum of 85%
DEBT-TO-INCOME RATIO: Maximum of 55%
S-62
LOAN AMOUNT: Maximum of $650,000.
CREDIT BUREAU RISK SCORE: Minimum of --
500 for loan amounts up to $600,000,
580 for loan amounts of $600,001 to $650,000.
MORTGAGE HISTORY: No more than 1 delinquency of 60 days in the past 12
months. Delinquencies of 30 days are not restricted.
BANKRUPTCY: At least 1 day since discharge or 1 year since dismissal of
Chapter 7 or 13 Bankruptcy, or open Chapter 13 Bankruptcy must be
paid-off through escrow at funding.
FORECLOSURE/NOTICE OF DEFAULT: At least 2 years since foreclosure/notice
of default released.
SECOND LIEN CREDIT GRADE CATEGORY "B"
- -------------------------------------
Credit Grade Category: "B"
COMBINED LOAN-TO-VALUE RATIO: Maximum of 80%
DEBT-TO-INCOME RATIO: Maximum of 55%
LOAN AMOUNT: Maximum of $100,000.
CREDIT BUREAU RISK SCORE: Minimum of 560.
MORTGAGE HISTORY: No more than 1 delinquency of 60 days in the past 12
months. Delinquencies of 30 days are not restricted.
BANKRUPTCY: At least 1 day since discharge or 1 year since dismissal of
Chapter 7 or 13 Bankruptcy.
FORECLOSURE/NOTICE OF DEFAULT: At least 2 years since foreclosure/notice
of default released.
FIRST LIEN CREDIT GRADE CATEGORY "C"
- ------------------------------------
Credit Grade Category: "C"
LOAN-TO-VALUE RATIO: Maximum of 80%
DEBT-TO-INCOME RATIO: Maximum of 55%
LOAN AMOUNT: Maximum of $600,000.
CREDIT BUREAU RISK SCORE: Minimum of --
500 for loan amounts up to $550,000, or
580 for loan amounts of $550,001 to $600,000.
MORTGAGE HISTORY: No more than 1 delinquency of 90 days during the past
12 months. Delinquencies of 30 days and 60 days are not restricted.
BANKRUPTCY: At least 1 day since discharge or 1 year since dismissal of
Chapter 7 or 13 Bankruptcy, or open Chapter 13 Bankruptcy must be
paid-off through escrow at funding.
FORECLOSURE/NOTICE OF DEFAULT: At least 1 year since foreclosure/notice
of default released.
SECOND LIEN CREDIT GRADE CATEGORY "C"
- -------------------------------------
Credit Grade Category: "C"
COMBINED LOAN-TO-VALUE RATIO: Maximum of 70%
DEBT-TO-INCOME RATIO: Maximum of 55%
LOAN AMOUNT: Maximum of $100,000.
CREDIT BUREAU RISK SCORE: Minimum of 560.
MORTGAGE HISTORY: No more than 1 delinquency of 90 days during the past
12 months. Delinquencies of 30 days and 60 days are not restricted.
BANKRUPTCY: At least 1 day since discharge or 1 year since dismissal of
Chapter 7 or 13 Bankruptcy.
FORECLOSURE/NOTICE OF DEFAULT: At least 1 year since foreclosure/notice
of default released.
S-63
FIRST LIEN CREDIT GRADE CATEGORIES "C-" AND "D"
- -----------------------------------------------
Credit Grade Category: "C-"
LOAN-TO-VALUE RATIO: Maximum of 70%
DEBT-TO-INCOME RATIO: Maximum of 55%
LOAN AMOUNT: Maximum of $500,000.
CREDIT BUREAU RISK SCORE: Minimum of 500.
MORTGAGE HISTORY: No more than 2 delinquencies of 90 days during the
past 12 months. Delinquencies of 30 days and 60 days are not restricted.
BANKRUPTCY: At least 1 day since discharge or dismissal of Chapter 7 or
13 Bankruptcy, or open Chapter 13 Bankruptcy must be paid-off through
escrow at funding.
FORECLOSURE/NOTICE OF DEFAULT: None at time of funding.
Credit Grade Category: "D"
LOAN-TO-VALUE RATIO: Maximum of 65%
DEBT-TO-INCOME RATIO: Maximum of 45%
LOAN AMOUNT: Maximum of $250,000.
CREDIT BUREAU RISK SCORE: Minimum of 500.
MORTGAGE HISTORY: Open Notice of default must be cured at time of
funding.
BANKRUPTCY: At least 1 day since discharge or dismissal of Chapter 7 or
13 Bankruptcy, or open Chapter 13 Bankruptcy must be paid-off through
escrow at funding.
FORECLOSURE/NOTICE OF DEFAULT: Notice of default is acceptable but must
be cured at time of funding.
The loan-to-value ratios or combined loan-to-value ratios, as
applicable, debt-to-income ratios, and loan amounts stated above are maximum
levels for a given credit grade category. There are additional restrictions on
loan-to-value ratios or combined loan-to-value ratios, as applicable,
debt-to-income ratios, and loan amounts depending on, but not limited to, the
occupancy status of the mortgaged property, the type of mortgaged property, and
the documentation program.
The "CREDIT BUREAU RISK SCORE" is a statistical credit score obtained by
Countrywide Home Loans in connection with the loan application to help assess a
borrower's creditworthiness. Credit Bureau Risk Scores are generated by models
developed by a third party and are made available to mortgage lenders through
three national credit bureaus. The models were derived by analyzing data on
consumers in order to establish patterns which are believed to be indicative of
the borrower's probability of default. The Credit Bureau Risk Scores are based
on a borrower's historical credit data, including, among other things, payment
history, delinquencies on accounts, levels of outstanding indebtedness, length
of client history, types of credit, and bankruptcy experience. Credit Bureau
Risk Scores range from approximately 250 to approximately 900, with higher
scores indicating an individual with a more favorable credit history compared to
an individual with a lower score. However, a Credit Bureau Risk Score purports
only to be a measurement of the relative degree of risk a borrower represents to
a lender, i.e., that a borrower with a higher score is statistically expected to
be less likely to default in payment than a borrower with a lower score. In
addition, it should be noted that Credit Bureau Risk Scores were developed to
indicate a level of default probability over a two-year period which does not
correspond to the life of a mortgage loan. Furthermore, Credit Bureau Risk
Scores were not developed specifically for use in connection with mortgage
loans, but for consumer loans in general. Therefore, a Credit Bureau Risk Score
does not take into consideration the effect of mortgage loan characteristics on
the probability of repayment by the borrower. The Credit Bureau Risk Scores set
forth in the statistical information regarding the Credit- Blemished Mortgage
Loans were obtained either at the time of origination of the Mortgage Loan or
more recently. The Credit Bureau Risk Score is used as an aid to, not a
substitute for, the underwriter's judgment.
S-64
In determining a Credit Bureau Risk Score for a particular borrower,
Countrywide Home Loans attempts to obtain Credit Bureau Risk Scores from each of
the three national credit bureaus that produce these scores. Although different
scores may be available from each of the three national credit bureaus for a
particular borrower, Countrywide Home Loans will use only one score in its
determination of whether to underwrite a mortgage loan, based on the following
methodology: if scores are available from each of the three national credit
bureaus, Countrywide Home Loans will disregard the highest and lowest scores,
and use the remaining score; and if scores are available from only two of the
three national credit bureau, Countrywide Home Loans will use the lower of the
two scores. In the case of a mortgage loan with more than one applicant,
Countrywide Home Loans will use the Credit Bureau Risk Score of the applicant
contributing the highest percentage of the total qualifying income.
If only one score is available, or no score is available, Countrywide
Home Loans will follow its limited credit guidelines. Under the limited credit
guidelines, credit histories may be developed using rent verification from
current and/or previous landlords, proof of payment to utilities such as
telephone, or verification from other sources of credit or services for which
the applicant has (or had) a regular financial obligation. In general,
applications with the aforementioned type of credit documentation are limited to
A- risk and 80% loan-to-value ratio or combined loan-to-value ratio, as
applicable. For applicants with established mortgage payment history of at least
12 months and one credit score or no credit score, the mortgage payment history
may be used in lieu of a credit score to determine a risk grade.
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. If, as of the Closing Date, any material pool
characteristic differs by 5% or more from the description in this prospectus
supplement, revised disclosure will be provided either in a supplement to this
prospectus supplement or in a Current Report on Form 8-K.
YIELD ON THE CERTIFICATES
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, the Servicer or the Sponsor). The
Mortgage Loans may be prepaid by the mortgagors at any time; however, as
described under
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"The Mortgage Pool" in this prospectus supplement, with respect to approximately
75.77% 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
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
S-66
Distributions on the 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 Certificates" in this prospectus
supplement.
In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. In addition, default rates may be higher
for mortgage loans used to refinance an existing mortgage loan. In the event of
a mortgagor's default on a Mortgage Loan, there can be no assurance that
recourse 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 36.17% 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 63.83% 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 six months or two, three or five
years with respect to Delayed First Adjustment Mortgage Loans. The Pass-Through
Rate on the Class A Certificates and Mezzanine Certificates adjusts monthly
based upon One-Month LIBOR, subject to the applicable Net WAC Pass-Through Rate
(as defined under "Description of the Certificates--Glossary" in this prospectus
supplement), 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 62.87% 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 and the supplemental interest
trust (including any Net Swap Payment and any Swap Termination Payment payable
to the Swap Provider which was not caused by the occurrence of a Swap Provider
Trigger Event), may not equal the amount of interest that would accrue at
One-Month LIBOR plus the applicable spread on the Class A Certificates and
Mezzanine Certificates during the related Interest Accrual Period; however, any
shortfall of this kind will be payable to the holders of such certificates, but
only to the extent and in the priority described under "Description of the
Certificates--Overcollateralization Provisions" and "Description of the
Certificates--The Cap Provider and the Swap Provider--The Swap Agreement" 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
Class A Certificates and Mezzanine Certificates, which would adversely affect
the yield to maturity on such certificates.
If the pass-through rates on the Class A Certificates or Mezzanine
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 the Cap Provider is required to make any cap payments on such
Distribution Date and to the extent that on such Distribution Date or future
Distribution Dates there are any available funds remaining after certain other
distributions on the Class A Certificates and Mezzanine Certificates and the
payment of certain fees and expenses of the trust and the supplemental interest
trust (including any Net Swap Payment payable to the Swap Provider and any Swap
Termination Payment payable to the Swap Provider which was not caused by the
occurrence of a
S-67
Swap Provider Trigger Event). The ratings on the Class A Certificates and
Mezzanine Certificates will not address the likelihood of any such recovery of
such interest shortfalls by holders of those certificates from amounts received
or advanced on the Mortgage Loans. In addition, any Net Swap Payment payable by
the Swap Provider on any given Distribution Date will be available to pay any
Net WAC Rate Carryover Amounts remaining unpaid on such Distribution Date after
taking into account any amounts paid in respect thereof from collections,
advances and other recoveries on the Mortgage Loans.
As described under "Description of the Certificates--Allocation of
Losses; Subordination," amounts otherwise distributable to holders of the
Mezzanine Certificates and the Class CE Certificates may be made available to
protect the holders of the Class A Certificates against interruptions in
distributions due to certain mortgagor delinquencies, to the extent not covered
by P&I Advances. Such delinquencies may affect the yield to investors in the
Mezzanine Certificates and, even if subsequently cured, will affect the timing
of the receipt of distributions by the holders of the Mezzanine Certificates. In
addition, the rate of delinquencies or losses will affect the rate of principal
payments on the Mezzanine Certificates. See "Description of the
Certificates--Principal Distributions on the 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 payments. The
"Assumed Final Distribution Date" for each class of the Offered Certificates is
the Distribution Date occurring in July 2036. 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 100% PPC. To assume 100% PPC is to
assume (i) a per annum prepayment rate of 5% of the then outstanding principal
balance of the mortgage loans in the first month of the life of the mortgage
loans, (ii) an additional 2% per annum in each month thereafter through the
eleventh month, (iii) building to a constant prepayment rate of 27% per annum
beginning in the twelfth month and remaining constant until the twenty-third
month, (iv) increasing to and remaining constant at a prepayment rate of 60% per
annum beginning in the twenty-fourth month until the twenty-seventh month and
(v) decreasing and remaining constant at a prepayment rate of 30% per annum from
the twenty-eighth month and thereafter; provided, however, the prepayment rate
will not exceed 85% per annum in any period for any percentage of PPC. 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 approximate 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; provided, however, the prepayment rate will not
exceed 85% per annum in any period for any percentage of PPC. No representation
is made that the Mortgage Loans will prepay in accordance with such
S-68
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 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 258 assumed mortgage loans with
the characteristics set forth below, (ii) distributions on the certificates are
received, in cash, on the 25th day of each month, commencing in August 2006;
(iii) the Mortgage Loans prepay at the percentages of 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 Sponsor, the Servicer, the Master Servicer or any other person
purchases from the trust fund any Mortgage Loan under any obligation or option
under the pooling and servicing agreement, except as indicated in footnote two
in the tables; (vi) scheduled monthly payments on the Mortgage Loans are
received on the first day of each month commencing in August 2006, and are
computed prior to giving effect to any prepayments received in the prior month;
(vii) prepayments representing payment in full of individual Mortgage Loans are
received on the last day of each month commencing in July 2006, and include 30
days' interest thereon; (viii) the scheduled monthly payment for each Mortgage
Loan is calculated based on the assumed mortgage loan characteristics stated
below; (ix) the certificates are purchased on July 25, 2006; (x) Six-Month LIBOR
remains constant at 5.5800% 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 5.3688% per annum; (xii) the Class P
Certificates have a Certificate Principal Balance equal to zero; (xiii) the
Servicer's fee is assumed to be equal to 0.5000% per annum, the fee payable to
the Master Servicer is assumed to be equal to 0.0000% per annum and the Credit
Risk Manager's fee is assumed to be equal to 0.0140% per annum; and (xiv) the
fixed swap payment is calculated based on a per annum rate of 5.480%.
S-69
Assumed Group I Mortgage Loan Characteristics
Remaining Initial Subse- Months Rate Remaining
Term Remaining Maximum Minimum Periodic quent to Next Adjust- Interest
Principal to Amortization Mortgage Gross Mortgage Mortgage Rate Periodic Rate ment Only
Balance Maturity Term Age Rate Index Margin Rate Rate Cap Rate Cap Adjust- Frequency Term
($) (Months) (Months) (Months) (%) Type* (%) (%) (%) (%) (%) ment (Months) (Months)
- ------------------------------------------------------------------------------------------------------------------------------------
56,534,420.21 357 357 3 8.763 LIB6M 6.831 15.653 8.691 1.662 1.420 20 6 0
3,015,288.94 357 357 3 8.584 LIB6M 6.917 15.414 8.544 1.755 1.415 21 6 21
13,448,207.48 357 357 3 8.458 LIB6M 7.209 15.405 8.428 1.648 1.466 21 6 57
333,295.57 355 355 5 9.403 LIB6M 8.904 16.211 9.403 1.787 1.404 19 6 0
1,793,069.58 357 357 3 8.631 LIB6M 6.849 15.240 8.472 1.970 1.189 17 6 0
213,000.00 357 357 3 8.950 LIB6M 7.950 15.950 8.950 1.500 1.500 21 6 57
437,972.70 355 355 5 8.598 LIB6M 7.496 15.598 7.801 1.500 1.500 19 6 0
194,296.71 354 354 6 8.625 LIB6M 7.625 14.625 8.625 3.000 1.000 18 6 0
132,000.00 356 356 4 9.500 LIB6M 8.500 16.500 9.500 1.500 1.500 20 6 56
104,713.73 356 356 4 7.975 LIB6M 6.975 13.975 7.975 3.000 1.000 20 6 0
196,481.76 357 357 3 9.100 LIB6M 8.100 16.100 9.100 1.500 1.500 21 6 0
124,200.00 357 357 3 8.650 LIB6M 7.650 14.650 7.650 3.000 1.000 21 6 57
5,366,847.46 357 357 3 8.850 LIB6M 7.115 15.791 8.798 1.544 1.426 20 6 0
246,000.00 357 357 3 7.593 LIB6M 7.068 14.593 7.593 1.500 1.500 21 6 21
2,815,065.00 357 357 3 7.808 LIB6M 6.506 14.665 7.737 1.768 1.375 21 6 57
505,376.75 356 356 4 9.246 LIB6M 7.960 15.511 8.264 2.603 1.132 20 6 0
151,200.00 357 357 3 7.650 LIB6M 6.650 13.650 7.650 3.000 1.000 21 6 21
8,817,463.95 357 357 3 8.835 LIB6M 7.266 15.621 8.782 1.908 1.389 21 6 0
522,799.95 357 357 3 8.822 LIB6M 7.583 15.583 8.822 1.858 1.381 21 6 57
1,445,307.29 357 357 3 8.047 LIB6M 6.240 14.670 7.911 2.066 1.311 21 6 0
160,000.00 357 357 3 7.650 LIB6M 6.650 13.650 7.650 3.000 1.000 21 6 21
224,800.00 357 357 3 8.625 LIB6M 7.625 14.625 8.625 3.000 1.000 21 6 57
16,651,636.25 357 357 3 8.464 LIB6M 7.234 15.184 8.378 1.959 1.354 21 6 0
501,210.00 357 357 3 6.809 LIB6M 6.574 13.809 6.809 1.500 1.500 21 6 21
5,152,296.97 357 357 3 7.751 LIB6M 6.907 14.210 7.690 2.311 1.230 21 6 57
269,535.86 357 357 3 8.805 LIB6M 7.805 14.805 8.805 3.000 1.000 21 6 0
1,625,536.99 357 357 3 8.302 LIB6M 5.852 15.302 8.302 1.500 1.500 21 6 0
257,363.99 358 358 2 7.703 LIB6M 6.432 14.703 7.703 1.500 1.500 22 6 58
316,645.51 356 356 4 8.744 LIB6M 7.185 15.219 8.269 2.288 1.237 20 6 0
139,249.85 357 357 3 8.600 LIB6M 7.600 15.600 8.600 1.500 1.500 21 6 0
1,585,079.94 356 356 4 8.277 LIB6M 7.277 14.486 8.277 2.686 1.105 20 6 0
4,887,907.07 356 356 4 8.439 LIB6M 7.294 14.972 8.321 2.745 1.085 20 6 0
S-70
Assumed Group I Mortgage Loan Characteristics
Remaining Initial Subse- Months Rate Remaining
Term Remaining Maximum Minimum Periodic quent to Next Adjust- Interest
Principal to Amortization Mortgage Gross Mortgage Mortgage Rate Periodic Rate ment Only
Balance Maturity Term Age Rate Index Margin Rate Rate Cap Rate Cap Adjust- Frequency Term
($) (Months) (Months) (Months) (%) Type* (%) (%) (%) (%) (%) ment (Months) (Months)
- ------------------------------------------------------------------------------------------------------------------------------------
234,000.00 357 357 3 9.600 LIB6M 7.600 16.600 9.600 1.400 1.500 21 6 21
1,557,099.79 357 357 3 8.271 LIB6M 7.048 14.470 8.271 1.900 1.100 21 6 57
317,387.83 357 357 3 8.401 LIB6M 6.599 14.401 8.408 3.000 1.000 21 6 0
95,839.84 357 357 3 8.950 LIB6M 7.950 14.950 8.950 3.000 1.000 21 6 0
257,349.21 356 356 4 7.000 LIB6M 6.700 13.000 7.000 3.000 1.000 20 6 56
97,598.38 357 357 3 9.300 LIB6M 8.300 16.300 9.300 1.500 1.500 21 6 0
2,401,529.03 357 357 3 8.512 LIB6M 6.804 15.512 8.512 1.500 1.500 21 6 0
138,099.00 357 357 3 8.000 LIB6M 6.875 15.000 8.000 1.500 1.500 21 6 21
103,999.00 357 357 3 7.950 LIB6M 6.950 14.950 7.950 1.500 1.500 21 6 57
102,918,929.17 357 357 3 8.233 LIB6M 6.932 15.094 8.147 1.739 1.426 21 6 0
13,784,703.36 357 357 3 7.309 LIB6M 6.519 14.168 7.295 1.686 1.454 21 6 21
53,686,154.40 357 357 3 7.702 LIB6M 6.726 14.570 7.674 1.730 1.433 21 6 57
181,326.36 355 355 5 9.300 LIB6M 8.500 16.050 9.300 3.000 1.500 19 6 0
987,158.16 357 357 3 7.931 LIB6M 7.153 14.580 7.690 2.137 1.109 14 6 0
200,000.00 356 356 4 7.950 LIB6M 7.950 14.950 7.950 1.500 1.500 20 6 56
265,059.38 357 357 3 8.975 LIB6M 4.975 15.975 8.975 1.000 1.000 3 6 0
91,769.68 355 355 5 9.490 LIB6M 8.240 16.490 9.490 3.000 1.500 19 6 0
1,006,914.57 357 357 3 7.722 LIB6M 6.511 14.431 7.552 1.666 1.085 11 6 0
537,560.00 356 356 4 6.898 LIB6M 5.751 12.898 6.898 3.000 1.000 20 6 56
61,462.02 358 478 2 7.750 LIB6M 7.250 14.750 7.750 3.000 1.500 22 6 0
1,348,040.34 356 476 4 7.484 LIB6M 6.986 14.484 7.484 3.000 1.500 20 6 0
236,872.35 356 476 4 6.875 LIB6M 6.625 13.875 6.875 3.000 1.500 20 6 0
4,256,860.33 357 357 3 8.598 LIB6M 7.203 15.454 8.568 1.793 1.428 33 6 0
569,289.00 356 356 4 7.837 LIB6M 7.637 14.414 7.709 2.134 1.289 32 6 32
1,268,850.00 357 357 3 7.703 LIB6M 6.965 14.174 7.703 2.294 1.235 33 6 57
202,698.08 357 357 3 9.500 LIB6M 8.500 16.500 9.500 3.000 1.500 57 6 0
349,385.18 357 357 3 8.700 LIB6M 7.700 15.700 8.700 1.500 1.500 33 6 0
319,000.00 357 357 3 7.500 LIB6M 6.750 14.500 7.500 1.500 1.500 33 6 57
355,875.92 357 357 3 7.990 LIB6M 5.990 14.990 7.990 1.500 1.500 33 6 0
227,125.03 357 357 3 8.016 LIB6M 6.751 15.016 8.016 1.500 1.500 33 6 0
419,498.98 357 357 3 6.345 LIB6M 6.250 13.345 6.345 1.500 1.500 33 6 57
172,577.78 356 356 4 9.850 LIB6M 8.850 15.850 9.850 3.000 1.000 32 6 0
267,915.00 357 357 3 6.750 LIB6M 6.625 13.750 6.750 1.500 1.500 33 6 57
S-71
Assumed Group I Mortgage Loan Characteristics
Remaining Initial Subse- Months Rate Remaining
Term Remaining Maximum Minimum Periodic quent to Next Adjust- Interest
Principal to Amortization Mortgage Gross Mortgage Mortgage Rate Periodic Rate ment Only
Balance Maturity Term Age Rate Index Margin Rate Rate Cap Rate Cap Adjust- Frequency Term
($) (Months) (Months) (Months) (%) Type* (%) (%) (%) (%) (%) ment (Months) (Months)
- ------------------------------------------------------------------------------------------------------------------------------------
104,830.21 357 357 3 9.100 LIB6M 8.100 15.100 8.100 3.000 1.000 33 6 0
98,000.00 356 356 4 8.800 LIB6M 7.800 14.800 8.800 3.000 1.000 32 6 56
548,734.18 357 357 3 9.586 LIB6M 8.586 16.586 9.374 1.500 1.500 33 6 0
262,507.32 354 354 6 7.950 LIB6M 6.950 13.950 7.950 3.000 1.000 30 6 30
157,500.00 354 354 6 7.125 LIB6M 7.125 14.125 7.125 3.000 1.500 30 6 54
1,147,993.23 357 357 3 8.666 LIB6M 7.652 15.391 8.462 1.911 1.363 33 6 0
216,000.00 357 357 3 6.625 LIB6M 6.125 13.625 6.625 3.000 1.500 33 6 57
81,799.17 356 356 4 8.500 LIB6M 7.500 15.500 7.500 1.500 1.500 32 6 0
249,436.82 355 355 5 9.077 LIB6M 7.373 15.373 9.077 2.676 1.148 31 6 0
704,676.42 356 356 4 8.707 LIB6M 7.461 15.036 8.707 3.000 1.117 32 6 0
6,581,951.40 357 357 3 7.920 LIB6M 6.909 14.756 7.775 1.921 1.418 33 6 0
1,072,799.72 357 357 3 7.025 LIB6M 6.251 14.025 7.025 1.500 1.500 33 6 33
2,495,719.66 357 357 3 6.692 LIB6M 6.239 13.692 6.692 1.760 1.500 33 6 57
226,738.31 357 477 3 6.990 LIB6M 6.500 13.990 6.990 3.000 1.500 33 6 0
140,492.35 357 357 3 7.625 LIB6M 6.125 14.625 7.625 3.000 1.500 57 6 0
39,999,396.76 357 357 3 8.298 FR N/A N/A N/A N/A N/A N/A N/A 0
2,094,633.00 357 357 3 7.733 FR N/A N/A N/A N/A N/A N/A N/A 57
140,114.25 357 357 3 11.500 FR N/A N/A N/A N/A N/A N/A N/A 0
353,278.17 357 357 3 8.000 FR N/A N/A N/A N/A N/A N/A N/A 0
155,910.97 355 355 5 7.500 FR N/A N/A N/A N/A N/A N/A N/A 0
291,580.38 355 355 5 7.990 FR N/A N/A N/A N/A N/A N/A N/A 0
119,638.82 355 355 5 8.600 FR N/A N/A N/A N/A N/A N/A N/A 0
299,477.59 357 357 3 8.750 FR N/A N/A N/A N/A N/A N/A N/A 0
9,572,388.12 357 357 3 7.776 FR N/A N/A N/A N/A N/A N/A N/A 0
1,916,300.00 357 357 3 7.527 FR N/A N/A N/A N/A N/A N/A N/A 57
74,660.09 357 357 3 10.500 FR N/A N/A N/A N/A N/A N/A N/A 0
217,232.66 357 357 3 10.453 FR N/A N/A N/A N/A N/A N/A N/A 0
286,672.88 357 357 3 8.125 FR N/A N/A N/A N/A N/A N/A N/A 0
231,386.78 356 356 4 8.125 FR N/A N/A N/A N/A N/A N/A N/A 0
418,066.32 357 357 3 8.834 FR N/A N/A N/A N/A N/A N/A N/A 0
4,671,310.60 357 357 3 7.988 FR N/A N/A N/A N/A N/A N/A N/A 0
192,000.00 358 358 2 7.700 FR N/A N/A N/A N/A N/A N/A N/A 58
2,746,457.01 357 357 3 8.183 FR N/A N/A N/A N/A N/A N/A N/A 0
S-72
Assumed Group I Mortgage Loan Characteristics
Remaining Initial Subse- Months Rate Remaining
Term Remaining Maximum Minimum Periodic quent to Next Adjust- Interest
Principal to Amortization Mortgage Gross Mortgage Mortgage Rate Periodic Rate ment Only
Balance Maturity Term Age Rate Index Margin Rate Rate Cap Rate Cap Adjust- Frequency Term
($) (Months) (Months) (Months) (%) Type* (%) (%) (%) (%) (%) ment (Months) (Months)
- ------------------------------------------------------------------------------------------------------------------------------------
171,000.00 356 356 4 8.700 FR N/A N/A N/A N/A N/A N/A N/A 56
664,930.11 357 357 3 7.253 FR N/A N/A N/A N/A N/A N/A N/A 0
207,909.93 357 357 3 7.500 FR N/A N/A N/A N/A N/A N/A N/A 57
667,339.72 357 357 3 7.298 FR N/A N/A N/A N/A N/A N/A N/A 0
2,028,174.47 357 357 3 8.360 FR N/A N/A N/A N/A N/A N/A N/A 0
136,800.00 357 357 3 7.000 FR N/A N/A N/A N/A N/A N/A N/A 57
716,973.79 357 357 3 7.910 FR N/A N/A N/A N/A N/A N/A N/A 0
330,000.00 357 357 3 6.875 FR N/A N/A N/A N/A N/A N/A N/A 57
557,088.98 357 357 3 8.096 FR N/A N/A N/A N/A N/A N/A N/A 0
224,750.00 357 357 3 7.875 FR N/A N/A N/A N/A N/A N/A N/A 57
62,737.88 356 356 4 8.250 FR N/A N/A N/A N/A N/A N/A N/A 0
60,325.00 357 357 3 8.800 FR N/A N/A N/A N/A N/A N/A N/A 57
164,692.48 356 356 4 9.420 FR N/A N/A N/A N/A N/A N/A N/A 0
1,460,822.05 356 356 4 8.642 FR N/A N/A N/A N/A N/A N/A N/A 0
400,850.00 357 357 3 8.977 FR N/A N/A N/A N/A N/A N/A N/A 57
219,554.05 356 356 4 8.802 FR N/A N/A N/A N/A N/A N/A N/A 0
66,256.27 356 356 4 7.650 FR N/A N/A N/A N/A N/A N/A N/A 0
677,507.29 357 357 3 7.809 FR N/A N/A N/A N/A N/A N/A N/A 0
21,424,274.35 357 357 3 7.829 FR N/A N/A N/A N/A N/A N/A N/A 0
4,069,430.90 357 357 3 7.356 FR N/A N/A N/A N/A N/A N/A N/A 57
259,401.29 356 356 4 8.800 FR N/A N/A N/A N/A N/A N/A N/A 0
2,543,094.48 178 178 3 7.815 FR N/A N/A N/A N/A N/A N/A N/A 0
49,659.31 177 177 3 10.750 FR N/A N/A N/A N/A N/A N/A N/A 0
287,121.63 177 177 3 7.994 FR N/A N/A N/A N/A N/A N/A N/A 0
326,874.31 178 178 2 9.504 FR N/A N/A N/A N/A N/A N/A N/A 0
113,695.59 175 175 5 7.250 FR N/A N/A N/A N/A N/A N/A N/A 0
400,436.73 177 177 3 7.600 FR N/A N/A N/A N/A N/A N/A N/A 0
300,899.43 234 234 3 11.288 FR N/A N/A N/A N/A N/A N/A N/A 0
38,819.59 208 208 3 9.875 FR N/A N/A N/A N/A N/A N/A N/A 0
14,921.12 177 177 3 13.500 FR N/A N/A N/A N/A N/A N/A N/A 0
18,658.85 177 177 3 9.690 FR N/A N/A N/A N/A N/A N/A N/A 0
64,761.37 237 237 3 10.722 FR N/A N/A N/A N/A N/A N/A N/A 0
4,432,110.02 177 357 3 11.320 FR N/A N/A N/A N/A N/A N/A N/A 0
S-73
Assumed Group I Mortgage Loan Characteristics
Remaining Initial Subse- Months Rate Remaining
Term Remaining Maximum Minimum Periodic quent to Next Adjust- Interest
Principal to Amortization Mortgage Gross Mortgage Mortgage Rate Periodic Rate ment Only
Balance Maturity Term Age Rate Index Margin Rate Rate Cap Rate Cap Adjust- Frequency Term
($) (Months) (Months) (Months) (%) Type* (%) (%) (%) (%) (%) ment (Months) (Months)
- ------------------------------------------------------------------------------------------------------------------------------------
35,966.64 177 357 3 11.700 FR N/A N/A N/A N/A N/A N/A N/A 0
72,619.49 177 357 3 12.189 FR N/A N/A N/A N/A N/A N/A N/A 0
153,546.13 177 357 3 10.653 FR N/A N/A N/A N/A N/A N/A N/A 0
17,475.95 177 357 3 9.875 FR N/A N/A N/A N/A N/A N/A N/A 0
141,904.83 177 357 3 11.323 FR N/A N/A N/A N/A N/A N/A N/A 0
21,038.99 177 357 3 10.375 FR N/A N/A N/A N/A N/A N/A N/A 0
14,979.27 177 357 3 9.850 FR N/A N/A N/A N/A N/A N/A N/A 0
128,277.70 177 357 3 11.767 FR N/A N/A N/A N/A N/A N/A N/A 0
1,428,773.47 177 357 3 11.629 FR N/A N/A N/A N/A N/A N/A N/A 0
37,764.20 177 357 3 11.600 FR N/A N/A N/A N/A N/A N/A N/A 0
208,412.13 177 357 3 12.280 FR N/A N/A N/A N/A N/A N/A N/A 0
111,476.08 177 357 3 11.167 FR N/A N/A N/A N/A N/A N/A N/A 0
91,140.26 177 357 3 10.500 FR N/A N/A N/A N/A N/A N/A N/A 0
105,856.47 175 355 5 11.690 FR N/A N/A N/A N/A N/A N/A N/A 0
183,483.99 177 357 3 10.667 FR N/A N/A N/A N/A N/A N/A N/A 0
220,181.07 177 357 3 10.501 FR N/A N/A N/A N/A N/A N/A N/A 0
27,378.15 177 357 3 12.375 FR N/A N/A N/A N/A N/A N/A N/A 0
*LIB6M means Six-Month LIBOR. FR means Fixed Rate.
S-74
Assumed Group II Mortgage Loan Characteristics
Remaining Initial Subse- Months Rate Remaining
Term Remaining Maximum Minimum Periodic quent to Next Adjust- Interest
Principal to Amortization Mortgage Gross Mortgage Mortgage Rate Periodic Rate ment Only
Balance Maturity Term Age Rate Index Margin Rate Rate Cap Rate Cap Adjust- Frequency Term
($) (Months) (Months) (Months) (%) Type* (%) (%) (%) (%) (%) ment (Months) (Months)
- ------------------------------------------------------------------------------------------------------------------------------------
26,280,736.21 357 357 3 8.603 LIB6M 7.058 15.497 8.520 1.640 1.413 20 6 0
3,467,140.60 357 357 3 8.711 LIB6M 7.619 15.711 8.711 1.500 1.500 21 6 21
17,500,330.30 357 357 3 8.682 LIB6M 7.303 15.623 8.682 1.590 1.470 21 6 57
138,341.76 357 357 3 9.450 LIB6M 7.000 15.450 9.450 3.000 1.000 21 6 0
443,870.16 357 357 3 8.065 LIB6M 6.685 14.571 8.065 2.241 1.253 21 6 0
546,900.00 357 357 3 9.271 LIB6M 7.724 16.271 9.271 2.077 1.308 21 6 57
239,501.24 357 357 3 7.875 LIB6M 6.625 14.875 7.875 1.500 1.500 21 6 0
3,438,008.69 357 357 3 8.855 LIB6M 7.148 15.855 8.855 1.466 1.466 20 6 0
347,656.00 356 356 4 8.400 LIB6M 7.400 15.400 8.400 1.500 1.500 20 6 20
3,722,263.67 357 357 3 8.159 LIB6M 7.196 15.079 8.079 1.620 1.460 21 6 57
2,768,168.30 357 357 3 8.728 LIB6M 7.137 15.626 8.634 1.707 1.453 21 6 0
195,211.00 357 357 3 8.990 LIB6M 8.260 15.990 8.990 1.500 1.500 21 6 21
499,999.00 357 357 3 7.875 LIB6M 6.875 14.875 7.875 1.500 1.500 21 6 21
609,121.42 357 357 3 8.173 LIB6M 7.173 15.173 8.173 1.500 1.500 21 6 0
247,950.00 356 356 4 8.375 LIB6M 7.375 14.375 8.375 3.000 1.000 20 6 56
3,390,108.18 357 357 3 8.119 LIB6M 6.763 14.790 7.919 1.994 1.335 21 6 0
1,941,900.00 357 357 3 8.451 LIB6M 7.451 15.009 8.451 2.164 1.279 21 6 57
734,754.78 357 357 3 8.011 LIB6M 6.193 15.011 8.011 1.500 1.500 21 6 0
530,579.45 357 357 3 8.228 LIB6M 6.000 15.228 8.228 1.500 1.500 21 6 57
237,825.68 356 356 4 8.279 LIB6M 7.425 15.279 7.425 1.500 1.500 20 6 0
195,394.91 356 356 4 7.350 LIB6M 6.350 13.350 7.350 3.000 1.000 20 6 0
897,914.94 356 356 4 8.611 LIB6M 8.017 14.611 8.611 3.000 1.000 20 6 0
1,061,999.33 357 357 3 8.857 LIB6M 7.374 15.044 8.857 2.531 1.093 21 6 57
272,059.65 357 357 3 9.397 LIB6M 7.000 15.397 9.397 3.000 1.000 21 6 0
168,000.00 357 357 3 8.750 LIB6M 7.000 14.750 8.750 3.000 1.000 21 6 57
1,023,022.08 357 357 3 8.667 LIB6M 7.536 15.667 8.667 1.500 1.500 21 6 0
54,029,244.39 357 357 3 8.196 LIB6M 7.052 15.095 8.151 1.685 1.445 21 6 0
17,104,243.09 357 357 3 7.602 LIB6M 6.560 14.466 7.540 1.674 1.442 21 6 21
54,641,949.53 357 357 3 7.820 LIB6M 6.790 14.740 7.814 1.654 1.460 21 6 57
208,000.00 357 357 3 7.850 LIB6M 6.850 14.850 6.850 1.500 1.500 21 6 21
176,800.00 356 356 4 7.500 LIB6M 7.500 13.500 7.500 3.000 1.000 20 6 56
254,000.00 357 357 3 5.250 LIB6M 5.750 12.250 5.250 1.500 1.500 21 6 21
S-75
Assumed Group II Mortgage Loan Characteristics
Remaining Initial Subse- Months Rate Remaining
Term Remaining Maximum Minimum Periodic quent to Next Adjust- Interest
Principal to Amortization Mortgage Gross Mortgage Mortgage Rate Periodic Rate ment Only
Balance Maturity Term Age Rate Index Margin Rate Rate Cap Rate Cap Adjust- Frequency Term
($) (Months) (Months) (Months) (%) Type* (%) (%) (%) (%) (%) ment (Months) (Months)
- ------------------------------------------------------------------------------------------------------------------------------------
983,176.29 357 357 3 7.086 LIB6M 6.061 14.086 7.086 1.500 1.500 21 6 57
323,611.31 356 476 4 7.875 LIB6M 7.625 14.875 7.875 3.000 1.500 20 6 0
905,400.12 357 357 3 9.026 LIB6M 7.963 15.775 9.026 2.198 1.374 33 6 0
617,920.00 357 357 3 7.047 LIB6M 5.853 14.047 7.047 1.500 1.500 33 6 33
1,414,909.00 356 356 4 7.654 LIB6M 7.197 14.502 7.654 1.995 1.424 32 6 56
563,503.11 356 356 4 7.339 LIB6M 6.237 13.746 7.339 2.390 1.203 32 6 0
198,926.69 354 354 6 9.250 LIB6M 6.125 16.250 9.250 1.500 1.500 30 6 0
219,791.69 358 358 2 9.700 LIB6M 8.700 16.700 9.700 1.500 1.500 34 6 0
111,789.70 357 357 3 8.375 LIB6M 6.125 15.375 8.375 1.500 1.500 33 6 0
1,187,455.44 357 357 3 8.531 LIB6M 7.114 15.363 8.531 1.751 1.416 33 6 0
564,011.20 355 355 5 6.900 LIB6M 6.247 13.900 6.900 1.500 1.500 31 6 31
1,934,119.00 357 357 3 7.333 LIB6M 6.272 14.333 7.203 1.500 1.500 33 6 57
276,808.99 358 358 2 7.950 LIB6M 6.950 14.950 7.950 3.000 1.500 58 6 0
615,400.20 357 357 3 8.625 LIB6M 6.375 15.625 8.625 3.000 1.500 57 6 0
186,504.87 357 357 3 6.875 LIB6M 5.750 13.875 6.875 3.000 1.500 57 6 0
13,567,623.11 357 357 3 8.333 FR N/A N/A N/A N/A N/A N/A N/A 0
2,312,107.02 357 357 3 7.776 FR N/A N/A N/A N/A N/A N/A N/A 57
384,170.36 358 358 2 8.371 FR N/A N/A N/A N/A N/A N/A N/A 0
2,629,040.62 357 357 3 8.162 FR N/A N/A N/A N/A N/A N/A N/A 0
1,043,756.50 357 357 3 7.536 FR N/A N/A N/A N/A N/A N/A N/A 57
64,884.64 357 357 3 8.650 FR N/A N/A N/A N/A N/A N/A N/A 0
83,774.09 357 357 3 8.750 FR N/A N/A N/A N/A N/A N/A N/A 0
194,629.05 356 356 4 7.990 FR N/A N/A N/A N/A N/A N/A N/A 0
1,910,990.13 357 357 3 7.814 FR N/A N/A N/A N/A N/A N/A N/A 0
215,000.00 357 357 3 6.375 FR N/A N/A N/A N/A N/A N/A N/A 57
1,088,643.95 357 357 3 7.921 FR N/A N/A N/A N/A N/A N/A N/A 0
139,050.00 357 357 3 8.500 FR N/A N/A N/A N/A N/A N/A N/A 57
776,447.08 357 357 3 8.246 FR N/A N/A N/A N/A N/A N/A N/A 0
271,955.39 356 356 4 7.829 FR N/A N/A N/A N/A N/A N/A N/A 0
65,597.64 355 355 5 9.000 FR N/A N/A N/A N/A N/A N/A N/A 0
142,766.83 356 356 4 9.060 FR N/A N/A N/A N/A N/A N/A N/A 0
200,522.06 356 356 4 7.200 FR N/A N/A N/A N/A N/A N/A N/A 0
111,165.77 357 357 3 8.990 FR N/A N/A N/A N/A N/A N/A N/A 0
S-76
Assumed Group II Mortgage Loan Characteristics
Remaining Initial Subse- Months Rate Remaining
Term Remaining Maximum Minimum Periodic quent to Next Adjust- Interest
Principal to Amortization Mortgage Gross Mortgage Mortgage Rate Periodic Rate ment Only
Balance Maturity Term Age Rate Index Margin Rate Rate Cap Rate Cap Adjust- Frequency Term
($) (Months) (Months) (Months) (%) Type* (%) (%) (%) (%) (%) ment (Months) (Months)
- ------------------------------------------------------------------------------------------------------------------------------------
132,000.00 357 357 3 9.400 FR N/A N/A N/A N/A N/A N/A N/A 57
152,067.20 356 356 4 10.550 FR N/A N/A N/A N/A N/A N/A N/A 0
100,932.17 356 356 4 7.750 FR N/A N/A N/A N/A N/A N/A N/A 0
10,143,474.86 357 357 3 7.870 FR N/A N/A N/A N/A N/A N/A N/A 0
2,628,698.73 357 357 3 7.220 FR N/A N/A N/A N/A N/A N/A N/A 57
76,231.62 357 357 3 11.850 FR N/A N/A N/A N/A N/A N/A N/A 0
1,951,681.15 357 357 3 8.362 FR N/A N/A N/A N/A N/A N/A N/A 0
7,962,158.70 357 357 3 7.934 FR N/A N/A N/A N/A N/A N/A N/A 0
425,499.08 357 357 3 7.163 FR N/A N/A N/A N/A N/A N/A N/A 57
284,045.69 356 356 4 8.340 FR N/A N/A N/A N/A N/A N/A N/A 0
171,593.01 357 357 3 7.225 FR N/A N/A N/A N/A N/A N/A N/A 0
1,990,864.43 357 357 3 8.246 FR N/A N/A N/A N/A N/A N/A N/A 0
101,572,584.35 357 357 3 7.628 FR N/A N/A N/A N/A N/A N/A N/A 0
19,583,310.86 357 357 3 6.982 FR N/A N/A N/A N/A N/A N/A N/A 57
737,516.07 177 177 3 7.671 FR N/A N/A N/A N/A N/A N/A N/A 0
197,653.64 177 177 3 8.651 FR N/A N/A N/A N/A N/A N/A N/A 0
130,483.89 177 177 3 6.750 FR N/A N/A N/A N/A N/A N/A N/A 0
298,431.77 177 177 3 7.856 FR N/A N/A N/A N/A N/A N/A N/A 0
2,068,778.86 180 180 3 7.812 FR N/A N/A N/A N/A N/A N/A N/A 0
340,194.69 221 221 3 10.090 FR N/A N/A N/A N/A N/A N/A N/A 0
55,560.20 237 237 3 11.600 FR N/A N/A N/A N/A N/A N/A N/A 0
34,963.63 177 177 3 11.000 FR N/A N/A N/A N/A N/A N/A N/A 0
27,828.57 177 177 3 11.900 FR N/A N/A N/A N/A N/A N/A N/A 0
233,997.10 204 204 3 11.122 FR N/A N/A N/A N/A N/A N/A N/A 0
61,595.53 177 177 3 11.250 FR N/A N/A N/A N/A N/A N/A N/A 0
139,300.29 190 190 3 11.085 FR N/A N/A N/A N/A N/A N/A N/A 0
8,692,763.27 177 357 3 11.666 FR N/A N/A N/A N/A N/A N/A N/A 0
52,514.57 177 357 3 13.125 FR N/A N/A N/A N/A N/A N/A N/A 0
62,054.43 177 357 3 12.750 FR N/A N/A N/A N/A N/A N/A N/A 0
628,889.20 177 357 3 11.493 FR N/A N/A N/A N/A N/A N/A N/A 0
49,103.47 177 357 3 11.600 FR N/A N/A N/A N/A N/A N/A N/A 0
275,350.80 177 357 3 12.298 FR N/A N/A N/A N/A N/A N/A N/A 0
177,792.61 177 357 3 11.675 FR N/A N/A N/A N/A N/A N/A N/A 0
S-77
Assumed Group II Mortgage Loan Characteristics
Remaining Initial Subse- Months Rate Remaining
Term Remaining Maximum Minimum Periodic quent to Next Adjust- Interest
Principal to Amortization Mortgage Gross Mortgage Mortgage Rate Periodic Rate ment Only
Balance Maturity Term Age Rate Index Margin Rate Rate Cap Rate Cap Adjust- Frequency Term
($) (Months) (Months) (Months) (%) Type* (%) (%) (%) (%) (%) ment (Months) (Months)
- ------------------------------------------------------------------------------------------------------------------------------------
23,167.95 177 357 3 9.850 FR N/A N/A N/A N/A N/A N/A N/A 0
51,936.81 175 355 5 12.825 FR N/A N/A N/A N/A N/A N/A N/A 0
405,190.18 177 357 3 11.864 FR N/A N/A N/A N/A N/A N/A N/A 0
52,910.13 177 357 3 11.798 FR N/A N/A N/A N/A N/A N/A N/A 0
35,771.61 177 357 3 12.400 FR N/A N/A N/A N/A N/A N/A N/A 0
5,894,318.07 177 357 3 11.555 FR N/A N/A N/A N/A N/A N/A N/A 0
42,344.19 176 356 4 11.157 FR N/A N/A N/A N/A N/A N/A N/A 0
24,318.85 177 357 3 11.990 FR N/A N/A N/A N/A N/A N/A N/A 0
78,703.40 177 357 3 13.700 FR N/A N/A N/A N/A N/A N/A N/A 0
1,298,851.12 177 357 3 11.318 FR N/A N/A N/A N/A N/A N/A N/A 0
53,463.93 177 357 3 13.125 FR N/A N/A N/A N/A N/A N/A N/A 0
700,158.63 177 357 3 11.326 FR N/A N/A N/A N/A N/A N/A N/A 0
*LIB6M means Six-Month LIBOR. FR means Fixed Rate.
S-78
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 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-79
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-1
---------
0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
------ ------- -------- -------- --------
DISTRIBUTION DATE
- -----------------
Initial Percentage ........... 100% 100% 100% 100% 100%
July 25, 2007 ................ 99 85 74 67 58
July 25, 2008 ................ 98 63 37 24 10
July 25, 2009 ................ 98 49 19 6 0
July 25, 2010 ................ 97 37 19 6 0
July 25, 2011 ................ 96 31 14 6 0
July 25, 2012 ................ 95 26 10 5 0
July 25, 2013 ................ 94 22 7 3 0
July 25, 2014 ................ 93 18 5 2 0
July 25, 2015 ................ 91 15 4 2 0
July 25, 2016 ................ 90 13 3 1 0
July 25, 2017 ................ 88 11 2 1 0
July 25, 2018 ................ 86 9 1 * 0
July 25, 2019 ................ 84 7 1 0 0
July 25, 2020 ................ 81 6 1 0 0
July 25, 2021 ................ 77 5 * 0 0
July 25, 2022 ................ 74 4 0 0 0
July 25, 2023 ................ 71 3 0 0 0
July 25, 2024 ................ 67 3 0 0 0
July 25, 2025 ................ 63 2 0 0 0
July 25, 2026 ................ 59 2 0 0 0
July 25, 2027 ................ 54 1 0 0 0
July 25, 2028 ................ 48 1 0 0 0
July 25, 2029 ................ 42 1 0 0 0
July 25, 2030 ................ 36 * 0 0 0
July 25, 2031 ................ 31 * 0 0 0
July 25, 2032 ................ 26 0 0 0 0
July 25, 2033 ................ 20 0 0 0 0
July 25, 2034 ................ 14 0 0 0 0
July 25, 2035 ................ 6 0 0 0 0
July 25, 2036 ................ 0 0 0 0 0
Weighted Average Life
in Years (1) 20.33 4.70 2.53 1.81 1.24
Weighted Average Life
in Years (1)(2) 20.29 4.40 2.35 1.67 1.24
- ----------
*If applicable, 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 the Master 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 A-2A
----------
0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
------ ------- -------- -------- --------
DISTRIBUTION DATE
- -----------------
Initial Percentage ........... 100% 100% 100% 100% 100%
July 25, 2007 ................ 98 70 47 34 16
July 25, 2008 ................ 97 29 0 0 0
July 25, 2009 ................ 95 * 0 0 0
July 25, 2010 ................ 94 0 0 0 0
July 25, 2011 ................ 92 0 0 0 0
July 25, 2012 ................ 89 0 0 0 0
July 25, 2013 ................ 86 0 0 0 0
July 25, 2014 ................ 83 0 0 0 0
July 25, 2015 ................ 80 0 0 0 0
July 25, 2016 ................ 76 0 0 0 0
July 25, 2017 ................ 72 0 0 0 0
July 25, 2018 ................ 67 0 0 0 0
July 25, 2019 ................ 62 0 0 0 0
July 25, 2020 ................ 56 0 0 0 0
July 25, 2021 ................ 40 0 0 0 0
July 25, 2022 ................ 34 0 0 0 0
July 25, 2023 ................ 27 0 0 0 0
July 25, 2024 ................ 19 0 0 0 0
July 25, 2025 ................ 11 0 0 0 0
July 25, 2026 ................ 2 0 0 0 0
July 25, 2027 ................ 0 0 0 0 0
July 25, 2028 ................ 0 0 0 0 0
July 25, 2029 ................ 0 0 0 0 0
July 25, 2030 ................ 0 0 0 0 0
July 25, 2031 ................ 0 0 0 0 0
July 25, 2032 ................ 0 0 0 0 0
July 25, 2033 ................ 0 0 0 0 0
July 25, 2034 ................ 0 0 0 0 0
July 25, 2035 ................ 0 0 0 0 0
July 25, 2036 ................ 0 0 0 0 0
Weighted Average Life
in Years (1) 13.35 1.57 1.00 0.83 0.68
Weighted Average Life
in Years (1)(2) 13.35 1.57 1.00 0.83 0.68
- ---------------------
*If applicable, 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 the Master 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 A-2B
----------
0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
------ ------- -------- -------- --------
DISTRIBUTION DATE
- -----------------
Initial Percentage ........... 100% 100% 100% 100% 100%
July 25, 2007 ................ 100 100 100 100 100
July 25, 2008 ................ 100 100 34 0 0
July 25, 2009 ................ 100 100 0 0 0
July 25, 2010 ................ 100 21 0 0 0
July 25, 2011 ................ 100 0 0 0 0
July 25, 2012 ................ 100 0 0 0 0
July 25, 2013 ................ 100 0 0 0 0
July 25, 2014 ................ 100 0 0 0 0
July 25, 2015 ................ 100 0 0 0 0
July 25, 2016 ................ 100 0 0 0 0
July 25, 2017 ................ 100 0 0 0 0
July 25, 2018 ................ 100 0 0 0 0
July 25, 2019 ................ 100 0 0 0 0
July 25, 2020 ................ 100 0 0 0 0
July 25, 2021 ................ 100 0 0 0 0
July 25, 2022 ................ 100 0 0 0 0
July 25, 2023 ................ 100 0 0 0 0
July 25, 2024 ................ 100 0 0 0 0
July 25, 2025 ................ 100 0 0 0 0
July 25, 2026 ................ 100 0 0 0 0
July 25, 2027 ................ 72 0 0 0 0
July 25, 2028 ................ 35 0 0 0 0
July 25, 2029 ................ 0 0 0 0 0
July 25, 2030 ................ 0 0 0 0 0
July 25, 2031 ................ 0 0 0 0 0
July 25, 2032 ................ 0 0 0 0 0
July 25, 2033 ................ 0 0 0 0 0
July 25, 2034 ................ 0 0 0 0 0
July 25, 2035 ................ 0 0 0 0 0
July 25, 2036 ................ 0 0 0 0 0
Weighted Average Life
in Years (1) 21.62 3.66 2.00 1.74 1.41
Weighted Average Life
in Years (1)(2) 21.62 3.66 2.00 1.74 1.41
- ----------
*If applicable, 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 the Master 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
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-2C
----------
0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
------ ------- -------- -------- --------
DISTRIBUTION DATE
- -----------------
Initial Percentage ........... 100% 100% 100% 100% 100%
July 25, 2007 ................ 100 100 100 100 100
July 25, 2008 ................ 100 100 100 68 12
July 25, 2009 ................ 100 100 44 0 0
July 25, 2010 ................ 100 100 35 0 0
July 25, 2011 ................ 100 83 11 0 0
July 25, 2012 ................ 100 61 0 0 0
July 25, 2013 ................ 100 43 0 0 0
July 25, 2014 ................ 100 28 0 0 0
July 25, 2015 ................ 100 15 0 0 0
July 25, 2016 ................ 100 4 0 0 0
July 25, 2017 ................ 100 0 0 0 0
July 25, 2018 ................ 100 0 0 0 0
July 25, 2019 ................ 100 0 0 0 0
July 25, 2020 ................ 100 0 0 0 0
July 25, 2021 ................ 100 0 0 0 0
July 25, 2022 ................ 100 0 0 0 0
July 25, 2023 ................ 100 0 0 0 0
July 25, 2024 ................ 100 0 0 0 0
July 25, 2025 ................ 100 0 0 0 0
July 25, 2026 ................ 100 0 0 0 0
July 25, 2027 ................ 100 0 0 0 0
July 25, 2028 ................ 100 0 0 0 0
July 25, 2029 ................ 97 0 0 0 0
July 25, 2030 ................ 81 0 0 0 0
July 25, 2031 ................ 63 0 0 0 0
July 25, 2032 ................ 43 0 0 0 0
July 25, 2033 ................ 20 0 0 0 0
July 25, 2034 ................ 0 0 0 0 0
July 25, 2035 ................ 0 0 0 0 0
July 25, 2036 ................ 0 0 0 0 0
Weighted Average Life
in Years (1) 25.57 6.88 3.50 2.29 1.87
Weighted Average Life
in Years (1)(2) 25.57 6.88 3.50 2.29 1.87
- ----------
*If applicable, 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 the Master 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-83
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A-2D
----------
0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
------ ------- -------- -------- --------
DISTRIBUTION DATE
- -----------------
Initial Percentage ........... 100% 100% 100% 100% 100%
July 25, 2007 ................ 100 100 100 100 100
July 25, 2008 ................ 100 100 100 100 100
July 25, 2009 ................ 100 100 100 84 0
July 25, 2010 ................ 100 100 100 84 0
July 25, 2011 ................ 100 100 100 75 0
July 25, 2012 ................ 100 100 88 51 0
July 25, 2013 ................ 100 100 64 34 0
July 25, 2014 ................ 100 100 47 23 0
July 25, 2015 ................ 100 100 35 16 0
July 25, 2016 ................ 100 100 26 11 0
July 25, 2017 ................ 100 90 19 7 0
July 25, 2018 ................ 100 75 14 4 0
July 25, 2019 ................ 100 63 10 1 0
July 25, 2020 ................ 100 53 7 0 0
July 25, 2021 ................ 100 41 4 0 0
July 25, 2022 ................ 100 34 1 0 0
July 25, 2023 ................ 100 28 0 0 0
July 25, 2024 ................ 100 23 0 0 0
July 25, 2025 ................ 100 19 0 0 0
July 25, 2026 ................ 100 15 0 0 0
July 25, 2027 ................ 100 12 0 0 0
July 25, 2028 ................ 100 10 0 0 0
July 25, 2029 ................ 100 8 0 0 0
July 25, 2030 ................ 100 5 0 0 0
July 25, 2031 ................ 100 3 0 0 0
July 25, 2032 ................ 100 * 0 0 0
July 25, 2033 ................ 100 0 0 0 0
July 25, 2034 ................ 91 0 0 0 0
July 25, 2035 ................ 41 0 0 0 0
July 25, 2036 ................ 0 0 0 0 0
Weighted Average Life
in Years (1) 28.86 15.35 8.71 6.52 2.49
Weighted Average Life
in Years (1)(2) 28.60 12.76 6.90 5.01 2.49
- ----------
*If applicable, 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 the Master 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-84
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-1
----------
0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
------ ------- -------- -------- --------
DISTRIBUTION DATE
- -----------------
Initial Percentage ........... 100% 100% 100% 100% 100%
July 25, 2007 ................ 100 100 100 100 100
July 25, 2008 ................ 100 100 100 100 100
July 25, 2009 ................ 100 100 100 100 85
July 25, 2010 ................ 100 100 0 57 74
July 25, 2011 ................ 100 67 0 0 0
July 25, 2012 ................ 100 34 0 0 0
July 25, 2013 ................ 100 6 0 0 0
July 25, 2014 ................ 100 0 0 0 0
July 25, 2015 ................ 100 0 0 0 0
July 25, 2016 ................ 100 0 0 0 0
July 25, 2017 ................ 100 0 0 0 0
July 25, 2018 ................ 100 0 0 0 0
July 25, 2019 ................ 100 0 0 0 0
July 25, 2020 ................ 100 0 0 0 0
July 25, 2021 ................ 100 0 0 0 0
July 25, 2022 ................ 100 0 0 0 0
July 25, 2023 ................ 100 0 0 0 0
July 25, 2024 ................ 100 0 0 0 0
July 25, 2025 ................ 100 0 0 0 0
July 25, 2026 ................ 100 0 0 0 0
July 25, 2027 ................ 100 0 0 0 0
July 25, 2028 ................ 100 0 0 0 0
July 25, 2029 ................ 100 0 0 0 0
July 25, 2030 ................ 83 0 0 0 0
July 25, 2031 ................ 53 0 0 0 0
July 25, 2032 ................ 20 0 0 0 0
July 25, 2033 ................ 0 0 0 0 0
July 25, 2034 ................ 0 0 0 0 0
July 25, 2035 ................ 0 0 0 0 0
July 25, 2036 ................ 0 0 0 0 0
Weighted Average Life
in Years (1) ............... 25.09 5.60 3.63 4.10 4.11
Weighted Average Life
in Years (1)(2) ............ 25.09 5.60 3.63 4.10 3.88
- ----------
*If applicable, 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 the Master 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-85
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-2
----------
0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
------ ------- -------- -------- --------
DISTRIBUTION DATE
- -----------------
Initial Percentage ........... 100% 100% 100% 100% 100%
July 25, 2007 ................ 100 100 100 100 100
July 25, 2008 ................ 100 100 100 100 100
July 25, 2009 ................ 100 100 100 100 100
July 25, 2010 ................ 100 100 89 100 100
July 25, 2011 ................ 100 100 49 33 81
July 25, 2012 ................ 100 100 19 0 23
July 25, 2013 ................ 100 100 0 0 0
July 25, 2014 ................ 100 80 0 0 0
July 25, 2015 ................ 100 58 0 0 0
July 25, 2016 ................ 100 39 0 0 0
July 25, 2017 ................ 100 23 0 0 0
July 25, 2018 ................ 100 10 0 0 0
July 25, 2019 ................ 100 0 0 0 0
July 25, 2020 ................ 100 0 0 0 0
July 25, 2021 ................ 100 0 0 0 0
July 25, 2022 ................ 100 0 0 0 0
July 25, 2023 ................ 100 0 0 0 0
July 25, 2024 ................ 100 0 0 0 0
July 25, 2025 ................ 100 0 0 0 0
July 25, 2026 ................ 100 0 0 0 0
July 25, 2027 ................ 100 0 0 0 0
July 25, 2028 ................ 100 0 0 0 0
July 25, 2029 ................ 100 0 0 0 0
July 25, 2030 ................ 100 0 0 0 0
July 25, 2031 ................ 100 0 0 0 0
July 25, 2032 ................ 100 0 0 0 0
July 25, 2033 ................ 81 0 0 0 0
July 25, 2034 ................ 35 0 0 0 0
July 25, 2035 ................ 0 0 0 0 0
July 25, 2036 ................ 0 0 0 0 0
Weighted Average Life
in Years (1) 27.71 9.65 5.13 4.89 5.58
Weighted Average Life
in Years (1)(2) 27.71 9.65 5.13 4.89 4.08
- ----------
*If applicable, 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 the Master 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-8
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-3
----------
0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
------ ------- -------- -------- --------
DISTRIBUTION DATE
- -----------------
Initial Percentage ........... 100% 100% 100% 100% 100%
July 25, 2007 ................ 100 100 100 100 100
July 25, 2008 ................ 100 100 100 100 100
July 25, 2009 ................ 100 100 100 100 100
July 25, 2010 ................ 100 100 100 100 100
July 25, 2011 ................ 100 100 100 100 100
July 25, 2012 ................ 100 100 100 75 100
July 25, 2013 ................ 100 100 97 50 82
July 25, 2014 ................ 100 100 71 33 38
July 25, 2015 ................ 100 100 51 22 12
July 25, 2016 ................ 100 100 37 10 0
July 25, 2017 ................ 100 100 27 1 0
July 25, 2018 ................ 100 100 20 0 0
July 25, 2019 ................ 100 98 8 0 0
July 25, 2020 ................ 100 81 2 0 0
July 25, 2021 ................ 100 64 0 0 0
July 25, 2022 ................ 100 53 0 0 0
July 25, 2023 ................ 100 44 0 0 0
July 25, 2024 ................ 100 36 0 0 0
July 25, 2025 ................ 100 29 0 0 0
July 25, 2026 ................ 100 23 0 0 0
July 25, 2027 ................ 100 19 0 0 0
July 25, 2028 ................ 100 10 0 0 0
July 25, 2029 ................ 100 2 0 0 0
July 25, 2030 ................ 100 0 0 0 0
July 25, 2031 ................ 100 0 0 0 0
July 25, 2032 ................ 100 0 0 0 0
July 25, 2033 ................ 100 0 0 0 0
July 25, 2034 ................ 100 0 0 0 0
July 25, 2035 ................ 73 0 0 0 0
July 25, 2036 ................ 0 0 0 0 0
Weighted Average Life
in Years (1) 29.28 17.12 9.66 7.49 7.88
Weighted Average
Life in Years (1)(2) 28.83 13.39 7.24 5.50 4.08
- ---------------------
*If applicable, 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 the Master 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-87
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-4
----------
0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
------ ------- -------- -------- --------
DISTRIBUTION DATE
- -----------------
Initial Percentage ........... 100% 100% 100% 100% 100%
July 25, 2007 ................ 100 100 100 100 100
July 25, 2008 ................ 100 100 100 100 100
July 25, 2009 ................ 100 100 100 100 100
July 25, 2010 ................ 100 100 55 37 21
July 25, 2011 ................ 100 87 40 24 12
July 25, 2012 ................ 100 73 29 16 7
July 25, 2013 ................ 100 62 21 11 1
July 25, 2014 ................ 100 52 15 7 0
July 25, 2015 ................ 100 43 11 5 0
July 25, 2016 ................ 100 36 8 0 0
July 25, 2017 ................ 100 31 6 0 0
July 25, 2018 ................ 100 26 2 0 0
July 25, 2019 ................ 100 21 0 0 0
July 25, 2020 ................ 100 18 0 0 0
July 25, 2021 ................ 100 14 0 0 0
July 25, 2022 ................ 100 12 0 0 0
July 25, 2023 ................ 100 10 0 0 0
July 25, 2024 ................ 100 8 0 0 0
July 25, 2025 ................ 100 6 0 0 0
July 25, 2026 ................ 100 5 0 0 0
July 25, 2027 ................ 100 * 0 0 0
July 25, 2028 ................ 100 0 0 0 0
July 25, 2029 ................ 100 0 0 0 0
July 25, 2030 ................ 93 0 0 0 0
July 25, 2031 ................ 81 0 0 0 0
July 25, 2032 ................ 67 0 0 0 0
July 25, 2033 ................ 52 0 0 0 0
July 25, 2034 ................ 35 0 0 0 0
July 25, 2035 ................ 16 0 0 0 0
July 25, 2036 ................ 0 0 0 0 0
Weighted Average Life
in Years (1) 26.98 9.57 5.37 4.64 4.17
Weighted Average
Life in Years (1)(2) 26.89 8.82 4.88 4.25 3.87
- ----------
*If applicable, 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 the Master 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-88
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-5
----------
0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
------ ------- -------- -------- --------
DISTRIBUTION DATE
- -----------------
Initial Percentage ........... 100% 100% 100% 100% 100%
July 25, 2007 ................ 100 100 100 100 100
July 25, 2008 ................ 100 100 100 100 100
July 25, 2009 ................ 100 100 100 100 100
July 25, 2010 ................ 100 100 55 37 21
July 25, 2011 ................ 100 87 40 24 12
July 25, 2012 ................ 100 73 29 16 7
July 25, 2013 ................ 100 62 21 11 0
July 25, 2014 ................ 100 52 15 7 0
July 25, 2015 ................ 100 43 11 1 0
July 25, 2016 ................ 100 36 8 0 0
July 25, 2017 ................ 100 31 6 0 0
July 25, 2018 ................ 100 26 0 0 0
July 25, 2019 ................ 100 21 0 0 0
July 25, 2020 ................ 100 18 0 0 0
July 25, 2021 ................ 100 14 0 0 0
July 25, 2022 ................ 100 12 0 0 0
July 25, 2023 ................ 100 10 0 0 0
July 25, 2024 ................ 100 8 0 0 0
July 25, 2025 ................ 100 6 0 0 0
July 25, 2026 ................ 100 3 0 0 0
July 25, 2027 ................ 100 0 0 0 0
July 25, 2028 ................ 100 0 0 0 0
July 25, 2029 ................ 100 0 0 0 0
July 25, 2030 ................ 93 0 0 0 0
July 25, 2031 ................ 81 0 0 0 0
July 25, 2032 ................ 67 0 0 0 0
July 25, 2033 ................ 52 0 0 0 0
July 25, 2034 ................ 35 0 0 0 0
July 25, 2035 ................ 16 0 0 0 0
July 25, 2036 ................ 0 0 0 0 0
Weighted Average Life
in Years (1) 26.98 9.54 5.33 4.55 3.98
Weighted Average
Life in Years (1)(2) 26.89 8.82 4.87 4.17 3.70
- ------------------
*If applicable, 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 the Master 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-89
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-6
----------
0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
------ ------- -------- -------- --------
DISTRIBUTION DATE
- -----------------
Initial Percentage ........... 100% 100% 100% 100% 100%
July 25, 2007 ................ 100 100 100 100 100
July 25, 2008 ................ 100 100 100 100 100
July 25, 2009 ................ 100 100 100 100 100
July 25, 2010 ................ 100 100 55 37 21
July 25, 2011 ................ 100 87 40 24 12
July 25, 2012 ................ 100 73 29 16 7
July 25, 2013 ................ 100 62 21 11 0
July 25, 2014 ................ 100 52 15 7 0
July 25, 2015 ................ 100 43 11 0 0
July 25, 2016 ................ 100 36 8 0 0
July 25, 2017 ................ 100 31 2 0 0
July 25, 2018 ................ 100 26 0 0 0
July 25, 2019 ................ 100 21 0 0 0
July 25, 2020 ................ 100 18 0 0 0
July 25, 2021 ................ 100 14 0 0 0
July 25, 2022 ................ 100 12 0 0 0
July 25, 2023 ................ 100 10 0 0 0
July 25, 2024 ................ 100 8 0 0 0
July 25, 2025 ................ 100 5 0 0 0
July 25, 2026 ................ 100 0 0 0 0
July 25, 2027 ................ 100 0 0 0 0
July 25, 2028 ................ 100 0 0 0 0
July 25, 2029 ................ 100 0 0 0 0
July 25, 2030 ................ 93 0 0 0 0
July 25, 2031 ................ 81 0 0 0 0
July 25, 2032 ................ 67 0 0 0 0
July 25, 2033 ................ 52 0 0 0 0
July 25, 2034 ................ 35 0 0 0 0
July 25, 2035 ................ 16 0 0 0 0
July 25, 2036 ................ 0 0 0 0 0
Weighted Average Life
in Years (1) 26.98 9.50 5.28 4.46 3.83
Weighted Average
Life in Years (1)(2) 26.89 8.82 4.85 4.11 3.57
- ----------
*If applicable, 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 the Master 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-90
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-7
----------
0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
------ ------- -------- -------- --------
DISTRIBUTION DATE
- -----------------
Initial Percentage ........... 100% 100% 100% 100% 100%
July 25, 2007 ................ 100 100 100 100 100
July 25, 2008 ................ 100 100 100 100 100
July 25, 2009 ................ 100 100 100 100 100
July 25, 2010 ................ 100 100 55 37 21
July 25, 2011 ................ 100 87 40 24 12
July 25, 2012 ................ 100 73 29 16 2
July 25, 2013 ................ 100 62 21 11 0
July 25, 2014 ................ 100 52 15 4 0
July 25, 2015 ................ 100 43 11 0 0
July 25, 2016 ................ 100 36 8 0 0
July 25, 2017 ................ 100 31 0 0 0
July 25, 2018 ................ 100 26 0 0 0
July 25, 2019 ................ 100 21 0 0 0
July 25, 2020 ................ 100 18 0 0 0
July 25, 2021 ................ 100 14 0 0 0
July 25, 2022 ................ 100 12 0 0 0
July 25, 2023 ................ 100 10 0 0 0
July 25, 2024 ................ 100 6 0 0 0
July 25, 2025 ................ 100 0 0 0 0
July 25, 2026 ................ 100 0 0 0 0
July 25, 2027 ................ 100 0 0 0 0
July 25, 2028 ................ 100 0 0 0 0
July 25, 2029 ................ 100 0 0 0 0
July 25, 2030 ................ 93 0 0 0 0
July 25, 2031 ................ 81 0 0 0 0
July 25, 2032 ................ 67 0 0 0 0
July 25, 2033 ................ 52 0 0 0 0
July 25, 2034 ................ 35 0 0 0 0
July 25, 2035 ................ 16 0 0 0 0
July 25, 2036 ................ 0 0 0 0 0
Weighted Average Life
in Years (1) 26.97 9.44 5.23 4.38 3.71
Weighted Average
Life in Years (1)(2) 26.88 8.82 4.84 4.06 3.48
- ----------
*If applicable, 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 the Master 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.
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-8
----------
0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
------ ------- -------- -------- --------
DISTRIBUTION DATE
- -----------------
Initial Percentage ........... 100% 100% 100% 100% 100%
July 25, 2007 ................ 100 100 100 100 100
July 25, 2008 ................ 100 100 100 100 100
July 25, 2009 ................ 100 100 100 100 100
July 25, 2010 ................ 100 100 55 37 21
July 25, 2011 ................ 100 87 40 24 12
July 25, 2012 ................ 100 73 29 16 0
July 25, 2013 ................ 100 62 21 11 0
July 25, 2014 ................ 100 52 15 0 0
July 25, 2015 ................ 100 43 11 0 0
July 25, 2016 ................ 100 36 * 0 0
July 25, 2017 ................ 100 31 0 0 0
July 25, 2018 ................ 100 26 0 0 0
July 25, 2019 ................ 100 21 0 0 0
July 25, 2020 ................ 100 18 0 0 0
July 25, 2021 ................ 100 14 0 0 0
July 25, 2022 ................ 100 12 0 0 0
July 25, 2023 ................ 100 7 0 0 0
July 25, 2024 ................ 100 0 0 0 0
July 25, 2025 ................ 100 0 0 0 0
July 25, 2026 ................ 100 0 0 0 0
July 25, 2027 ................ 100 0 0 0 0
July 25, 2028 ................ 100 0 0 0 0
July 25, 2029 ................ 100 0 0 0 0
July 25, 2030 ................ 93 0 0 0 0
July 25, 2031 ................ 81 0 0 0 0
July 25, 2032 ................ 67 0 0 0 0
July 25, 2033 ................ 52 0 0 0 0
July 25, 2034 ................ 35 0 0 0 0
July 25, 2035 ................ 16 0 0 0 0
July 25, 2036 ................ 0 0 0 0 0
Weighted Average Life
in Years (1) 26.97 9.35 5.17 4.31 3.60
Weighted Average
Life in Years (1)(2) 26.88 8.82 4.83 4.03 3.40
- ----------
*If applicable, 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 the Master 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.
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PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M-9
----------
0% PPC 55% PPC 100% PPC 125% PPC 160% PPC
------ ------- -------- -------- --------
DISTRIBUTION DATE
- -----------------
Initial Percentage ........... 100% 100% 100% 100% 100%
July 25, 2007 ................ 100 100 100 100 100
July 25, 2008 ................ 100 100 100 100 100
July 25, 2009 ................ 100 100 100 100 99
July 25, 2010 ................ 100 100 55 37 21
July 25, 2011 ................ 100 87 40 24 11
July 25, 2012 ................ 100 73 29 16 0
July 25, 2013 ................ 100 62 21 5 0
July 25, 2014 ................ 100 52 15 0 0
July 25, 2015 ................ 100 43 7 0 0
July 25, 2016 ................ 100 36 0 0 0
July 25, 2017 ................ 100 31 0 0 0
July 25, 2018 ................ 100 26 0 0 0
July 25, 2019 ................ 100 21 0 0 0
July 25, 2020 ................ 100 18 0 0 0
July 25, 2021 ................ 100 14 0 0 0
July 25, 2022 ................ 100 9 0 0 0
July 25, 2023 ................ 100 0 0 0 0
July 25, 2024 ................ 100 0 0 0 0
July 25, 2025 ................ 100 0 0 0 0
July 25, 2026 ................ 100 0 0 0 0
July 25, 2027 ................ 100 0 0 0 0
July 25, 2028 ................ 100 0 0 0 0
July 25, 2029 ................ 100 0 0 0 0
July 25, 2030 ................ 93 0 0 0 0
July 25, 2031 ................ 81 0 0 0 0
July 25, 2032 ................ 67 0 0 0 0
July 25, 2033 ................ 52 0 0 0 0
July 25, 2034 ................ 35 0 0 0 0
July 25, 2035 ................ 16 0 0 0 0
July 25, 2036 ................ 0 0 0 0 0
Weighted Average Life
in Years (1) 26.96 9.25 5.10 4.23 3.52
Weighted Average
Life in Years (1)(2) 26.88 8.82 4.83 4.00 3.35
- ----------
*If applicable, 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 the Master 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.
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There is no assurance that prepayments of the Mortgage Loans included in
the Mortgage Pool will conform to any of the levels of the Prepayment Assumption
indicated in the immediately preceding tables, or to any other level, or that
the actual weighted average lives of the Class A Certificates and the Mezzanine
Certificates will conform to any of the weighted average lives set forth in the
immediately preceding tables. Furthermore, the information contained in the
tables with respect to the weighted average lives of the Class A Certificates
and the Mezzanine Certificates is not necessarily indicative of the weighted
average lives that might be calculated or projected under different or varying
prepayment assumptions.
The characteristics of the Mortgage Loans will differ from those assumed
in preparing the immediately preceding tables. In addition, it is unlikely that
any Mortgage Loan will prepay at any constant percentage until maturity or that
all of the Mortgage Loans will prepay at the same rate. The timing of changes in
the rate of prepayments may significantly affect the actual yield to maturity to
investors, even if the average rate of principal prepayments is consistent with
the expectations of investors.
YIELD SENSITIVITY OF THE MEZZANINE CERTIFICATES
If the Certificate Principal Balances of the Class CE, Class M-11, Class
M-10, Class M-9, Class M-8, Class M-7, 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 or by amounts paid under the Interest Rate Swap
Agreement and available for that purpose) will be allocated to the Class M-1
Certificates. If the Certificate Principal Balances of the Class CE, Class M-11,
Class M-10, Class M-9, Class M-8, Class M-7, 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 or by amounts paid under the Interest Rate Swap Agreement and
available for that purpose) will be allocated to the Class M-2 Certificates. If
the Certificate Principal Balances of the Class CE, Class M-11, Class M-10,
Class M-9, Class M-8, Class M-7, 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
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Monthly Excess Cashflow or by amounts paid under the Interest Rate Swap
Agreement and available for that purpose) will be allocated to the Class M-3
Certificates. If the Certificate Principal Balances of the Class CE, Class M-11,
Class M-10, Class M-9, Class M-8, Class M-7, 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 or by amounts paid under the Interest Rate Swap Agreement and available
for that purpose) will be allocated to the Class M-4 Certificates. If the
Certificate Principal Balances of the Class CE, Class M-11, Class M-10, Class
M-9, Class M-8, Class M-7 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 or by amounts paid under
the Interest Rate Swap Agreement and available for that purpose) will be
allocated to the Class M-5 Certificates. If the Certificate Principal Balances
of the Class CE, Class M-11, Class M-10, Class M-9, Class M-8 and Class M-7
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 or by amounts paid under the Interest Rate Swap Agreement and available
for that purpose) will be allocated to the Class M-6 Certificates. If the
Certificate Principal Balances of the Class CE, Class M-11, Class M-10, Class
M-9 and Class M-8 Certificates have been reduced to zero, the yield to maturity
on the Class M-7 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 or by amounts paid under the Interest Rate Swap
Agreement and available for that purpose) will be allocated to the Class M-7
Certificates. If the Certificate Principal Balances of the Class CE, Class M-11,
Class M-10 and Class M-9 Certificates have been reduced to zero, the yield to
maturity on the Class M-8 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 or by amounts paid under the Interest
Rate Swap Agreement and available for that purpose) will be allocated to the
Class M-8 Certificates. If the Certificate Principal Balances of the Class CE,
Class M-11 and Class M-10 Certificates have been reduced to zero, the yield to
maturity on the Class M-9 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 or by amounts paid under the Interest
Rate Swap Agreement and available for that purpose) will be allocated to the
Class M-9 Certificates. If the Certificate Principal Balance of the Class CE
Certificates and Class M-11 Certificates has been reduced to zero, the yield to
maturity on the Class M-10 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 or by amounts paid under the Interest
Rate Swap Agreement and available for that purpose) will be allocated to the
Class M-10 Certificates. If the Certificate Principal Balance of the Class CE
Certificates has been reduced to zero, the yield to maturity on the Class M-11
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 or by amounts paid under the Interest Rate Swap Agreement and available
for that purpose) will be allocated to the Class M-11 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 M-7, Class M-8, Class M-9,
Class M-10, Class M-11 and Class CE Certificates are approximately 3.55%,
approximately 3.25%, approximately 1.90%, approximately 1.65%, approximately
1.65%, approximately 1.45%, approximately 1.40%, approximately 1.15%,
approximately 0.90%, approximately 0.55%, approximately 1.00% and approximately
2.55%, respectively. Investors in the Mezzanine Certificates should fully
consider the risk that Realized Losses on the Mortgage Loans could result in the
failure of investors to fully recover their investments. In addition, 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 (except in the case of subsequent
recoveries as described in this prospectus supplement). However, Allocated
Realized Loss Amounts may be paid to the holders of the Mezzanine Certificates
from Net Monthly Excess Cashflow and from payments received by the Securities
Administrator in respect of the Interest Rate Swap Agreement in the priorities
set forth under "Description of the Certificates--Overcollateralization
Provisions" and "Description of the Certificates--The Cap Provider and the Swap
Provider--The Swap Agreement" in this prospectus supplement.
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 Class A
S-95
Certificates and Mezzanine 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 2006-CW1, Asset
Backed Pass-Through Certificates will consist of nineteen classes of
certificates, designated as (i) the Class A-1 Certificates; (ii) the Class A-2A,
Class A-2B, Class A-2C and Class A-2D 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,
Class M-6, Class M-7, Class M-8, Class M-9, Class M-10 and Class M-11
Certificates (collectively, the "Mezzanine Certificates"); (iv) the Class CE
Certificates (collectively, with the Mezzanine Certificates, the "Subordinate
Certificates"); (v) the Class P Certificates; and (vi) the Class R Certificates
(also referred to herein as the "Residual Certificates"). Only the Class A
Certificates and the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5,
Class M-6, Class M-7, Class M-8 and Class M-9 Certificates (collectively, the
"Offered Certificates") are offered by this prospectus supplement.
Distributions on the Class A Certificates and Mezzanine Certificates
will be made on the 25th day of each month, or, if that day is not a business
day, on the next succeeding business day, beginning in August 2006 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 and any Distribution Date 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 $843,837,521, subject to a
permitted variance of plus or minus 5%.
The Offered Certificates will have the initial Certificate Principal
Balance set forth in the table appearing on the cover of this prospectus
supplement and the Class M-10 Certificates and Class M-11 Certificates will have
the initial Certificate Principal Balances set forth in the definition of
"Certificate Principal Balance" under "Description of the
Certificates--Glossary" below. The Pass-Through Rates on the Class A
Certificates and Mezzanine Certificates will be calculated for each Distribution
Date as described under "--Pass-Through Rates" below. The Class A Certificates
evidence an initial aggregate undivided interest of approximately 79.00% in the
trust fund, the Class M-1, Class M-2, Class M-3, Class M-4, Class M-5, Class
M-6, Class M-7, Class M-8, Class M-9, Class M-10 and Class M-11 Certificates
evidence initial undivided interests of approximately 3.55%, approximately
3.25%, approximately 1.90%, approximately 1.65%, approximately 1.65%,
approximately 1.45%, approximately 1.40%, approximately 1.15%, approximately
0.90%, approximately 0.55% and approximately 1.00%, respectively, in the trust
fund and the Class CE Certificates evidence an initial undivided interest of
approximately 2.55% in the trust fund.
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BOOK-ENTRY CERTIFICATES
The Class A Certificates and the Mezzanine 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 Clearstream's 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 depository for Clearstream, and JPMorgan Chase Bank,
N.A. will act as depository for Euroclear (in such capacities, individually the
"Relevant Depository" and collectively the "European Depositories"). Investors
may hold such beneficial interests in the Book-Entry Certificates in minimum
dollar denominations of $25,000 and integral multiples of $1.00 in excess
thereof. 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 Class A Certificates and the Mezzanine 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 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
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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 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.
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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 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
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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 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.
S-100
As of the Closing Date, the certificate registrar designates its offices located
at Sixth Street and Marquette Avenue, 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 0.140% 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 as of
the last day of the related Due Period is reduced to less than or equal to 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 0.280%, 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 0.050% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 0.100% 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 A-2B Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 0.100% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 0.200%, 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 0.140% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 0.280%, 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-2D Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 0.260% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 0.520%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass Through Rate for the Distribution Date.
The Pass-Through Rate on the Class M-1 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 0.260% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 0.390%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for the Distribution Date.
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The Pass-Through Rate on the Class M-2 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 Optional Termination Date, or
One-Month LIBOR plus 0.480%, 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 0.360% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 0.540%, 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 0.380% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 0.570%, 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 0.420% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 0.630%, 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 0.480% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 0.720%, 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-7 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 0.950% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 1.425%, 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-8 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 1.100% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 1.600%, 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-9 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 1.900% in the case of each
Distribution Date through and including the Optional Termination Date, or One
Month LIBOR plus 2.400%, 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-10 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 2.500% in the case of each
Distribution Date through and including the Optional Termination Date, or One
Month LIBOR plus 3.000%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass Through Rate for the Distribution Date.
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The Pass Through Rate on the Class M-11 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 2.500% in the case of each
Distribution Date through and including the Optional Termination Date, or One
Month LIBOR plus 3.000%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass Through Rate for the Distribution Date.
GLOSSARY
"ADMINISTRATION FEE RATE": With respect to each Mortgage Loan, the
Administration Fee Rate is equal to the sum of (i) the Servicing Fee Rate and
(ii) 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 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, Subsequent Recoveries and proceeds
from repurchases of and substitutions for the Mortgage Loans received during the
related Prepayment Period); and (iii) all P&I Advances with respect to the
Mortgage Loans received for the Distribution Date.
"CERTIFICATE PRINCIPAL BALANCE": The Certificate Principal Balance of a
Class A Certificate or Mezzanine Certificate outstanding at any time represents
the then maximum amount that the holder of such certificate is entitled to
receive as distributions allocable to principal from the cash flow on the
Mortgage Loans and the other assets in the trust fund. The Certificate Principal
Balance of a Class A Certificate or Mezzanine Certificate as of any date of
determination is equal to the initial Certificate Principal Balance of such
certificate plus, in the case of a Mezzanine 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 Mezzanine 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 M-10 Certificates and Class M-11
Certificates is equal to approximately $4,641,000 and $8,438,000, respectively.
The Certificate Principal Balance of the Class CE Certificates as of any date of
determination is equal to the excess, if any, of (i) the then aggregate
principal balance of the Mortgage Loans over (ii) the then aggregate Certificate
Principal Balance of the Class A Certificates, Mezzanine Certificates and the
Class P Certificates. The initial Certificate Principal Balance of the Class P
Certificates is equal to $100.
"CLASS A PRINCIPAL DISTRIBUTION AMOUNT": The Class A Principal
Distribution Amount is an amount equal to the sum of the Class A-1 Principal
Distribution Amount and the Class A-2 Principal Distribution Amount.
"CLASS A-1 ALLOCATION PERCENTAGE": For any Distribution Date, the
percentage equivalent of a fraction, the numerator of which is (x) the Group I
Principal Remittance Amount for such
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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
58.00% and (ii) the aggregate principal balance of the Group I Mortgage Loans as
of the last day of the related Due Period (after giving effect to scheduled
payments of principal due during the related Due Period, to the extent received
or advanced, and unscheduled collections of principal received during the
related Prepayment Period) and (B) the aggregate principal balance of the Group
I Mortgage Loans as of the last day of the related Due Period (after giving
effect to scheduled payments of principal due during the related Due Period, to
the extent received or advanced, and unscheduled collections of principal
received during the related Prepayment Period) minus 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, 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, Class A-2C and
Class A-2D Certificates immediately prior to the Distribution Date over (y) the
lesser of (A) the product of (i) approximately 58.00% and (ii) the aggregate
principal balance of the Group II Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the aggregate principal balance of the Group II Mortgage Loans
as of the last day of the related Due Period (after giving effect to scheduled
payments of principal due during the related Due Period, to the extent received
or advanced, and unscheduled collections of principal received during the
related Prepayment Period) minus 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 M-1/M-2/M-3 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-1/M-2/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 and (ii) the sum of the Certificate Principal
Balances of the Class M-1, Class M-2 and Class M-3 Certificates immediately
prior to the Distribution Date over (y) the lesser of (A) the product of (i)
approximately 75.40% 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 aggregate Certificate Principal Balance of the Class
M-1, Class M-2 and Class M-3 Certificates after taking into account the payment
of the Class M-1/M-2/M-
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3 Principal Distribution Amount on the Distribution Date and (iii) 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 78.70% 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-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 aggregate Certificate Principal Balance of the Class
M-1, Class M-2 and Class M-3 Certificates after taking into account the payment
of the Class M-1/M-2/M-3 Principal Distribution Amount on the Distribution Date,
(iii) the Certificate Principal Balance of the Class M-4 Certificates after
taking into account the payment of the Class M-4 Principal Distribution Amount
on the Distribution Date and (iv) 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 82.00% and (ii) the aggregate principal
balance of the Mortgage Loans as of the last day of the related Due Period
(after giving effect to scheduled payments of principal due during the related
Due Period, to the extent received or advanced, and unscheduled collections of
principal received during the related Prepayment Period) and (B) the aggregate
principal balance of the Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period) minus
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 aggregate Certificate Principal Balance of the Class
M-1, Class M-2 and Class M-3 Certificates after taking into account the payment
of the Class M-1/M-2/M-3 Principal Distribution Amount on the Distribution Date,
(iii) the Certificate Principal Balance of the Class M-4 Certificates after
taking into account the payment of the Class M-4 Principal Distribution Amount
on the Distribution Date, (iv) the Certificate Principal Balance of the Class
M-5 Certificates after taking into account the payment of the Class M-5
Principal Distribution Amount on the Distribution Date and (v) 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
84.90% 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-7 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-7 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
S-105
Amount on the Distribution Date, (ii) the aggregate Certificate Principal
Balance of the Class M-1, Class M-2 and Class M-3 Certificates after taking into
account the payment of the Class M-1/M-2/M-3 Principal Distribution Amount on
the Distribution Date, (iii) the Certificate Principal Balance of the Class M-4
Certificates after taking into account the payment of the Class M-4 Principal
Distribution Amount on the Distribution Date, (iv) the Certificate Principal
Balance of the Class M-5 Certificates after taking into account the payment of
the Class M-5 Principal Distribution Amount on the Distribution Date, (v) the
Certificate Principal Balance of the Class M-6 Certificates after taking into
account the payment of the Class M-6 Principal Distribution Amount on the
Distribution Date and (vi) the Certificate Principal Balance of the Class M-7
Certificates immediately prior to the Distribution Date over (y) the lesser of
(A) the product of (i) approximately 87.70% 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-8 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-8 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 aggregate Certificate Principal Balance of the Class
M-1, Class M-2 and Class M-3 Certificates after taking into account the payment
of the Class M-1/M-2/M-3 Principal Distribution Amount on the Distribution Date,
(iii) the Certificate Principal Balance of the Class M-4 Certificates after
taking into account the payment of the Class M-4 Principal Distribution Amount
on the Distribution Date, (iv) the Certificate Principal Balance of the Class
M-5 Certificates after taking into account the payment of the Class M-5
Principal Distribution Amount on the Distribution Date, (v) the Certificate
Principal Balance of the Class M-6 Certificates after taking into account the
payment of the Class M-6 Principal Distribution Amount on the Distribution Date,
(vi) the Certificate Principal Balance of the Class M-7 Certificates after
taking into account the payment of the Class M-7 Principal Distribution Amount
on the Distribution Date and (vii) the Certificate Principal Balance of the
Class M-8 Certificates immediately prior to the Distribution Date over (y) the
lesser of (A) the product of (i) approximately 90.00% and (ii) the aggregate
principal balance of the Mortgage Loans as of the last day of the related Due
Period (after giving effect to scheduled payments of principal due during the
related Due Period, to the extent received or advanced, and unscheduled
collections of principal received during the related Prepayment Period) and (B)
the aggregate principal balance of the Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) minus the product of (i) 0.50% and (ii) the aggregate principal balance
of the Mortgage Loans as of the Cut-off Date.
"CLASS M-9 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-9 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 aggregate Certificate Principal Balance of the Class
M-1, Class M-2 and Class M-3 Certificates after taking into account the payment
of the Class M-1/M-2/M-3 Principal Distribution Amount on the Distribution Date,
(iii) the Certificate Principal Balance of the Class M-4 Certificates after
taking into account the payment of the Class M-4 Principal Distribution Amount
on the Distribution Date, (iv) the Certificate Principal Balance of the Class
M-5 Certificates after taking into account the payment of the Class M-5
Principal Distribution Amount on the Distribution Date, (v) the Certificate
Principal Balance of the Class M-6 Certificates after taking into account the
payment of the Class M-6 Principal Distribution Amount on the Distribution Date,
(vi)
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the Certificate Principal Balance of the Class M-7 Certificates after taking
into account the payment of the Class M-7 Principal Distribution Amount on the
Distribution Date, (vii) the Certificate Principal Balance of the Class M-8
Certificates after taking into account the payment of the Class M-8 Principal
Distribution Amount on the Distribution Date and (viii) the Certificate
Principal Balance of the Class M-9 Certificates immediately prior to the
Distribution Date over (y) the lesser of (A) the product of (i) approximately
91.80% 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-10 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-10 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 aggregate Certificate Principal Balance of the Class
M-1, Class M-2 and Class M-3 Certificates after taking into account the payment
of the Class M-1/M-2/M-3 Principal Distribution Amount on the Distribution Date,
(iii) the Certificate Principal Balance of the Class M-4 Certificates after
taking into account the payment of the Class M-4 Principal Distribution Amount
on the Distribution Date, (iv) the Certificate Principal Balance of the Class
M-5 Certificates after taking into account the payment of the Class M-5
Principal Distribution Amount on the Distribution Date, (v) the Certificate
Principal Balance of the Class M-6 Certificates after taking into account the
payment of the Class M-6 Principal Distribution Amount on the Distribution Date,
(vi) the Certificate Principal Balance of the Class M-7 Certificates after
taking into account the payment of the Class M-7 Principal Distribution Amount
on the Distribution Date, (vii) the Certificate Principal Balance of the Class
M-8 Certificates after taking into account the payment of the Class M-8
Principal Distribution Amount on the Distribution Date, (viii) the Certificate
Principal Balance of the Class M-9 Certificates after taking into account the
payment of the Class M-9 Principal Distribution Amount on the Distribution Date
and (ix) the Certificate Principal Balance of the Class M-10 Certificates
immediately prior to the Distribution Date over (y) the lesser of (A) the
product of (i) approximately 92.90% 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-11 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-11 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 aggregate Certificate Principal Balance of the Class
M-1, Class M-2 and Class M-3 Certificates after taking into account the payment
of the Class M-1/M-2/M-3 Principal Distribution Amount on the Distribution Date,
(iii) the Certificate Principal Balance of the Class M-4 Certificates after
taking into account the payment of the Class M-4 Principal Distribution Amount
on the Distribution Date, (iv) the Certificate Principal Balance of the Class
M-5 Certificates after taking into account the payment of the Class M-5
Principal Distribution Amount on the Distribution Date, (v) the Certificate
Principal Balance of the Class M-6 Certificates after taking into account the
payment of the Class M-6 Principal Distribution Amount on the Distribution Date,
(vi)
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the Certificate Principal Balance of the Class M-7 Certificates after taking
into account the payment of the Class M-7 Principal Distribution Amount on the
Distribution Date, (vii) the Certificate Principal Balance of the Class M-8
Certificates after taking into account the payment of the Class M-8 Principal
Distribution Amount on the Distribution Date, (viii) the Certificate Principal
Balance of the Class M-9 Certificates after taking into account the payment of
the Class M-9 Principal Distribution Amount on the Distribution Date, (ix) the
Certificate Principal Balance of the Class M-10 Certificates after taking into
account the payment of the Class M-10 Principal Distribution Amount on the
Distribution Date and (x) the Certificate Principal Balance of the Class M-11
Certificates immediately prior to the Distribution Date over (y) the lesser of
(A) the product of (i) approximately 94.90% 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 (which includes
the Overcollateralization Amount) by (y) the aggregate principal balance of the
Mortgage Loans, calculated after taking into account distributions of principal
on the Mortgage Loans and distribution of the Principal Distribution Amount to
the holders of the certificates then entitled to distributions of principal on
the Distribution Date.
"DETERMINATION DATE": 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": With respect to any Distribution Date, the period
commencing on the second day of the month immediately preceding the month in
which the Distribution Date occurs and ending on the first day of the month in
which the Distribution Date occurs.
"GROUP I ALLOCATION PERCENTAGE": The aggregate principal balance of the
Group I Mortgage Loans divided by the sum of the aggregate principal balance of
the Group I Mortgage Loans and Group II Mortgage Loans.
"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 Credit Risk Manager,
the Master Servicer or the Securities Administrator with respect to the Group I
Mortgage Loans.
"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 related Prepayment
Period; (iii) the principal portion of all other unscheduled collections,
including insurance proceeds, liquidation proceeds, Subsequent Recoveries and
all full and partial
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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 Credit Risk Manager, the Master
Servicer or the Securities Administrator. In no event will the Group I Principal
Distribution Amount with respect to any Distribution Date be (x) less than zero
or (y) greater than the then outstanding aggregate Certificate Principal Balance
of the Class A-1 Certificates and the Mezzanine Certificates.
"GROUP I PRINCIPAL REMITTANCE AMOUNT": The Group I Principal Remittance
Amount for any Distribution Date will be the sum of the amounts described in
clauses (i) through (iii) of the definition of Group I Principal Distribution
Amount net of any amounts payable or reimbursable therefrom to the Servicer, the
Trustee, the Custodian, the Credit Risk Manager, the Master Servicer or the
Securities Administrator.
"GROUP II ALLOCATION PERCENTAGE": The aggregate principal balance of the
Group II Mortgage Loans divided by the sum of the aggregate principal balance of
the Group I Mortgage Loans and the Group II Mortgage Loans.
"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
therefrom to the Servicer, the Trustee, the Custodian, the Credit Risk Manager,
the Master Servicer or the Securities Administrator with respect to the Group II
Mortgage Loans.
"GROUP II PRINCIPAL DISTRIBUTION AMOUNT": The Group II Principal
Distribution Amount for any Distribution Date will be the sum of (i) the
principal portion of all scheduled monthly payments on the Group II Mortgage
Loans due during the related Due Period, whether or not received on or prior to
the related Determination Date; (ii) the principal portion of all proceeds
received in respect of the repurchase of a Group II Mortgage Loan (or, in the
case of a substitution, certain amounts representing a principal adjustment) as
required by the pooling and servicing agreement during the related Prepayment
Period; (iii) the principal portion of all other unscheduled collections,
including insurance proceeds, liquidation proceeds, Subsequent Recoveries 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 Credit
Risk Manager, the Master Servicer or the Securities Administrator. In no event
will the Group II Principal Distribution Amount with respect to any Distribution
Date be (x) less than zero or (y) greater than the then outstanding aggregate
Certificate Principal Balance of the Class A-2 Certificates and the Mezzanine
Certificates.
"GROUP II PRINCIPAL REMITTANCE AMOUNT": The Group II Principal
Remittance Amount for any Distribution Date will be the sum of the amounts
described in clauses (i) through (iii) of the definition of Group II Principal
Distribution Amount net of any amounts payable or reimbursable therefrom to the
Servicer, the Trustee, the Custodian, the Credit Risk Manager, the Master
Servicer or the Securities Administrator.
"INTEREST ACCRUAL PERIOD": The Interest Accrual Period for the Class A
Certificates and Mezzanine Certificates and any Distribution Date is the period
commencing on the Distribution Date of the month immediately preceding the month
in which such Distribution Date occurs (or, in
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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 which
have elapsed in the applicable Interest Accrual Period.
"INTEREST CARRY FORWARD AMOUNT": The Interest Carry Forward Amount with
respect to any class of Class A Certificates or Mezzanine 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 Class A Certificates or Mezzanine 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 an amount
not less than zero), in the case of each such class, by the allocable share, if
any, for that class of Prepayment Interest Shortfalls to the extent not covered
by Compensating Interest paid by the Master Servicer or the Servicer and
shortfalls resulting from the application of the Relief Act or similar state or
local laws.
"INTEREST REMITTANCE AMOUNT": The Interest Remittance Amount for any
Distribution Date is the sum of the Group I Interest Remittance Amount and the
Group II Interest Remittance Amount.
"NET MONTHLY EXCESS CASHFLOW": The Net Monthly Excess Cashflow for any
Distribution Date is equal to the sum of (i) any Overcollateralization Reduction
Amount and (ii) the excess of (x) the Available Distribution Amount for the
Distribution Date over (y) the sum for the Distribution Date of the aggregate of
the Senior Interest Distribution Amounts payable to the holders of the Class A
Certificates, the aggregate of the Interest Distribution Amounts payable to the
holders of the Mezzanine Certificates, the Principal Remittance Amount and any
Net Swap Payment or Swap Termination Payment (not caused by the occurrence of a
Swap Provider Trigger Event) owed to the Swap Provider.
"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 product of (i) twelve and (ii) a fraction, expressed as a
percentage, the numerator of which is the amount of interest which accrued on
the Group I Mortgage Loans in the related Due Period minus the fees payable to
the Servicer and the Credit Risk Manager with respect to the Group I Mortgage
Loans for such Distribution Date and the Group I Allocation Percentage of any
Net Swap Payment payable to the Swap Provider and Swap Termination Payment
payable to the Swap Provider which was not caused by the occurrence of a Swap
Provider Trigger Event, in each case for such Distribution Date and the
denominator of which is the aggregate principal balance of the Group I Mortgage
Loans as of the last day of the immediately preceding Due Period (or as of the
Cut-off Date with respect to the first Distribution Date).
(B) any class of 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 product of (i) twelve and (ii) a fraction, expressed as a
percentage, the numerator of which is the amount of interest which accrued on
the Group II Mortgage Loans in the related Due Period minus the fees payable to
the Servicer and the Credit Risk Manager with respect to the Group II Mortgage
Loans for such Distribution Date and the Group II Allocation Percentage of any
Net Swap Payment payable to the
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Swap Provider and Swap Termination Payment payable to the Swap Provider which
was not caused by the occurrence of a Swap Provider Trigger Event, in each case
for such Distribution Date and the denominator of which is the aggregate
principal balance of the Group II Mortgage Loans as of the last day of the
immediately preceding Due Period (or as of the Cut-off Date with respect to the
first Distribution Date).
(C) the Mezzanine Certificates, is a rate per annum equal to the
weighted average (weighted in proportion to the results of subtracting from the
Scheduled Principal Balance of each loan group, the Certificate Principal
Balance of the related Class A Certificates) of (i) the Net WAC Pass-Through
Rate for the Class A-1 Certificates and (ii) the Net WAC Pass-Through Rate for
the Class A-2 Certificates.
"NET WAC RATE CARRYOVER AMOUNT": With respect to any class of Class A
Certificates or Mezzanine Certificates and any Distribution Date on which the
Pass-Through Rate is limited to the applicable Net WAC Pass-Through Rate, an
amount equal to the sum of (i) the excess of (x) the amount of interest such
class would have been entitled to receive on such Distribution Date had the
applicable Net WAC Pass-Through Rate not been applicable to such class 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 the sum of the aggregate
outstanding principal balance of the Mortgage Loans immediately following the
Distribution Date exceeds the sum of the Certificate Principal Balances of the
Class A Certificates, Mezzanine Certificates and Class P Certificates after
taking into account the payment of the Principal Remittance Amount on the
related Distribution Date.
"OVERCOLLATERALIZATION INCREASE AMOUNT": An Overcollateralization
Increase Amount for any Distribution Date is the amount of Net Monthly Excess
Cashflow actually applied as an accelerated payment of principal to the classes
of Class A Certificates and Mezzanine Certificates then entitled to
distributions 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,
but is limited to the Principal Remittance Amount. The Overcollateralization
Reduction Amount is equal to zero when a Trigger Event is in effect.
"PREPAYMENT PERIOD": For any Distribution Date, the period from the 16th
day of the month immediately preceding the Distribution Date to the 15th day of
the month of the Distribution Date.
"PRINCIPAL DISTRIBUTION AMOUNT": The Principal Distribution Amount for
any Distribution Date is the sum of the Group I Principal Distribution Amount
and 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
Group II Principal Remittance Amount.
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"REQUIRED OVERCOLLATERALIZATION AMOUNT": Initially, shall mean an amount
equal to the product of (i) approximately 2.55% 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.
"SERVICER REMITTANCE DATE": With respect to any Distribution Date, the
18th day of each month; provided that if the 18th day of a given month is not a
business day, the Servicer Remittance Date shall be the business day immediately
preceding such 18th day.
"STEPDOWN DATE": The Stepdown Date is the earlier to occur of (i) the
later to occur of (x) the Distribution Date occurring in August 2009 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
42.00% and (ii) the first Distribution Date following the 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 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 approximately 38.00% 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
- --------------------------- ---------------------------------------------------
August 2008 to July 2009 1.20% plus 1/12 of 1.45% for each month thereafter
August 2009 to July 2010 2.65% plus 1/12 of 1.60% for each month thereafter
August 2010 to July 2011 4.25% plus 1/12 of 1.30% for each month thereafter
August 2011 to July 2012 5.55% plus 1/12 of 0.70% for each month thereafter
August 2012 to July 2013 6.25% plus 1/12 of 0.10% for each month thereafter
August 2013 and thereafter 6.35%
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THE CAP PROVIDER AND THE SWAP PROVIDER
The Royal Bank of Scotland plc ("RBS") is the cap provider (in such
capacity, the "Cap Provider") and the swap provider (in such capacity, the "Swap
Provider").
RBS is a company limited by shares incorporated under the law of
Scotland and is the principal operating subsidiary of The Royal Bank of Scotland
Group plc ("RBS Group"), which, together with its subsidiaries, is a diversified
financial services group engaged in a wide range of banking, financial and
finance related activities in the United Kingdom and internationally. The
short-term unsecured and unguaranteed debt obligations of RBS are currently
rated "A-1+" by S&P, "P-1" by Moody's and "F1+" by Fitch. The long-term,
unsecured, unsubordinated and unguaranteed debt obligations of RBS are currently
rated "AA" by S&P, "Aa1" by Moody's and "AA+" by Fitch. Except for the
information provided in this paragraph, neither RBS nor the RBS Group has been
involved in the preparation of, and do not accept responsibility for, this
prospectus supplement or the accompanying prospectus.
THE CAP AGREEMENTS
The Trustee on behalf of the trust will enter into two separate interest
rate cap agreements (each, a "Cap Agreement") with the Cap Provider. Pursuant to
the pooling and servicing agreement, the Trustee will appoint the Securities
Administrator to receive and distribute funds in respect of the Cap Agreements
on behalf of the Trustee. Under the Cap Agreement relating to the Class A-1
Certificates and Mezzanine Certificates (the "Group I Cap Agreement") on or
before each Distribution Date commencing with the Distribution Date in August
2006 and ending with the Distribution Date in January 2007, the Cap Provider
will be obligated to make a payment for that Distribution Date equal to the
product of (x) the excess, if any, of (i) One-Month LIBOR as determined pursuant
to the Group I Cap Agreement for the related calculation period (as defined in
the Group I Cap Agreement) over (ii) the strike rate for such Distribution Date
set forth in the Group I Cap Agreement, (y) the Group I Cap Agreement Notional
Amount (as defined below) for that Distribution Date, and (z) a fraction, the
numerator of which is equal to the actual number of days in the related
calculation period and the denominator of which is 360.
The Group I Cap Agreement Notional Amount for each Distribution Date
will be equal to the lesser of (x) the aggregate Certificate Principal Balance
of the Class A-1, Mezzanine and Class CE Certificates at the beginning of the
related calculation period and (y) Group I Cap Agreement Calculation Amount set
forth in the Group I Cap Agreement for such Distribution Date (such lesser
amount, the "Group I Cap Agreement Notional Amount"). The Group I Cap Agreement
Notional Amount is set forth below and will be substantially the same schedule
as set forth in the Group I Cap Agreement.
GROUP I CAP AGREEMENT
DISTRIBUTION DATE NOTIONAL AMOUNT ($) STRIKE RATE (%)
--------------------- ------------------------- -------------------
August 2006 441,118,026.00 7.50
September 2006 436,789,480.00 7.50
October 2006 431,714,598.00 7.50
November 2006 425,903,133.00 7.50
December 2006 419,368,727.00 7.50
January 2007 412,128,860.00 7.50
The Group I Cap Agreement will terminate following the Distribution Date
in January 2007, unless terminated earlier upon the occurrence of a Cap
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Agreement Event of Default, a Cap Agreement Termination Event or a Cap Agreement
Additional Termination Event, each as defined below.
Under the Cap Agreement relating to the Class A-2 Certificates and the
Mezzanine Certificates (the "Group II Cap Agreement") on or before each
Distribution Date commencing with the Distribution Date in August 2006 and
ending with the Distribution Date in January 2007, the Cap Provider will be
obligated to make a payment for that Distribution Date equal to the product of
(x) the excess, if any, of (i) One-Month LIBOR as determined pursuant to the
Group II Cap Agreement for the related calculation period (as defined in the
Group II Cap Agreement) over (ii) the strike rate for such Distribution Date set
forth in the Group II Cap Agreement, (y) the Group II Cap Agreement Notional
Amount (as defined below) for that Distribution Date, and (z) a fraction, the
numerator of which is equal to the actual number of days in the related
calculation period and the denominator of which is 360.
The Group II Cap Agreement Notional Amount for each Distribution Date
will be equal to the lesser of (x) the aggregate Certificate Principal Balance
of the Class A-2, Mezzanine and Class CE Certificates at the beginning of the
related calculation period and (y) Group II Cap Agreement Calculation Amount set
forth in the Group II Cap Agreement for such Distribution Date (such lesser
amount, the "Group II Cap Agreement Notional Amount"). The Group II Cap
Agreement Notional Amount is set forth below and will be substantially the same
schedule as set forth in the Group II Cap Agreement.
GROUP II CAP AGREEMENT
DISTRIBUTION DATE NOTIONAL AMOUNT ($) STRIKE RATE (%)
--------------------- -------------------------- -------------------
August 2006 402,719,496.00 7.50
September 2006 398,956,933.00 7.50
October 2006 394,536,582.00 7.50
November 2006 389,466,522.00 7.50
December 2006 383,758,121.00 7.50
January 2007 377,426,060.00 7.50
The Group II Cap Agreement will terminate following the Distribution
Date in January 2007, unless terminated earlier upon the occurrence of a Cap
Agreement Event of Default, a Cap Agreement Termination Event or a Cap Agreement
Additional Termination Event, each as defined below.
If, on any Distribution Date, the payments received by the Securities
Administrator under the Cap Agreements exceed the amount of the Net WAC Rate
Carryover Amounts payable to the Class A Certificates and Mezzanine Certificates
for such Distribution Date, such excess will be distributed to the Class CE
Certificates.
The obligations of the Cap Provider to pay specified amounts due under
each Cap Agreement (other than Cap Agreement Termination Payments (as defined
below)) will be subject to the following conditions precedent: (1) no Cap
Agreement Event of Default or event that with the giving of notice or lapse of
time or both would become a Cap Agreement Event of Default will have occurred
and be continuing with respect to the related Cap Agreement and (2) no "early
termination date" (as defined in the related Cap Agreement) has occurred or been
effectively designated with respect to the Cap Agreement.
Events of default under each Cap Agreement (each a "Cap Agreement Event
of Default") include the following:
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o failure to make a payment due under the Cap Agreement, after notice
of such failure is received and expiration of a specified grace
period,
o certain insolvency or bankruptcy events, and
o a merger by the Cap Provider without an assumption of its
obligations under the Cap Agreement,
each as further described in the related Cap Agreement.
Termination events under each Cap Agreement (each a "Cap Agreement
Termination Event") include the following:
o illegality (which generally relates to changes in law causing it to
become unlawful for either party to perform its obligations under
the Cap Agreement),
o tax event (which generally relates to the Securities Administrator
receiving a payment under the Cap Agreement from which an amount has
been deducted or withheld for or on account of taxes, as a result of
a change in tax law) and
o tax event upon merger (which generally relates to the Securities
Administrator receiving a payment under the Cap Agreement from which
an amount has been deducted or withheld for or on account of an
indemnifiable tax resulting from a merger or similar transaction),
each as further described the related Cap Agreement.
Additional termination events" under each Cap Agreement (each a "Cap
Agreement Additional Termination Event") include the following:
o failure of the Cap Provider to comply with the Cap Agreement
Downgrade Provisions,
o failure of the Cap Provider to comply with the Regulation AB
provisions of the Cap Agreement, and
o occurrence of an optional termination of the securitization pursuant
to the terms of the Pooling and Servicing Agreement,
each as further described in the related Cap Agreement.
If the Cap Provider's credit ratings are withdrawn or reduced below the
levels specified in the Cap Agreement, then, unless each rating agency has
reconfirmed the ratings which were in effect immediately prior to such
withdrawal or reduction for all securities the ratings for which are supported
by the Cap Agreement, the Cap Provider will be required, at its own expense,
either (1) to obtain a substitute cap provider which will assume the obligations
of the Cap Provider under the Cap Agreement and which meets all rating agency
requirements and any third party consent requirements provided therein or in any
related documentation, or (2) to establish any other arrangement specified in
the Cap Agreement that meets all rating agency requirements and any third party
consent requirements provided therein or in any related documentation
(collectively, the "Cap Agreement Downgrade Provisions").
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Upon the occurrence of a Cap Agreement Event of Default, the
non-defaulting party will have the right to designate an early termination date
(an "Early Termination Date"). Upon the occurrence of a Cap Agreement
Termination Event or a Cap Agreement Additional Termination Event, an Early
Termination Date may be designated by one of the parties (as specified in the
Cap Agreement) and will occur only upon notice and, in some circumstances, after
any affected party has used reasonable efforts to transfer its rights and
obligations under the Cap Agreement to a related entity within a specified
period after notice has been given of the Cap Agreement Termination Event, all
as set forth in the Cap Agreement. The occurrence of an Early Termination Date
under the Cap Agreement will constitute a "Cap Agreement Early Termination."
Upon a Cap Agreement Early Termination, the Cap Provider may be liable
to make a termination payment (the "Cap Agreement Termination Payment") to the
Securities Administrator (regardless, if applicable, of which of the parties has
caused the termination). The Cap Agreement Termination Payment will be based on
the value of the Cap Agreement computed in accordance with the procedures set
forth in the Cap Agreement.
Upon a Cap Agreement Early Termination other than in connection with the
optional termination of the trust, the Securities Administrator, pursuant to the
Pooling and Servicing Agreement, will use reasonable efforts to appoint a
successor yield maintenance agreement provider. The Securities Administrator
will apply any Cap Agreement Termination Payment received from the original Cap
Provider in connection with such Cap Agreement Early Termination to the upfront
payment required to appoint the successor yield maintenance agreement provider.
If the Securities Administrator is unable to appoint a successor yield
maintenance agreement provider within 30 days of the Cap Agreement Early
Termination, then the Securities Administrator will deposit any Cap Termination
Payment received from the original Cap Provider into a separate, non-interest
bearing reserve account and will, on each subsequent Distribution Date, withdraw
from the amount then remaining on deposit in such reserve account an amount
equal to the payment, if any, that would have been paid to the Securities
Administrator by the original Cap Provider calculated in accordance with the
terms of the original Cap Agreement, and distribute such amount in accordance
with the terms of the Pooling and Servicing Agreement.
Upon a Cap Agreement Early Termination in connection with the optional
termination of the trust, if the Securities Administrator receives a Cap
Agreement Termination Payment from the Cap Provider, such Cap Agreement
Termination Payment generally will not be available to Certificateholders;
rather, the Securities Administrator will distribute such Cap Agreement
Termination Payment in accordance with the terms of the Pooling and Servicing
Agreement.
The significance percentage of the Cap Agreements and the Interest Rate
Swap Agreement as calculated in accordance with Item 1115 of Regulation AB, is
less than 10%. The Cap Agreements and the Interest Rate Swap Agreement will
provide that the Cap Provider and Swap Provider may be replaced in certain
circumstances, including if the significance percentage of the Cap Agreements
and the Interest Rate Swap Agreement, is equal to or greater than 10%.
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 INTEREST RATE SWAP AGREEMENT
HSBC Bank USA, National Association as trustee (the "Supplemental
Interest Trust Trustee") on behalf of a separate trust created under the pooling
and servicing agreement (the "Supplemental Interest Trust") will enter into an
interest rate swap agreement (the "Interest Rate Swap Agreement"), with the Swap
Provider. The Interest Rate Swap Agreement will be held in the Supplemental
Interest Trust. The Supplemental Interest Trust Trustee will appoint the
Securities
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Administrator to receive and distribute funds with regards to the Interest Rate
Swap Agreement on behalf of the Supplemental Interest Trust. On each
Distribution Date, the Securities Administrator will deposit into an account
held in the Supplemental Interest Trust (the "Derivative Account"), certain
amounts, if any, received from the Swap Provider. For the avoidance of doubt,
the Supplemental Interest Trust, the Interest Rate Swap Agreement, and the
Derivative Account will not be assets of any REMIC.
Pursuant to the Interest Rate Swap Agreement, on each Distribution Date
commencing on the Distribution Date occurring in February 2007 and terminating
immediately following the Distribution Date in November 2010 (i) the Securities
Administrator (on behalf of the Supplemental Interest Trust and from funds of
such trust) will be obligated to pay to the Swap Provider, a fixed amount equal
to the product of (x) a fixed rate equal to 5.480% per annum, (y) the Swap
Notional Amount for that Distribution Date set forth in the final prospectus
supplement and (z) a fraction, the numerator of which is 30, and the denominator
of which is 360; and (ii) the Swap Provider will be obligated to pay to the
Supplemental Interest Trust for the benefit of the holders of the Class A
Certificates and Mezzanine Certificates, a floating amount equal to the product
of (x) One-Month LIBOR (as determined pursuant to the Interest Rate Swap
Agreement), (y) the Swap Notional Amount set forth below, and (z) a fraction,
the numerator of which is the actual number of days elapsed from the previous
Distribution Date to but excluding the current Distribution Date, and the
denominator of which is 360. A net payment will be required to be made on each
Distribution Date (each such net payment, a "Net Swap Payment") (a) by the
Securities Administrator to the Swap Provider, to the extent that the fixed
amount exceeds the corresponding floating amount, or (b) by the Swap Provider to
the Securities Administrator, to the extent that the floating amount exceeds the
corresponding fixed amount. For each Distribution Date in respect of which the
Securities Administrator is required to make a Net Swap Payment to the Swap
Provider, the trust will be required to make a payment to the Securities
Administrator in the same amount.
The Swap Notional Amount with respect to each Distribution Date
commencing in February 2007 is set forth below and will be substantially the
same schedule as set forth in the Interest Rate Swap Agreement.
DISTRIBUTION DATE SWAP NOTIONAL AMOUNT ($)
------------------------ ------------------------
February 2007 738,774,499
March 2007 714,410,158
April 2007 688,369,440
May 2007 660,852,881
June 2007 634,437,886
July 2007 609,084,922
August 2007 584,751,184
September 2007 561,395,304
October 2007 538,977,752
November 2007 517,460,759
December 2007 496,807,777
January 2008 476,983,904
February 2008 457,901,601
March 2008 439,473,441
April 2008 420,781,547
May 2008 370,326,371
June 2008 327,855,635
July 2008 292,076,263
August 2008 262,245,816
September 2008 251,323,956
October 2008 240,894,077
November 2008 230,909,844
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DISTRIBUTION DATE SWAP NOTIONAL AMOUNT ($)
------------------------ ------------------------
December 2008 221,355,400
January 2009 212,205,676
February 2009 203,443,141
March 2009 195,050,981
April 2009 187,013,137
May 2009 179,315,197
June 2009 171,945,039
July 2009 164,884,889
August 2009 158,121,391
September 2009 151,641,784
October 2009 145,433,877
November 2009 139,486,011
December 2009 133,787,309
January 2010 128,326,781
February 2010 123,094,229
March 2010 118,079,907
April 2010 113,274,501
May 2010 108,669,100
June 2010 104,255,302
July 2010 100,024,812
August 2010 95,969,831
September 2010 92,082,904
October 2010 88,356,900
November 2010 84,784,997
The Interest Rate Swap Agreement will terminate immediately following
the last Distribution Date for the Interest Rate Swap Agreement set forth in the
final prospectus supplement, unless terminated earlier upon the occurrence of a
Swap Event of Default, a Swap Termination Event or a Swap Additional Termination
Event (each as defined below).
The respective obligations of the Swap Provider and the Supplemental
Interest Trust to pay specified amounts due under the Interest Rate Swap
Agreement will be subject to the following conditions precedent: (1) no Swap
Default or event that with the giving of notice or lapse of time or both would
become a Swap Default, shall have occurred and be continuing with respect to the
Interest Rate Swap Agreement and (2) no "Early Termination Date" (as defined in
the Interest Rate Swap Agreement) has occurred or been effectively designated
with respect to the Interest Rate Swap Agreement.
Events of default under the Interest Rate Swap Agreement (each a "Swap
Event of Default") include the following:
o failure to make a payment due under the Interest Rate Swap Agreement
after notice of such failure is received and expiration of a
specified grace period,
o certain insolvency or bankruptcy events, and
o a merger by the Swap Provider without an assumption of its
obligations under the Interest Rate Swap Agreement,
each as further described in the Interest Rate Swap Agreement.
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Termination events under the Interest Rate Swap Agreement (each a "Swap
Termination Event") include the following:
o illegality (which generally relates to changes in law causing it to
become unlawful for either party to perform its obligations under
the Interest Rate Swap Agreement),
o tax event (which generally relates to either party to the Interest
Rate Swap Agreement receiving a payment under the Interest Rate Swap
Agreement from which an amount has been deducted or withheld for or
on account of taxes or paying an additional amount on account of an
indemnifiable tax, as defined in the Interest Rate Swap Agreement,
in either case as a result of a change in tax law) and
o tax event upon merger (which generally relates to either party to
the Interest Rate Swap Agreement receiving a payment under the
Interest Rate Swap Agreement from which an amount has been deducted
or withheld for or on account of an indemnifiable tax or paying an
additional amount on account of an indemnifiable tax, in either case
as a result of a merger or similar transaction),
each as further described in the Interest Rate Swap Agreement.
Additional termination events under the Interest Rate Swap Agreement
(each a "Swap Additional Termination Event"), include the following:
o failure of the Swap Provider to comply with the Swap Downgrade
Provisions,
o failure of the Swap Provider to comply with the Regulation AB
provisions of the Interest Rate Swap Agreement,
o occurrence of an optional termination of the securitization pursuant
to the terms of the Pooling and Servicing Agreement, and
o amendment of the Pooling and Servicing Agreement in a manner that
may materially adversely affect the Swap Provider without the prior
written consent of the Swap Provider,
each as further described in the Interest Rate Swap Agreement.
If the Swap Provider's credit ratings are withdrawn or reduced below the
levels specified in the Interest Rate Swap Agreement, then, unless each rating
agency has reconfirmed the ratings which were in effect immediately prior to
such withdrawal or reduction for all securities the ratings for which are
supported by the Interest Rate Swap Agreement, the Swap Provider will be
required, at its own expense, either (1) to obtain a substitute swap provider
which will assume the obligations of the Swap Provider under the Interest Rate
Swap Agreement and which meets all rating agency requirements and any third
party consent requirements provided therein or in any related documentation, or
(2) to establish any other arrangement specified in the Interest Rate Swap
Agreement that meets all rating agency requirements and any third party consent
requirements provided therein or in any related documentation (collectively, the
"Swap Downgrade Provisions").
Upon the occurrence of a Swap Event of Default, the non-defaulting party
will have the right to designate an early termination date (an "Early
Termination Date"). Upon the occurrence of a Swap Termination Event or a Swap
Additional Termination Event, an Early Termination Date may be designated by one
of the parties as specified in the Interest Rate Swap Agreement, and will
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occur only upon notice and, in some circumstances, after any affected party has
used reasonable efforts to transfer its rights and obligations under the
Interest Rate Swap Agreement to a related entity within a specified period after
notice has been given of the Swap Termination Event, all as set forth in the
Interest Rate Swap Agreement. The occurrence of an Early Termination Date under
the Interest Rate Swap Agreement will constitute a "Swap Early Termination."
Upon a Swap Early Termination, the Securities Administrator or the Swap
Provider may be liable to make a swap termination payment (the "Swap Termination
Payment") to the other, regardless, if applicable, of which of the parties has
caused the termination. The Swap Termination Payment will be based on the value
of the Interest Rate Swap Agreement computed in accordance with the procedures
set forth in the Interest Rate Swap Agreement. In the event that the Securities
Administrator is required to make a Swap Termination Payment to the Swap
Provider, the trust will be required to make a payment to the Securities
Administrator in the same amount (to the extent such Swap Termination Payment
has not been paid by the Securities Administrator from any upfront payment
received pursuant to any replacement interest rate swap agreement that may be
entered into by the Securities Administrator Trustee). In the case of a Swap
Termination Payment not triggered by a Swap Provider Trigger Event (as defined
in this prospectus supplement), the trust will be required to make such payment
on the related Distribution Date, and on any subsequent Distribution Dates until
paid in full, prior to distributions to certificateholders. In the case of a
Swap Termination Payment triggered by a Swap Provider Trigger Event, the trust's
obligation to make such payment on the related Distribution Date, and on any
subsequent Distribution Date, generally will be subordinated to distributions to
the holders of the Class A Certificates and Class M Certificates to the extent
described in the Pooling and Servicing Agreement.
Upon a Swap Early Termination other than in connection with the optional
termination of the trust, the Securities Administrator will use reasonable
efforts to appoint a successor swap provider. If the Securities Administrator
receives a Swap Termination Payment from the Swap Provider in connection with
such Swap Early Termination, the Securities Administrator will apply such Swap
Termination Payment to any upfront payment required to appoint the successor
swap provider. If the Securities Administrator is required to pay a Swap
Termination Payment to the Swap Provider in connection with such Swap Early
Termination, the Securities Administrator will apply any upfront payment
received from the successor swap provider to pay such Swap Termination Payment.
If the Securities Administrator is unable to appoint a successor swap provider
within 30 days of the Swap Early Termination, then the Securities Administrator
will deposit any Swap Termination Payment received from the original Swap
Provider into a separate, non-interest bearing reserve account and will, on each
subsequent Distribution Date, withdraw from the amount then remaining on deposit
in such reserve account an amount equal to the Net Swap Payment, if any, that
would have been paid to the Securities Administrator by the original Swap
Provider calculated in accordance with the terms of the original Interest Rate
Swap Agreement, and distribute such amount in accordance with the terms of the
Pooling and Servicing Agreement.
Upon a Swap Early Termination in connection with the optional
termination of the trust, if the Securities Administrator is required to make a
Swap Termination Payment to the Swap Provider, the party exercising such
optional termination of the trust will be required to include in its payment an
amount equal to such Swap Termination Payment, as described in this prospectus
supplement. If the Securities Administrator receives a Swap Termination Payment
from the Swap Provider in connection with such Swap Early Termination, such Swap
Termination Payment generally will not be available to Certificateholders;
rather, the Securities Administrator will distribute such Swap Termination
Payment in accordance with the terms of the Pooling and Servicing Agreement.
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A "Swap Provider Trigger Event" will mean: (i) a Swap Event of Default
under the Interest Rate Swap Agreement with respect to which the Swap Provider
is a Defaulting Party (as defined in the Interest Rate Swap Agreement), (ii) a
Swap Termination Event under the Interest Rate Swap Agreement with respect to
which the Swap Provider is the sole Affected Party (as defined in the Interest
Rate Swap Agreement) or (iii) a Swap Additional Termination Event under the
Interest Rate Swap Agreement with respect to which the Swap Provider is the sole
Affected Party.
The significance percentage of the Cap Agreements and the Interest Rate
Swap Agreement, as calculated in accordance with Item 1115 of Regulation AB, is
less than 10%. The Cap Agreements and the Interest Rate Swap Agreement will
provide that the Cap Provider and Swap Provider may be replaced in certain
circumstances, including if the significance percentage of the Cap Agreements
and the Interest Rate Swap Agreement, is equal to or greater than 10%.
On each Distribution Date commencing on the Distribution Date occurring
in February 2007 and ending on the Distribution Date in November 2010, to the
extent required, following the distribution of the Net Monthly Excess Cashflow
and withdrawals from the Reserve Fund, as described in "--Overcollateralization
Provisions" in this prospectus supplement, the Securities Administrator will
withdraw any amounts in the Supplemental Interest Trust and distribute such
amounts in the following order of priority:
FIRST, to the Swap Provider, any Net Swap Payment owed to the
Swap Provider pursuant to the Interest Rate Swap Agreement for such Distribution
Date;
SECOND, to the Swap Provider, any Swap Termination Payment owed
to the Swap Provider not due to a Swap Provider Trigger Event pursuant to the
Interest Rate Swap Agreement;
THIRD, concurrently, to each class of Class A Certificates, the
related Senior Interest Distribution Amount remaining undistributed after the
distributions of the Group I Interest Remittance Amount and Group II Interest
Remittance Amount, on a PRO RATA basis based on such respective remaining Senior
Interest Distribution Amounts;
FOURTH, sequentially, to the Class M-1, Class M-2, Class M-3,
Class M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9, Class M-10 and
Class M-11 Certificates, in that order, the related Interest Distribution Amount
and Interest Carry Forward Amount, to the extent remaining undistributed after
the distributions of the Group I Interest Remittance Amount and Group II
Interest Remittance Amount and the Net Monthly Excess Cashflow;
FIFTH, sequentially to the Class M-1, Class M-2, Class M-3,
Class M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9, Class M-10 and
Class M-11 Certificates, in that order, in each case up to the related Allocated
Realized Loss Amount related to such Certificates for such Distribution Date
remaining undistributed after distribution of the Net Monthly Excess Cashflow;
SIXTH, to the holders of the class or classes of Certificates
then entitled to receive distributions in respect of principal, in an amount
necessary to maintain or restore the Required Overcollateralization Amount after
taking into account distributions made pursuant to clause FIRST under
"--Overcollateralization Provisions";
SEVENTH, concurrently, to each class of Class A Certificates,
the related Net WAC Rate Carryover Amount, to the extent remaining undistributed
after distributions of Net Monthly Excess Cashflow on deposit in the Reserve
Fund, on a PRO RATA basis based on such respective Net WAC Rate Carryover
Amounts remaining;
EIGHTH, sequentially, to the Class M-1, Class M-2, Class M-3,
Class M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9, Class M-10 and
Class M-11 Certificates, in that order,
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the related Net WAC Rate Carryover Amount, to the extent remaining undistributed
after distributions of Net Monthly Excess Cashflow on deposit in the Reserve
Fund;
NINTH, to the Swap Provider, an amount equal to any Swap
Termination Payment owed to the Swap Provider due to a Swap Provider Trigger
Event pursuant to the Interest Rate Swap Agreement; and
TENTH, to the Class CE Certificates, any remaining amounts.
The Interest Rate Swap Agreement will be governed by and construed in
accordance with the laws of the State of New York. The obligations of the Swap
Provider are limited to those specifically set forth in the Interest Rate Swap
Agreement, as applicable.
INTEREST DISTRIBUTIONS ON THE CERTIFICATES
Holders of the 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, commencing on the Distribution Date occurring in February
2007, to the Supplemental Interest Trust, an amount equal to the Group I
Allocation Percentage of (i) any Net Swap Payment owed to the Swap Provider and
(ii) any Swap Termination Payment owed to the Swap Provider not due to a Swap
Provider Trigger Event;
SECOND, to the holders of the Class A-1 Certificates, the Senior
Interest Distribution Amount allocable to the Class A-1 Certificates; and
THIRD, concurrently, to the holders of the Class A-2A, Class
A-2B, Class A-2C and Class A-2D Certificates, the Senior 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.
(B) On each Distribution Date, the Group II Interest Remittance
Amount will be distributed in the following order of priority:
FIRST, commencing on the Distribution Date occurring in February
2007, to the Supplemental Interest Trust, an amount equal to the Group II
Allocation Percentage of (i) any Net Swap Payment owed to the Swap Provider and
(ii) any Swap Termination Payment owed to the Swap Provider not due to a Swap
Provider Trigger Event;
SECOND, concurrently, to the holders of the Class A-2A, Class
A-2B, Class A-2C and Class A-2D Certificates, the Senior Interest Distribution
Amount allocable to each such class, on a pro rata basis, based on the
entitlement of each such class; and
THIRD, 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.
(C) On each Distribution Date, following the deposit of the Net Swap
Payment and any Swap Termination Payment into the Supplemental Interest Trust as
described in clauses (A) and
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(B) above and the distributions of interest to the holders of the Class A
Certificates as described in clauses (A) and (B) above, any Group I Interest
Remittance Amount and Group II Interest Remittance Amount remaining will be
distributed sequentially, to the Class M-1, Class M-2, Class M-3, Class M-4,
Class M-5, Class M-6, Class M-7, Class M-8, Class M-9, Class M-10 and Class M-11
Certificates, in that order, to the extent of the Interest Distribution Amount
allocable to each such class.
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 and payments received under the Interest Rate Swap Agreement according
to the priorities set forth under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement,
SECOND, to the Class M-11 Certificates, THIRD, to the Class M-10 Certificates,
FOURTH, to the Class M-9 Certificates, FIFTH, to the Class M-8 Certificates,
SIXTH to the Class M-7 Certificates, SEVENTH, to the Class M-6 Certificates,
EIGHTH, to the Class M-5 Certificates, NINTH, to the Class M-4 Certificates,
TENTH, to the Class M-3 Certificates, ELEVENTH, to the Class M-2 Certificates,
TWELFTH, to the Class M-1 Certificates and THIRTEENTH, 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 Class A
Certificates and Mezzanine Certificates will be entitled to reimbursement for
any of these interest shortfalls, subject to available funds, in the priorities
described under "--Overcollateralization Provisions" in this prospectus
supplement.
With respect to any Distribution Date, to the extent that the aggregate
Interest Distribution Amount exceeds the Interest Remittance Amount, a shortfall
in interest distributions on one or more classes of Class A Certificates or
Mezzanine Certificates will result and payments of Interest Carry Forward
Amounts to such classes of certificates will be made. The Interest Carry Forward
Amount with respect to the Class A Certificates, if any, is distributed as part
of the Senior Interest Distribution Amount on each Distribution Date. The
Interest Carry Forward Amount with respect to the Mezzanine Certificates, if
any, may be carried forward to succeeding Distribution Dates and, subject to
available funds, will be distributed in the manner set forth in
"--Overcollateralization Provisions" and "--The Swap Agreement" in this
prospectus supplement.
Except as otherwise described in this prospectus supplement, on any
Distribution Date, distributions of the Interest Distribution Amount for a class
of certificates will be made in respect of that class of certificates, to the
extent provided in this prospectus supplement, on a PARI PASSU basis, based on
the Certificate Principal Balance of the certificates of each class.
CALCULATION OF ONE-MONTH LIBOR
With respect to each Interest Accrual Period (other than the initial
Interest Accrual Period) and the Class A Certificates and Mezzanine
Certificates, on the second business day preceding such Interest Accrual Period,
(each such date, an "Interest Determination Date"), the Securities Administrator
will determine One-Month LIBOR for such Interest Accrual Period. With respect to
the initial Interest Accrual Period, on the Closing Date, the Securities
Administrator will determine One-Month LIBOR for such Interest Accrual Period
based on information available on the second business day preceding the Closing
Date (the related "Interest Determination Date"). "One-Month LIBOR" means, as of
any Interest Determination Date, the London interbank offered rate for one-month
U.S. dollar deposits which appears on Telerate Page 3750 (as defined herein) as
of 11:00 a.m. (London time) on such date. If such rate does not appear on
Telerate Page 3750, the rate for that day will be determined on the basis of the
offered rates of the Reference Banks (as defined in this prospectus supplement)
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
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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 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 Class A Certificates and Mezzanine
Certificates for the related Interest Accrual Period shall (in the absence of
manifest error) be final and binding.
PRINCIPAL DISTRIBUTIONS ON THE CERTIFICATES
On each Distribution Date, the Principal Distribution Amount will be
distributed to the holders of the certificates then entitled to principal
distributions. In no event will the Principal Distribution Amount with respect
to any Distribution Date be (i) less than zero or (ii) greater than the then
outstanding aggregate Certificate Principal Balance of the Class A Certificates
and Mezzanine Certificates.
(A) On each Distribution Date (i) prior to the Stepdown Date or (ii)
on which a Trigger Event is in effect, distributions in respect of principal to
the extent of the Group I Principal Distribution Amount will be made in the
following amounts and order of priority:
FIRST, commencing on the Distribution Date occurring in February
2007, to the Supplemental Interest Trust, an amount equal to the Group I
Allocation Percentage of (i) any Net Swap Payment owed to the Swap Provider and
(ii) any Swap Termination Payment owed to the Swap Provider not due to a Swap
Provider Trigger Event to the extent not paid from the Interest Remittance
Amount on such Distribution Date;
SECOND, 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
THIRD, sequentially, to the holders of the Class A-2A, Class
A-2B, Class A-2C and Class A-2D Certificates, in that order, after taking into
account the distribution of the Group II
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Principal Distribution Amount as described below, 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, commencing on the Distribution Date occurring in February
2007, to the Supplemental Interest Trust, an amount equal to the Group II
Allocation Percentage of (i) any Net Swap Payment owed to the Swap Provider and
(ii) any Swap Termination Payment owed to the Swap Provider not due to a Swap
Provider Trigger Event to the extent not paid from the Interest Remittance
Amount on such Distribution Date;
SECOND, sequentially, to the holders of the Class A-2A, Class
A-2B, Class A-2C and Class A-2D Certificates, in that order, until the
Certificate Principal Balance of each such class has been reduced to zero; and
THIRD, to the holders of the Class A-1 Certificates, after
taking into account the distribution of the Group I Principal Distribution
Amount as described above, until the Certificate Principal Balance of such class
has been reduced to zero.
(C) On each Distribution Date (i) prior to the Stepdown Date or (ii)
on which a Trigger Event is in effect, distributions in respect of principal to
the extent of the sum of the Group I Principal Distribution Amount and Group II
Principal Distribution Amount remaining undistributed for such Distribution Date
will be made sequentially, to the holders of the Class M-1, Class M-2, Class
M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9, Class
M-10 and Class M-11 Certificates, in that order, in each case until the
Certificate Principal Balance of each such class 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, commencing on the Distribution Date occurring in February
2007, to the Supplemental Interest Trust, an amount equal to the Group I
Allocation Percentage of (i) any Net Swap Payment owed to the Swap Provider and
(ii) any Swap Termination Payment owed to the Swap Provider not due to a Swap
Provider Trigger Event to the extent not paid from the Interest Remittance
Amount on such Distribution Date;
SECOND, 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; and
THIRD, sequentially, to the holders of the Class A-2A, Class
A-2B, Class A-2C and Class A-2D Certificates, in that order, after taking into
account the distribution of the Group II Principal Distribution Amount on such
Distribution Date, as described below, up to an amount equal to the amount, if
any, of the Class A-2 Principal Distribution Amount remaining unpaid on such
Distribution Date, until the Certificate Principal Balance of each such class
has been reduced to zero.
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(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, commencing on the Distribution Date occurring in February
2007, to the Supplemental Interest Trust, an amount equal to the Group II
Allocation Percentage of (i) any Net Swap Payment owed to the Swap Provider and
(ii) any Swap Termination Payment owed to the Swap Provider not due to a Swap
Provider Trigger Event to the extent not paid from the Interest Remittance
Amount on such Distribution Date;
SECOND, sequentially, to the holders of the Class A-2A, Class
A-2B, Class A-2C and Class A-2D Certificates, in that order, the Class A-2
Principal Distribution Amount, until the Certificate Principal Balance of each
such class has been reduced to zero; and
THIRD, to the holders of the Class A-1 Certificates, after
taking into account the distribution of the Group I Principal Distribution
Amount on such Distribution Date, as described above 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.
(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, sequentially, to the holders of the Class M-1, Class M-2
and Class M-3 Certificates, the lesser of (x) the excess of (i) the Principal
Distribution Amount over (ii) the amount distributed to the Supplemental
Interest Trust and to the holders of the Class A Certificates under (D) and (E)
above, and (y) the Class M-1/M-2/M-3 Principal Distribution Amount, in each
case, until the Certificate Principal Balances of the Class M-1, Class M-2 and
Class M-3 Certificates have been reduced to zero;
SECOND, 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 Supplemental Interest Trust and to the holders of
the Class A Certificates under (D) and (E) above and to the holders of the Class
M-1, Class M-2 and Class M-3 Certificates under clause FIRST 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;
THIRD, 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 Supplemental Interest Trust and to the holders of
the Class A Certificates under (D) and (E) above, to the holders of the Class
M-1, Class M-2 and Class M-3 Certificates under clause FIRST above and to the
holders of the Class M-4 Certificates under clause SECOND 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;
FOURTH, 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 Supplemental Interest Trust and to the holders of
the Class A Certificates under (D) and (E) above, to the holders of the Class
M-1, Class M-2 and Class M-3 Certificates under clause FIRST above, to the
holders of the Class M-4 Certificates under clause SECOND above and to the
holders of the Class M-5 Certificates under clause THIRD 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;
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FIFTH, to the holders of the Class M-7 Certificates, the lesser
of (x) the excess of (i) the Principal Distribution Amount over (ii) the sum of
the amounts distributed to the Supplemental Interest Trust and to the holders of
the Class A Certificates under (D) and (E) above, to the holders of the Class
M-1, Class M-2 and Class M-3 Certificates under clause FIRST above, to the
holders of the Class M-4 Certificates under clause SECOND above, to the holders
of the Class M-5 Certificates under clause THIRD above and to the holders of the
Class M-6 Certificates under clause FOURTH above, and (y) the Class M-7
Principal Distribution Amount, until the Certificate Principal Balance of the
Class M-7 Certificates has been reduced to zero;
SIXTH, to the holders of the Class M-8 Certificates, the lesser
of (x) the excess of (i) the Principal Distribution Amount over (ii) the sum of
the amounts distributed to the Supplemental Interest Trust and to the holders of
the Class A Certificates under (D) and (E) above, to the holders of the Class
M-1, Class M-2 and Class M-3 Certificates under clause FIRST above, to the
holders of the Class M-4 Certificates under clause SECOND above, to the holders
of the Class M-5 Certificates under clause THIRD above, to the holders of the
Class M-6 Certificates under clause FOURTH above and to the holders of the Class
M-7 Certificates under clause FIFTH above, and (y) the Class M-8 Principal
Distribution Amount, until the Certificate Principal Balance of the Class M-8
Certificates has been reduced to zero;
SEVENTH, to the holders of the Class M-9 Certificates, the
lesser of (x) the excess of (i) the Principal Distribution Amount over (ii) the
sum of the amounts distributed to the Supplemental Interest Trust and to the
holders of the Class A Certificates under (D) and (E) above, to the holders of
the Class M-1, Class M-2 and Class M-3 Certificates under clause FIRST above, to
the holders of the Class M-4 Certificates under clause SECOND above, to the
holders of the Class M-5 Certificates under clause THIRD above, to the holders
of the Class M-6 Certificates under clause FOURTH above, to the holders of the
Class M-7 Certificates under clause FIFTH above and to the holders of the Class
M-8 Certificates under clause SIXTH above, and (y) the Class M-9 Principal
Distribution Amount, until the Certificate Principal Balance of the Class M-9
Certificates has been reduced to zero;
EIGHTH, to the holders of the Class M-10 Certificates, the
lesser of (x) the excess of (i) the Principal Distribution Amount over (ii) the
sum of the amounts distributed to the Supplemental Interest Trust and to the
holders of the Class A Certificates under (D) and (E) above, to the holders of
the Class M-1, Class M-2 and Class M-3 Certificates under clause FIRST above, to
the holders of the Class M-4 Certificates under clause SECOND above, to the
holders of the Class M-5 Certificates under clause THIRD above, to the holders
of the Class M-6 Certificates under clause FOURTH above, to the holders of the
Class M-7 Certificates under clause FIFTH above, to the holders of the Class M-8
Certificates under clause SIXTH above and to the holders of the Class M-9
Certificates under clause SEVENTH above, and (y) the Class M-10 Principal
Distribution Amount, until the Certificate Principal Balance of the Class M-10
Certificates has been reduced to zero; and
NINTH, to the holders of the Class M-11 Certificates, the lesser
of (x) the excess of (i) the Principal Distribution Amount over (ii) the sum of
the amounts distributed to the Supplemental Interest Trust and to the holders of
the Class A Certificates under (D) and (E) above, to the holders of the Class
M-1, Class M-2 and Class M-3 Certificates under clause FIRST above, to the
holders of the Class M-4 Certificates under clause SECOND above, to the holders
of the Class M-5 Certificates under clause THIRD above, to the holders of the
Class M-6 Certificates under clause FOURTH above, to the holders of the Class
M-7 Certificates under clause FIFTH above, to the holders of the Class M-8
Certificates under clause SIXTH above, to the holders of the Class M-9
Certificates under clause SEVENTH above, and to the holders of the Class M-10
Certificates under clause EIGHTH above and (y) the Class M-11 Principal
Distribution Amount, until the Certificate Principal Balance of the Class M-11
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. Increasing the
respective percentage interest in the trust fund of the Mezzanine Certificates
relative to that of the Class A Certificates is intended to preserve the
availability of the subordination provided by the Mezzanine Certificates.
Notwithstanding the priority of distributions described in this section
with respect to the Class A-2A, Class A-2B, Class A-2C and Class A-2D
Certificates, on any Distribution Date which occurs after the Certificate
Principal Balances of the Mezzanine Certificates have been reduced to zero
distributions in respect of principal to the Class A-2A, Class A-2B, Class A-2C
and Class A-2D Certificates will be made 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.
TABLE OF FEES AND EXPENSES
The following table indicates the fees and expenses to be paid from the
cash flows from the Mortgage Loans and other assets of the trust fund, while the
Class A Certificates and Mezzanine Certificates are outstanding.
All fees are expressed in basis points, at an annualized rate, applied
to the outstanding aggregate principal balance of the Mortgage Loans.
Item Fee or Expense Paid To Paid From Frequency
- ---------------------- ------------------- -------------- --------------------------- ----------
Servicing Fee(1) 0.500% per annum Servicer Mortgage Loan interest Monthly
of the Scheduled collections
Principal Balance
of each Mortgage
Loan
Credit Risk Manager 0.014% per annum Credit Risk Mortgage Loan interest Monthly
Fee(2) of the Scheduled Manager collections
Principal Balance
of each Mortgage
Loan
P&I Advances and To the extent of Servicer or With respect to each Time to
Servicing Advances funds available, Master Mortgage Loan, late Time
the amount of any Servicer, as recoveries of the
advances and applicable payments of the costs
servicing advances and expenses,
liquidation proceeds,
Subsequent Recoveries,
purchase proceeds or
repurchase proceeds for
that Mortgage Loan
Nonrecoverable The amount of any Servicer or All collections on the Time to
Advances and advances and Master Mortgage Loans Time
Servicing Advances servicing Servicer, as
advances deemed applicable
nonrecoverable
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Item Fee or Expense Paid To Paid From Frequency
- ---------------------- ------------------- -------------- --------------------------- ----------
Reimbursement for The amount of the Servicer, All collections on the Time to
certain expenses, expenses, costs Master Mortgage Loans Time
costs and and liabilities Servicer,
liabilities incurred incurred Securities
by the Servicer, the Administrator,
Master Servicer, the Sponsor or
Securities Depositor,
Administrator, the as applicable
Sponsor or the
Depositor in
connection with any
legal action
relating to the
servicing agreement,
the pooling and
servicing agreement or
the certificates (3)
Indemnification Amounts for which Servicer, All collections on the Time to
expenses the Sponsor, the Master Mortgage Loans (or, in Time
Servicer, the Servicer, the case of the
Master Servicer, Securities Servicer, the related
the Securities Administrator Mortgage Loans)
Administrator and Sponsor or
the Depositor are Depositor,
entitled to as applicable
indemnification
(4)
Indemnification Amounts for which Trustee or All collections on the Time to
expenses the Trustee or the Mortgage Loans Time
the Custodian is Custodian,
entitled to as applicable
indemnification
(5)
Reimbursement for The amounts paid Trustee All collections on the Time to
any amounts payable by the Trustee Mortgage Loans Time
by the Trustee for
recording of
assignments of
mortgages to the
extent not paid by
the Servicer
Reimbursement for The amount of Trustee or All collections on the Time to
costs associated costs incurred by Master Mortgage Loans Time
with the transfer of the Master Servicer, as
servicing or master Servicer or the applicable
servicing in the Trustee in
event of termination connection with
of the Master the transfer of
Servicer or a servicing to the
defaulting Servicer Master Servicer
or a successor
servicer or by
the Trustee in
the event of
termination the
Master Servicer,
to the extent not
paid by the
terminated
Servicer or
Master Servicer
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Item Fee or Expense Paid To Paid From Frequency
- ---------------------- ------------------- -------------- --------------------------- ----------
Reimbursement for The amount Trustee and All collections on the Time to
any expenses incurred by the Securities Mortgage Loans Time
incurred by the Trustee or the Administrator
Trustee or the Securities
Securities Administrator in
Administrator in connection with a
connection with a tax audit of the
tax audit of the trust
trust
- ----------
(1) The servicing fee is paid on a first priority basis from collections
allocable to interest on the Mortgage Loans, prior to distributions to the
Certificateholders.
(2) The credit risk manager fee is paid on a first priority basis from
collections allocable to interest on the Mortgage Loans, prior to
distributions to Certificateholders.
(3) The Master Servicer pays trustee fees and ongoing custodial and safekeeping
fees out of its compensation.
(4) See "The Securities Administrator, The Master Servicer and The Custodian"
in this prospectus supplement.
(5) See "The Trustee" in this prospectus supplement.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the
Class A Certificates consists of subordination, as described in this section,
the Interest Rate Swap Agreement, as described under "--The Swap Agreement" and
overcollateralization, as described under "--Overcollateralization Provisions"
in this prospectus supplement. In addition, the holders of the Class A
Certificates and Mezzanine Certificates may benefit from the Cap Agreements, as
described under "--The Cap Agreements" 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 M-7, Class M-8, Class M-9, Class M-10, Class M-11
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 M-7, Class M-8, Class M-9, Class M-10, Class
M-11 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 M-7, Class M-8, Class M-9, Class M-10, Class M-11 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 M-7, Class M-8, Class M-9, Class M-10, Class M-11 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 M-7, Class M-8,
Class M-9, Class M-10, Class M-11 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 M-7, Class M-8, Class M-9, Class M-10, Class M-
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11 and Class CE Certificates, (vii) the rights of the holders of the Class M-7
Certificates will be senior to the rights of the holders of the Class M-8, Class
M-9, Class M-10, Class M-11 and Class CE Certificates, (viii) the rights of the
holders of the Class M-8 Certificates will be senior to the rights of the
holders of the Class M-9, Class M-10, Class M-11 and Class CE Certificates, (ix)
the rights of the holders of the Class M-9 Certificates will be senior to the
rights of the holders of the Class M-10, Class M-11 and Class CE Certificates,
(x) the rights of the holders of the Class M-10 Certificates will be senior to
the rights of the holders of the Class M-11 Certificates and Class CE
Certificates and (xi) the rights of the holders of the Class M-11 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.
OVERCOLLATERALIZATION PROVISIONS
The weighted average Mortgage Rate for the Mortgage Loans, less the
Administration Fee Rate and the amount, expressed as a per annum rate of any Net
Swap Payments payable to the Swap Provider and any Swap Termination Payments
payable to the Swap Provider not due to a Swap Provider Trigger Event, is
expected to be higher than the weighted average of the Pass-Through Rates on the
Class A Certificates and Mezzanine Certificates, thus generating excess interest
collections which, in the absence of Realized Losses, will not be necessary to
fund interest distributions on the Class A Certificates and Mezzanine
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 Class A Certificates
and Mezzanine 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 the Overcollateralization Increase Amount for such Distribution Date,
owed to such holders in accordance with the priorities set forth under
"--Principal Distributions on the Certificates" above;
SECOND, sequentially, to the holders of the Class M-1, Class
M-2, Class M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class
M-9, Class M-10 and Class M-11 Certificates, in that order, in an amount equal
to the Interest Carry Forward Amount allocable to each such class;
THIRD, sequentially to the holders of the Class M-1, Class M-2,
Class M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9,
Class M-10 and Class M-11 Certificates, in that order, in an amount equal to the
Allocated Realized Loss Amount allocable to each such class;
FOURTH, 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;
FIFTH, sequentially to the holders of the Class M-1, Class M-2,
Class M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class M-9,
Class M-10 and Class M-11 Certificates, in
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that order, in an amount equal to each such 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;
SIXTH, to the reserve fund (the "Reserve Fund") established in
accordance with the terms of the pooling and servicing agreement, the amount by
which the Net WAC Rate Carryover Amounts, if any, with respect to the Class A
Certificates and Mezzanine 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;
SEVENTH, to the Supplemental Interest Trust, an amount equal to
any Swap Termination Payment owed to the Swap Provider due to a Swap Provider
Trigger Event pursuant to the Interest Rate Swap Agreement;
EIGHTH, to the holders of the Class P Certificates and Class CE
Certificates as provided in the Pooling and Servicing Agreement; provided,
however, that the Certificate Principal Balance of the Class P Certificates will
not be reduced until the Distribution Date following the expiration of the
latest prepayment charge term with respect to the Mortgage Loans; and
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 Certificates", "Principal Distributions on the
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 and the Mezzanine Certificates in respect of any Net WAC Rate
Carryover Amounts due to each such class in the following manner and order of
priority:
(A) any amounts received by the 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, Class A-2C and Class A-2D Certificates in respect of
the related Net WAC Rate Carryover Amount for such Distribution Date, on a pro
rata basis, based on the entitlement of each such class;
(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, Class M-4, Class M-5, Class M-6, Class
M-7, Class M-8, Class M-9, Class M-10 and Class M-11 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, Class A-2C and Class A-2D Certificates,
the related Net WAC Rate Carryover Amount for such Distribution Date to the
extent
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not paid pursuant to clause (B) above, on a pro rata basis, based on the
entitlement of each such class; and
SECOND, sequentially, to the holders of the Class M-1, Class
M-2, Class M-3, Class M-4, Class M-5, Class M-6, Class M-7, Class M-8, Class
M-9, Class M-10 and Class M-11 Certificates, in that order, in respect of the
related Net WAC Rate Carryover Amount for each such class for such Distribution
Date to the extent not paid pursuant to clause (C) above.
If, on any Distribution Date, the payments received by the Securities
Administrator under the Cap Agreements exceed the amount of the Net WAC Rate
Carryover Amounts payable to the Class A Certificates and Mezzanine Certificates
for such Distribution Date, such excess will be distributed to the Class CE
Certificates.
As of the Closing Date, the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date will exceed the sum of the aggregate Certificate
Principal Balances of the Class A Certificates, Mezzanine Certificates and Class
P Certificates by an amount equal to approximately $21,518,421, which is equal
to the initial Certificate Principal Balance of the Class CE Certificates. This
amount represents approximately 2.55% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date, which is the initial amount of
overcollateralization required to be provided by the Mortgage Pool under the
pooling and servicing agreement. Under the pooling and servicing agreement, the
Overcollateralization Amount is required to be maintained at the "Required
Overcollateralization Amount." In the event that Realized Losses are incurred on
the Mortgage Loans, such Realized Losses may result in an overcollateralization
deficiency since the Realized Losses will reduce the principal balance of the
Mortgage Loans without a corresponding reduction to the aggregate Certificate
Principal Balances of the Class A Certificates and the Mezzanine Certificates.
In the event of an overcollateralization deficiency, the pooling and servicing
agreement requires the payment from Net Monthly Excess Cashflow and any Net Swap
Payments received from the Swap Provider in respect of the Interest Rate Swap
Agreement, subject to available funds, of an amount equal to the
overcollateralization deficiency, which shall constitute a principal
distribution on the Class A Certificates and Mezzanine Certificates in reduction
of the Certificate Principal Balances of the Class A Certificates and the
Mezzanine Certificates. These payments have the effect of accelerating the
amortization of the Class A Certificates and the Mezzanine 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 5.10% of the then
current aggregate outstanding principal balance of the Mortgage Loans as of the
last day of the related Due Period, 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 Class A Certificates and Mezzanine
Certificates on the related Distribution Date shall be distributed to the
holders of the Class CE Certificates pursuant to the priorities set forth above.
With respect to each Distribution Date, the Overcollateralization
Reduction Amount, after taking into account all other distributions to be made
on the related Distribution Date, shall be distributed as Net Monthly Excess
Cashflow pursuant to the priorities set forth above. This has the effect of
decelerating the amortization of the Class A Certificates and Mezzanine
Certificates relative to the amortization of the Mortgage Loans, and of reducing
the Overcollateralization Amount. However, if on any Distribution Date a Trigger
Event is in effect, the Required Overcollateralization Amount will not be
permitted to step down on the related Distribution Date.
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ALLOCATION OF 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 Securities Administrator 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 and to Net Swap
Payments received from the Swap Provider under the Interest Rate Swap Agreement
for that purpose, SECOND, to the Class CE Certificates, THIRD, to the Class M-11
Certificates until the Certificate Principal Balance of the Class M-11
Certificates has been reduced to zero, FOURTH, to the Class M-10 Certificates
until the Certificate Principal Balance of the Class M-10 Certificates has been
reduced to zero, FIFTH, to the Class M-9 Certificates until the Certificate
Principal Balance of the Class M-9 Certificates has been reduced to zero, SIXTH,
to the Class M-8 Certificates until the Certificate Principal Balance of the
Class M-8 Certificates has been reduced to zero, SEVENTH, to the Class M-7
Certificates until the Certificate Principal Balance of the Class M-7
Certificates has been reduced to zero, EIGHTH, to the Class M-6 Certificates
until the Certificate Principal Balance of the Class M-6 Certificates has been
reduced to zero, NINTH, to the Class M-5 Certificates until the Certificate
Principal Balance of the Class M-5 Certificates has been reduced to zero, TENTH,
to the Class M-4 Certificates until the Certificate Principal Balance of the
Class M-4 Certificates has been reduced to zero, ELEVENTH, to the Class M-3
Certificates until the Certificate Principal Balance of the Class M-3
Certificates has been reduced to zero, TWELFTH, to the Class M-2 Certificates
until the Certificate Principal Balance of the Class M-2 Certificates has been
reduced to zero and THIRTEENTH, to the Class M-1 Certificates until the
Certificate Principal Balance of the Class M-1 Certificates has been reduced to
zero.
The pooling and servicing agreement does not permit the allocation of
Realized Losses to the Class A Certificates or Class P Certificates. Investors
in the Class A Certificates should note that although Realized Losses cannot be
allocated to the Class A Certificates, under certain loss scenarios there will
not be enough principal and interest on the Mortgage Loans to pay the Class A
Certificates all interest and principal amounts to which they are then entitled.
Except as described below, once Realized Losses have been allocated to
the Mezzanine Certificates, such amounts with respect to such certificates will
no longer accrue interest, and such amounts will not be reinstated thereafter
(except in the case of Subsequent Recoveries as described below). However,
Allocated Realized Loss Amounts may be paid to the holders of the Mezzanine
Certificates from Net Monthly Excess Cashflow and from amounts received by the
Securities Administrator under the Interest Rate Swap Agreement, according to
the priorities set forth under "--Overcollateralization Provisions" and "--The
Swap Agreement" above.
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Any allocation of a Realized Loss to a Mezzanine 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 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 and from amounts on deposit in
the Supplemental Interest Trust.
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 Mezzanine 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 not by more than the
amount of Realized Losses previously allocated to reduce the Certificate
Principal Balance of such certificate, and 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" and from amounts on deposit in the Supplemental Interest Trust as
described under "Description of the Certificates--The Cap Provider and the Swap
Provider--The Swap Agreement" in this prospectus supplement. Holders of such
certificates will 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.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Securities Administrator will make
available to each certificateholder and the Depositor a statement generally
setting forth, among other information:
1. the applicable Interest Accrual Periods and general Distribution
Dates;
2. with respect to each loan group, the total cash flows received
and the general sources thereof;
3. the amount, if any, of fees or expenses accrued and paid, with
an identification of the payee and the general purpose of such fees;
4. with respect to each loan group, the amount of the related
distribution to holders of the Class A Certificates and Mezzanine Certificates
(by class) allocable to principal, separately identifying (A) the aggregate
amount of any principal prepayments included therein, (B) the aggregate of all
scheduled payments of principal included therein and (C) any
Overcollateralization Increase Amount included therein;
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5. with respect to each loan group, the amount of such distribution
to holders of the Class A Certificates and Mezzanine Certificates (by class)
allocable to interest and the portion thereof, if any, provided by the Interest
Rate Swap Agreement in the aggregate;
6. with respect to each loan group, the Interest Carry Forward
Amounts and any Net WAC Rate Carryover Amounts for the related Class A
Certificates and Mezzanine Certificates (if any);
7. with respect to each loan group, the Certificate Principal
Balance of the related Class A Certificates and Mezzanine Certificates before
and after giving effect to the distribution of principal and allocation of
Allocated Realized Loss Amounts on such distribution date;
8. with respect to each loan group, the number and Scheduled
Principal Balance of all the Mortgage Loans for the following Distribution Date;
9. the Pass-Through Rate for each class of Class A Certificates and
Mezzanine Certificates for such Distribution Date;
10. with respect to each loan group, the aggregate amount of
advances included in the distributions on the Distribution Date (including the
general purpose of such advances);
11. with respect to each loan group, the number and aggregate
principal balance of any Mortgage Loans (not including any Liquidated Mortgage
Loans as of the end of the Prepayment Period) that were (A) delinquent
(exclusive of Mortgage Loans in foreclosure) using the "OTS" method (1) one
scheduled payment is delinquent, (2) two scheduled payments are delinquent, (3)
three scheduled payments are delinquent and (4) foreclosure proceedings have
been commenced, and loss information for the period;
12. with respect to each loan group, the amount of, if any, of
excess cashflow or excess spread and the application of such excess cashflow;
13. with respect to each loan group and any Mortgage Loan that was
liquidated during the preceding calendar month, the loan number and Scheduled
Principal Balance of, and Realized Loss on, such Mortgage Loan as of the end of
the related Prepayment Period;
14. with respect to each loan group, whether the Stepdown Date has
occurred and whether a Trigger Event is in effect;
15. with respect to each loan group, the total number and principal
balance of any real estate owned, or REO, properties as of the end of the
related Prepayment Period;
16. with respect to each loan group, the cumulative Realized Losses
through the end of the preceding month;
17. with respect to each loan group, the three-month rolling average
of the percent equivalent of a fraction, the numerator of which is the aggregate
Scheduled Principal Balance of the Mortgage Loans in such loan group that are 60
days or more delinquent or are in bankruptcy or foreclosure or are REO
properties, and the denominator of which is the Scheduled Principal Balances of
all of the Mortgage Loans in such loan group;
18. with respect to each loan group, the amount of the Prepayment
Charges remitted by the Servicer;
19. the amount of any cap payments payable to the trust by the Cap
Provider; and
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20. the amount of any Net Swap Payment payable to the trust, any
related Net Swap Payment payable to the Swap Provider, any Swap Termination
Payment payable to the trust and any related Swap Termination Payment payable to
the Swap Provider.
On each Distribution Date, the Securities Administrator will make the
monthly 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.
The annual reports on Form 10-K, the distribution reports on Form 10-D,
the current reports on Form 8-K and amendments to those reports in each case, as
prepared and filed by the Securities Administrator with respect to the trust
pursuant to section 13(a) or 15(d) of the Exchange Act will be made available on
the website of the Securities Administrator as soon as reasonably practicable
after such material is electronically filed with, or furnished to, the
Securities and Exchange Commission.
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 ORIGINATOR
GENERAL
The originator of the Mortgage Loans is Countrywide Home Loans, Inc., a
New York corporation.
For a description of the underwriting standards applicable to the
Mortgage Loans and certain other information with respect to the Originator see
"Underwriting Standards" in this prospectus supplement.
STATIC POOL INFORMATION
Static pool information material to this offering may be found at
http://regab.db.com.
Information provided through the Internet address above will not be
deemed to be a part of this prospectus or the registration statement for the
securities offered hereby if it relates to any prior securities pool or vintage
formed before January 1, 2006, or with respect to the mortgage pool (if
applicable) any period before January 1, 2006.
ISSUING ENTITY
ACE Securities Corp. Home Equity Loan Trust, Series 2006-CW1 is a common
law trust formed under the laws of the State of New York pursuant to the pooling
and servicing agreement among the Depositor, the Master Servicer, the Securities
Administrator and the Trustee, dated as of July 1, 2006 (the "Pooling and
Servicing Agreement"). The Pooling and Servicing Agreement
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constitutes the "governing instrument" under the laws of the State of New York.
After its formation, the ACE Securities Corp. Home Equity Loan Trust, Series
2006-CW1 will not engage in any activity other than (i) acquiring and holding
the Mortgage Loans and the other assets of the Trust and proceeds therefrom,
(ii) issuing the Certificates, (iii) making payments on the Certificates and
(iv) engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental thereto or connected therewith. The
foregoing restrictions are contained in the Pooling and Servicing Agreement.
These restrictions cannot be amended without the consent of holders of
Certificates evidencing at least 51% of the voting rights. For a description of
other provisions relating to amending the Pooling and Servicing Agreement,
please see "Description of the Agreements -- Amendment" in the prospectus.
The assets of the ACE Securities Corp. Home Equity Loan Trust, Series
2006-CW1 will consist of the Mortgage Loans and certain related assets.
ACE Securities Corp. Home Equity Loan Trust, Series 2006-CW1's fiscal
year end is December 31.
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.
The Depositor has been serving as a private secondary mortgage market
conduit for residential mortgage loans since 1999. Since that time it has been
involved in the issuance of securities backed by residential mortgage loans in
excess of $30 billion.
After issuance and registration of the securities contemplated in this
prospectus supplement, the Depositor will have no duties or responsibilities
with respect to the pool assets or securities.
All of the shares of capital stock of the Depositor are held by Altamont
Holdings Corp., a Delaware corporation.
THE SPONSOR
DB Structured Products, Inc. is the Sponsor. The Sponsor was
incorporated in the State of Delaware on February 4, 1970 under the name "Sharps
Pixley Incorporated". The name of the Sponsor was changed on January 3, 1994 to
Deutsche Bank Sharps Pixley Inc., and subsequently changed on January 2, 2002 to
DB Structured Products, Inc. The Sponsor maintains its principal office at 60
Wall Street, New York, New York 10005. Its telephone number is (212) 250-2500.
Through December 31, 2005, the Sponsor has purchased over $26 billion in
residential mortgage loans. This includes the purchase of newly originated
non-agency loans, as well as seasoned, program exception, sub-performing and
non-performing loans.
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The Sponsor has been securitizing residential mortgage loans since 2004.
The following table describes size, composition and growth of the Sponsor's
total portfolio of assets it has securitized as of the dates indicated.
DECEMBER 31, 2004 DECEMBER 31, 2005
----------------------- -------------------------
TOTAL TOTAL
PORTFOLIO OF PORTFOLIO OF
LOAN TYPE NUMBER LOANS ($) NUMBER LOANS ($)
- -------------------------- ------ ------------- ------- --------------
Alt-A ARM ................ -- -- 3,466 1,088,327,305
Alt-A Fixed .............. -- -- 17,892 3,361,707,721
Prime ARM ................ 3,612 1,096,433,033 -- --
Prime Fixed .............. 5,275 986,186,740 -- --
Scratch & Dent/Reperf .... 1,376 135,671,795 4,913 500,710,103
Seconds .................. -- -- 5,227 258,281,341
SubPrime ................. 31,174 5,481,240,453 71,747 13,066,859,416
Seasoned ................. -- -- 1,827 165,210,069
------ ------------- ------- --------------
TOTAL: ................... 41,437 7,699,532,021 105,072 18,441,095,955
====== ============= ======= ==============
SERVICING OF THE MORTGAGE LOANS
GENERAL
Primary servicing of the Mortgage Loans will be provided by Countrywide
Home Loans Servicing LP. Countrywide Home Loans Servicing LP will service the
Mortgage pursuant to the Amended and Restated Master Mortgage Loan Purchase and
Servicing Agreement dated as of September 1, 2005 as amended and restated to and
including May 1, 2006, between the Originator and the Sponsor, as amended, as
modified by the Assignment, Assumption and Recognition Agreement, dated as of
July 25, 2006, among the Originator, the Servicer, the Sponsor, the Depositor,
the Master Servicer and the Trustee (together, the "Servicing Agreement"). The
Master Servicer will be required to monitor Countrywide Home Loans Servicing LP
performance under the Servicing Agreement. In the event of a default by
Countrywide Home Loans Servicing LP under the Servicing Agreement, the Master
Servicer shall enforce any remedies against Countrywide Home Loans Servicing LP.
The information set forth in the following paragraphs has been provided
by Countrywide Home Loans Servicing LP.
COUNTRYWIDE HOME LOANS SERVICING LP
The principal executive offices of Countrywide Home Loans Servicing LP
("COUNTRYWIDE SERVICING") are located at 7105 Corporate Drive, Plano, Texas
75024. Countrywide Servicing is a Texas limited partnership directly owned by
Countrywide GP, Inc. and Countrywide LP, Inc., each a Nevada corporation and a
direct wholly owned subsidiary of Countrywide Home Loans, Inc. Countrywide GP,
Inc. owns a 0.1% interest in Countrywide Servicing and is the general partner.
Countrywide LP, Inc. owns a 99.9% interest in Countrywide Servicing and is a
limited partner.
Countrywide Home Loans established Countrywide Servicing in February
2000 to service mortgage loans originated by Countrywide Home Loans that would
otherwise have been serviced by Countrywide Home Loans. In January and February,
2001, Countrywide Home Loans transferred to Countrywide Servicing all of its
rights and obligations relating to mortgage loans serviced on behalf of Freddie
Mac and Fannie Mae, respectively. In October 2001, Countrywide Home Loans
transferred to Countrywide Servicing all of its rights and obligations relating
to the bulk of its non-agency loan servicing portfolio (other than the servicing
of home equity lines of credit), including with respect to those mortgage loans
(other than home equity lines of credit)
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formerly serviced by Countrywide Home Loans and securitized by CWABS, Inc. or
CWMBS, Inc. While Countrywide Home Loans expects to continue to directly service
a portion of its loan portfolio, it is expected that the servicing rights for
most newly originated Countrywide Home Loans mortgage loans will be transferred
to Countrywide Servicing upon sale or securitization of the related mortgage
loans. Countrywide Servicing is engaged in the business of servicing mortgage
loans and will not originate or acquire loans, an activity that will continue to
be performed by Countrywide Home Loans. In addition to acquiring mortgage
servicing rights from Countrywide Home Loans, it is expected that Countrywide
Servicing will service mortgage loans for non-Countrywide Home Loans affiliated
parties as well as subservice mortgage loans on behalf of other master
servicers.
In connection with the establishment of Countrywide Servicing, certain
employees of Countrywide Home Loans became employees of Countrywide Servicing.
Countrywide Servicing has engaged Countrywide Home Loans as a subservicer to
perform certain loan servicing activities on its behalf.
Countrywide Servicing is an approved mortgage loan servicer for Fannie
Mae, Freddie Mac, Ginnie Mae, HUD and VA and is licensed to service mortgage
loans in each state where a license is required. Its loan servicing activities
are guaranteed by Countrywide Financial and/or Countrywide Home Loans when
required by the owner of the mortgage loans.
COUNTRYWIDE HOME LOANS
Countrywide Home Loans is a New York corporation and a direct wholly
owned subsidiary of Countrywide Financial Corporation, a Delaware corporation
("COUNTRYWIDE FINANCIAL"). The principal executive offices of Countrywide Home
Loans are located at 4500 Park Granada, Calabasas, California 91302. Countrywide
Home Loans is engaged primarily in the mortgage banking business, and as part of
that business, originates, purchases, sells and services mortgage loans.
Countrywide Home Loans originates mortgage loans through a retail branch system
and through mortgage loan brokers and correspondents nationwide. Mortgage loans
originated by Countrywide Home Loans are principally first-lien, fixed or
adjustable rate mortgage loans secured by single-family residences.
Countrywide Home Loans has historically sold substantially all the
mortgage loans that it has originated and purchased, generally through
securitizations. Countrywide Home Loans does not always sell mortgage loans
immediately after origination or acquisition, but may decide to sell certain
mortgage loans in later periods as part of its overall management of interest
rate risk. Countrywide Home Loans has been involved in the securitization of
mortgage loans since 1969 when it was approved as a Federal National Mortgage
Association seller/servicer. Except as otherwise indicated, reference in the
remainder of this section to "COUNTRYWIDE HOME LOANS" should be read to include
Countrywide Home Loans and its consolidated subsidiaries, including Countrywide
Servicing. Countrywide Home Loans services substantially all of the mortgage
loans it originates or acquires. In addition, Countrywide Home Loans has
purchased in bulk the rights to service mortgage loans originated by other
lenders. Countrywide Home Loans has in the past and may in the future sell to
mortgage bankers and other institutions a portion of its portfolio of loan
servicing rights. As of December 31, 2002, December 31, 2003, December 31, 2004,
December 31, 2005 and March 31, 2006, Countrywide Home Loans provided servicing
for mortgage loans with an aggregate principal balance of approximately $452.405
billion, $644.855 billion, $838.322 billion, $1,111.090 billion and $1,152.651
billion, respectively, substantially all of which were being serviced for
unaffiliated persons. As of December 31, 2005, and March 31, 2006, Countrywide
Home Loans provided servicing for Credit-Blemished Mortgage Loans (excluding
mortgage loans being subserviced by Countrywide Home Loans) with an aggregate
principal balance of approximately $121.734 billion and $120.692 billion,
respectively.
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MORTGAGE LOAN PRODUCTION
The following table sets forth, by number and dollar amount of mortgage
loans, Countrywide Home Loans' residential mortgage loan production for the
periods indicated.
CONSOLIDATED MORTGAGE LOAN PRODUCTION
------------------------------------------------------------------------------
TEN MONTHS YEARS ENDED THREE MONTHS
ENDED DECEMBER 31, ENDED
DECEMBER 31, ---------------------------------------------------- MARCH 31,
2001 2002 2003 2004 2005 2006
----------- ---------- ---------- ---------- ---------- -----------
(DOLLARS IN MILLIONS, EXCEPT AVERAGE LOAN AMOUNT)
Conventional Conforming Loans
Number of Loans ................ 504,975 999,448 1,517,743 846,395 809,630 164,665
Volume of Loans ................ $ 76,432 $ 150,110 $ 235,868 $ 138,845 $ 167,675 $ 32,068
Percent of Total Dollar Volume ... 61.7% 59.6% 54.2% 38.2% 34.1% 31.0%
Conventional Non-conforming Loans
Number of Loans ................ 137,593 277,626 554,571 509,711 826,178 155,746
Volume of Loans ................ $ 22,209 $ 61,627 $ 136,664 $ 140,580 $ 225,217 $ 48,204
Percent of Total Dollar Volume ... 17.9% 24.5% 31.4% 38.7% 45.9% 46.6%
FHA/VA Loans
Number of Loans ................ 118,734 157,626 196,063 105,562 80,528 20,487
Volume of Loans ................ $ 14,109 $ 19,093 $ 24,402 $ 13,247 $ 10,712 $ 2,878
Percent of Total Dollar Volume ... 11.4% 7.6% 5.6% 3.6% 2.2% 2.8%
Prime Home Equity Loans
Number of Loans ................ 164,503 316,049 453,817 587,046 683,887 165,076
Volume of Loans ................ $ 5,639 $ 11,650 $ 18,103 $ 30,893 $ 42,706 $ 11,063
Percent of Total Dollar Volume ... 4.5% 4.6% 4.2% 8.5% 8.7% 10.7%
Nonprime Mortgage Loans
Number of Loans ................ 43,359 63,195 124,205 250,030 278,112 59,226
Volume of Loans ................ $ 5,580 $ 9,421 $ 19,827 $ 39,441 $ 44,637 $ 9,205
Percent of Total Dollar Volume ... 4.5% 3.7% 4.6% 11.0% 9.1% 8.9%
Total Loans
Number of Loans ................ 969,164 1,813,944 2,846,399 2,298,744 2,678,335 565,200
Volume of Loans ................ $123,969 $ 251,901 $ 434,864 $ 363,006 $ 490,947 $103,418
Average Loan Amount ............ $128,000 $ 139,000 $ 153,000 $ 158,000 $ 183,000 $183,000
Non-Purchase Transactions(1) ... 63% 66% 72% 51% 53% 55%
Adjustable-Rate Loans(1) ....... 12% 14% 21% 52% 52% 50%
(1) Percentage of total mortgage loan production (excluding commercial real
estate loans) based on dollar volume.
LOAN SERVICING
Countrywide Servicing has established standard policies for the
servicing and collection of mortgages. Servicing includes, but is not limited
to:
(a) collecting, aggregating and remitting mortgage loan payments;
(b) accounting for principal and interest;
(c) holding escrow (impound) funds for payment of taxes and
insurance;
(d) making inspections as required of the mortgaged properties;
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(e) preparation of tax related information in connection with the
mortgage loans;
(f) supervision of delinquent mortgage loans;
(g) loss mitigation efforts;
(h) foreclosure proceedings and, if applicable, the disposition of
mortgaged properties; and
(i) generally administering the mortgage loans, for which it
receives servicing fees.
Billing statements with respect to mortgage loans are mailed monthly by
Countrywide Servicing. The statement details all debits and credits and
specifies the payment due. Notice of changes in the applicable loan rate are
provided by Countrywide Servicing to the borrower with these statements.
COLLECTION PROCEDURES
When a borrower fails to make a payment on a Credit-Blemished Mortgage
Loan, Countrywide Servicing attempts to cause the deficiency to be cured by
corresponding with the borrower. In most cases, deficiencies are cured promptly.
Pursuant to Countrywide Servicing's servicing procedures for Credit-Blemished
Mortgage Loans, Countrywide Servicing generally mails to the borrower a notice
of intent to foreclose after the loan becomes 31 days past due (two payments due
but not received) and, generally within 59 days thereafter, if the loan remains
delinquent, institutes appropriate legal action to foreclose on the mortgaged
property. Foreclosure proceedings may be terminated if the delinquency is cured.
Credit-Blemished Mortgage Loans to borrowers in bankruptcy proceedings may be
restructured in accordance with law and with a view to maximizing recovery of
the loans, including any deficiencies.
Once foreclosure is initiated by Countrywide Servicing, a foreclosure
tracking system is used to monitor the progress of the proceedings. The system
includes state specific parameters to monitor whether proceedings are
progressing within the time frame typical for the state in which the mortgaged
property is located. During the foreclosure proceeding, Countrywide Servicing
determines the amount of the foreclosure bid and whether to liquidate the
mortgage loan.
If the mortgaged property was subject to a senior lien, Countrywide
Servicing will either directly manage the foreclosure sale of the property and
satisfy the lien at the time of sale or take other action deemed necessary to
protect the interest in the mortgaged property. After foreclosure, if the
mortgaged property securing a second lien credit-blemished mortgage loan is also
securing a first lien mortgage loan, Countrywide Servicing may liquidate the
mortgaged property and charge off the second lien credit-blemished mortgage loan
balance that was not recovered through liquidation proceeds. If, in the judgment
of Countrywide Servicing , the cost of maintaining or purchasing the senior lien
mortgage loan exceeds the economic benefit of such action, Countrywide Servicing
will generally charge off the entire second lien credit-blemished mortgage loan
and may seek a money judgment against the borrower. If foreclosed, the mortgaged
property is sold at a public or private sale and may be purchased by Countrywide
Home Loans. Generally, Countrywide Servicing will charge off the entire second
lien credit-blemished mortgage loan when the related mortgaged property is
liquidated, unless Countrywide Servicing has determined that liquidation
proceeds in respect of such mortgaged property, which have not been received by
that date, may be received by Countrywide Servicing subsequently.
Servicing and charge-off policies and collection practices with respect
to Credit-Blemished Mortgage Loans may change over time in accordance with,
among other things, Countrywide
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Servicing's business judgment, changes in the servicing portfolio and applicable
laws and regulations.
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 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 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
collection account and any related escrow account.
The Servicer is entitled to retain any Prepayment Interest Excess (as
defined in Servicing Agreement) with respect to the Mortgage Loans. The Servicer
is obligated to pay insurance premiums and other ongoing expenses associated
with the related Mortgage Loans in connection with its responsibilities under
the Servicing Agreement and is entitled to reimbursement for these expenses as
provided in the 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.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION 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 Servicing Agreement). Upon receipt by the Servicer of amounts in
respect of the Mortgage Loans (excluding amounts representing the 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 by the Servicer may be invested in
Permitted Investments 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.
Any one or more of the following obligations or securities held in the
name of the Trustee for the benefit of the certificateholders will be considered
a Permitted Investment:
(i) obligations of the United States or any agency thereof, provided
such obligations are backed by the full faith and credit of the United States;
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(ii) general obligations of or obligations guaranteed by any state of
the United States or the District of Columbia receiving the highest long-term
debt rating of each rating agency, or such lower rating as will not result in
the downgrading or withdrawal of the ratings then assigned to the certificates
by each rating agency, as evidenced in writing;
(iii) commercial or finance company paper which is then receiving the
highest commercial or finance company paper rating of each rating agency rating
such paper, or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to the certificates by each rating
agency, as evidenced in writing;
(iv) certificates of deposit, demand or time deposits, or bankers'
acceptances issued by any depository institution or trust company incorporated
under the laws of the United States or of any state thereof and subject to
supervision and examination by federal and/or state banking authorities
(including the trustee in its commercial banking capacity), provided that the
commercial paper and/or long term unsecured debt obligations of such depository
institution or trust company are then rated one of the two highest long-term and
the highest short-term ratings of each such rating agency for such securities,
or such lower ratings as will not result in the downgrading or withdrawal of the
rating then assigned to the certificates by any rating agency, as evidenced in
writing;
(v) guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation containing, at the time of the issuance of such
agreements, such terms and conditions as will not result in the downgrading or
withdrawal of the rating then assigned to the certificates by each rating
agency, as evidenced in writing;
(vi) repurchase obligations with respect to any security described in
clauses (i) and (ii) above, in either case entered into with a depository
institution or trust company (acting as principal) described in clause (v)
above;
(vii) securities (other than stripped bonds, stripped coupons or
instruments sold at a purchase price in excess of 115% of the face amount
thereof) bearing interest or sold at a discount issued by any corporation
incorporated under the laws of the United States or any state thereof which, at
the time of such investment, have one of the two highest short term ratings of
each rating agency (except if the rating agency is Moody's, such rating will be
the highest commercial paper rating of Moody's for any such securities), or such
lower rating as will not result in the downgrading or withdrawal of the rating
then assigned to the certificates by each rating agency, as evidenced by a
signed writing delivered by each rating agency;
(viii) interests in any money market fund (including any such fund
managed or advised by the trustee or any affiliate thereof) which at the date of
acquisition of the interests in such fund and throughout the time such interests
are held in such fund has the highest applicable short term rating by each
rating agency or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to the certificates by each rating
agency, as evidenced in writing;
(ix) short term investment funds sponsored by any trust company or
banking association incorporated under the laws of the United States or any
state thereof (including any such fund managed or advised by the Trustee or the
Master Servicer or any affiliate thereof) which on the date of acquisition has
been rated by each rating agency in their respective highest applicable rating
category or such lower rating as will not result in the downgrading or
withdrawal of the ratings then assigned to the certificates by each rating
agency, as evidenced in writing; and
(x) such other investments having a specified stated maturity and
bearing interest or sold at a discount acceptable to each rating agency and as
will not result in the downgrading or
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withdrawal of the rating then assigned to the certificates by any rating agency,
as evidenced by a signed writing delivered by each rating agency.
PREPAYMENT INTEREST SHORTFALLS AND COMPENSATING 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 voluntary principal prepayments in full 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 in
full 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 or any similar state or local laws. 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 compensation
payable to the Master Servicer for the applicable Distribution Date.
Accordingly, the effect of interest shortfalls resulting from principal
prepayments in full or in part on the Mortgage Loans (each, a "Prepayment
Interest Shortfall") to the extent that they exceed any payments by the Master
Servicer or the Servicer ("Compensating Interest") or 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 Certificates" and "-- Overcollateralization Provisions" in
this prospectus supplement. See "Certain Legal Aspects of the Mortgage
Loans--Servicemembers Civil Relief Act" in the prospectus.
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 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 related advance will be equal to the aggregate of all
scheduled payments of principal and interest, net of the Servicing Fee, that
were due during the related Due Period on the related 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
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 on the related Mortgage Loan. 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
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or the 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 the Master Servicer to be nonrecoverable
from related late collections, insurance proceeds or liquidation proceeds may be
reimbursed to the Servicer or the 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 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, subject to
its determination of recoverability.
In the event that a Balloon Loan is not paid in full on its maturity
date, the Servicer will also be obligated to make advances with respect to the
assumed monthly payments that would have been due on such Balloon Loan based
upon the original amortization schedule for the loan, unless the Servicer
determines that the advance would not be recoverable. In no event will the
Servicer be obligated to advance the balloon payment due on any Balloon Loan.
Upon an Event of Default by the Servicer under the Servicing Agreement,
the Master Servicer may terminate the Servicer and appoint a successor servicer.
Such successor servicer must meet the requirements for successor servicers under
the 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).
MODIFICATIONS
In instances in which a Mortgage Loan is in default or if default is
reasonably foreseeable, and if determined by the Servicer to be in the best
interest of the certificateholders, the Servicer may permit servicing
modifications of the Mortgage Loan rather than proceeding with foreclosure.
However, the Servicer's ability to perform servicing modifications will be
subject to some limitations, including but not limited to the following: any
amounts added to the principal balance of the Mortgage Loan, or capitalized
amounts added to the Mortgage Loan, will be required to be fully amortized over
the remaining term, or the extended term, of the Mortgage Loan; all
capitalizations are to be implemented in accordance with the Servicer's
standards and may be implemented only by the Servicer for that purpose; the
final maturity of any Mortgage Loan will not be extended beyond the Assumed
Final Distribution Date; and no servicing modification with respect to a
Mortgage Loan will have the effect of reducing the Mortgage Rate below one half
of the Mortgage Rate as in effect on the Cut off Date, but not less than the
servicing fee rate. Further, the aggregate current principal balance of all
Mortgage Loans subject to modifications can be no more than five percent (5%) of
the aggregate principal balance of the Mortgage Loans as of the cut off date,
but this limit may increase from time to time with the consent of the Rating
Agencies.
Any advances made on any Mortgage Loan will be reduced to reflect any
related servicing modifications previously made. The Mortgage Rate and net
Mortgage Rate as to any Mortgage Loan will be deemed not reduced by any
servicing modification, so that the calculation of the Interest Distribution
Amount (as defined in this prospectus supplement) payable on the Class A
Certificates and Mezzanine Certificates will not be affected by the servicing
modification.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement and Servicing Agreement will provide
that each year on or before the date set forth in the Pooling and Servicing
Agreement or Servicing Agreement, as applicable, beginning with the first year
after the year in which the Cut-off Date occurs, each party responsible for the
servicing function will provide to the Depositor, the Master Servicer and the
Trustee a report on an assessment of compliance with the minimum servicing
criteria established
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in Item 1122(a) of Regulation AB (the "AB Servicing Criteria"). The AB Servicing
Criteria include specific criteria relating to the following areas: general
servicing considerations, cash collection and administration, investor
remittances and reporting, and pool asset administration. Such report will
indicate that the AB Servicing Criteria were used to test compliance on a
platform level basis and will set out any material instances of noncompliance.
The Pooling and Servicing Agreement and Servicing Agreement will also
provide that the each party responsible for the servicing function will deliver
along with its report on assessment of compliance, an attestation report from a
firm of independent public accountants on the assessment of compliance with the
AB Servicing Criteria.
The Servicing Agreement will also provide for delivery to the Master
Servicer, the Securities Administrator and the Trustee, each year on or before
the date set forth in the Servicing Agreement, of a separate annual statement of
compliance from each entity responsible for the servicing function to the effect
that, to the best knowledge of the signing officer, the Servicer has fulfilled
in all material respects its obligations under the Servicing Agreement,
throughout the preceding year or, if there has been a material failure in the
fulfillment of any obligation, the statement shall specify such failure and the
nature and status thereof. This statement may be provided as a single form
making the required statements as to more than one servicing agreement.
Copies of the annual reports of assessment of compliance, attestation
reports, and statements of compliance may be obtained by securityholders without
charge upon written request to the Master Servicer at the address of the Master
Servicer set forth under "The Securities Administrator, the Master Servicer and
the Custodian" in this prospectus supplement. These items will be filed with the
Issuing Entity's annual report on Form 10-K, to the extent required under
Regulation AB.
THE SECURITIES ADMINISTRATOR, THE MASTER SERVICER AND THE CUSTODIAN
WELLS FARGO BANK, NATIONAL ASSOCIATION
GENERAL
The information set forth in the following five paragraphs has been
provided by Wells Fargo Bank, National Association.
Wells Fargo Bank, National Association ("Wells Fargo Bank") will act as
Securities Administrator, Master Servicer and the Custodian under the Pooling
and Servicing Agreement and the custodial agreement. Wells Fargo Bank is a
national banking association and a wholly-owned subsidiary of Wells Fargo &
Company. A diversified financial services company with approximately $482
billion in assets, 23 million customers and 153,000 employees as of December 31,
2005, Wells Fargo & Company is a U.S. bank holding company, providing banking,
insurance, trust, mortgage and consumer finance services throughout the United
States and internationally. Wells Fargo Bank provides retail and commercial
banking services and corporate trust, custody, securities lending, securities
transfer, cash management, investment management and other financial and
fiduciary services. The Depositor, the Sponsor and the Servicer may maintain
banking and other commercial relationships with Wells Fargo Bank and its
affiliates. Wells Fargo Bank maintains principal corporate trust offices located
at 9062 Old Annapolis Road, Columbia, Maryland 21045-1951 (among other
locations) and its office for certificate transfer services is located at Sixth
Street and Marquette Avenue, Minneapolis, Minnesota 55479.
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SECURITIES ADMINISTRATOR. Under the terms of the Pooling and Servicing
Agreement, Wells Fargo Bank also is responsible for securities administration,
which includes pool performance calculations, distribution calculations and the
preparation of monthly distribution reports. As Securities Administrator, Wells
Fargo Bank is responsible for the preparation and filing of all REMIC tax
returns on behalf of the trust and the preparation of monthly reports on Form
10-D, periodic reports on Form 8-K and annual reports on Form 10-K that are
required to be filed with the Securities and Exchange Commission on behalf of
the trust. Wells Fargo Bank has been engaged in the business of securities
administration since June 30, 1995. As of March 31, 2006, Wells Fargo Bank was
acting as securities administrator with respect to more than $829,726,924,092 of
outstanding residential mortgage-backed securities.
MASTER SERVICER. Wells Fargo Bank acts as Master Servicer pursuant to
the Pooling and Servicing Agreement. The Master Servicer is responsible for the
aggregation of monthly Servicer reports and remittances and for the oversight of
the performance of the Servicer under the terms of the Pooling and Servicing
Agreement. In particular, the Master Servicer independently calculates monthly
loan balances based on servicer data, compares its results to servicer
loan-level reports and reconciles any discrepancies with the Servicer. The
Master Servicer also reviews the servicing of defaulted loans for compliance
with the terms of the Pooling and Servicing Agreement. In addition, upon the
occurrence of certain servicer events of default under the terms of the Pooling
and Servicing Agreement, the Master Servicer may be required to enforce certain
remedies on behalf of the Trust and against the defaulting Servicer. Wells Fargo
has been engaged in the business of master servicing since June 30, 1995. As of
March 31, 2006, Wells Fargo Bank was acting as master servicer for approximately
1,155 series of residential mortgage-backed securities with an aggregate
outstanding principal balance of approximately $593,256,087,420.
CUSTODIAN. Wells Fargo Bank is acting as the custodian of the mortgage
loan files pursuant to a custodial agreement. In that capacity, Wells Fargo Bank
is responsible to hold and safeguard the mortgage notes and other contents of
the related mortgage files on behalf of the Trustee and the Certificateholders.
Wells Fargo Bank maintains each mortgage loan file in a separate file folder
marked with a unique bar code to assure loan-level file integrity and to assist
in inventory management. Files are segregated by transaction or investor. Wells
Fargo Bank has been engaged in the mortgage document custody business for more
than 25 years. Wells Fargo Bank maintains document custody facilities in its
Minneapolis, Minnesota headquarters and in three regional offices located in
Richfield, Minnesota, Irvine, California, and Salt Lake City, Utah. As of March
31, 2006, Wells Fargo Bank maintains mortgage custody vaults in each of those
locations with an aggregate capacity of over eleven million files.
Wells Fargo serves or may have served within the past two years as loan
file custodian for various mortgage loans owned by the Sponsor or an affiliate
of the Sponsor and anticipates that one or more of those mortgage loans may be
included in the Trust. The terms of any custodial agreement under which those
services are provided by Wells Fargo are customary for the mortgage-backed
securitization industry and provide for the delivery, receipt, review and
safekeeping of mortgage loan files.
All of the mortgage loan files will be held by Wells Fargo Bank pursuant
to a custodial agreement to be entered into among HSBC Bank USA, National
Association, as Trustee, Wells Fargo Bank, as a custodian, and the Servicer.
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 the amount of
any interest or other income earned on
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funds held in the Distribution Account. The Master Servicer will not be entitled
to a master servicing fee.
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 compensation payable
to the Master Servicer on such Distribution Date.
THE DISTRIBUTION ACCOUNT
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 (as defined in the Pooling and Servicing Agreement).
Amounts on deposit therein may be invested in Permitted Investments (as defined
under "Servicing of the Mortgage Loans -- Payments on Mortgage Loans; Deposits
to Collection Account" in this prospectus supplement) 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.
TRANSFER OF MASTER SERVICING
The Master Servicer may sell and assign its rights and delegate its
duties and obligations in its entirety as Master Servicer under the Pooling and
Servicing Agreement; provided, however, that: (i) the purchaser or transferee
accept in writing such assignment and delegation and assume the obligations of
the Master Servicer under the Pooling and Servicing Agreement (a) shall have a
net worth of not less than $25,000,000 (unless otherwise approved by each Rating
Agency pursuant to clause (ii) below); (b) shall be reasonably satisfactory to
the Trustee (as evidenced in a writing signed by the Trustee); and (c) shall
execute and deliver to the Trustee an agreement, in form and substance
reasonably satisfactory to the Trustee, which contains an assumption by such
Person of the due and punctual performance and observance of each covenant and
condition to be performed or observed by it as Master Servicer under the Pooling
and Servicing Agreement; (ii) each Rating Agency shall be given prior written
notice of the identity of the proposed successor to the Master Servicer and each
Rating Agency's rating of the Certificates in effect immediately prior to such
assignment, sale and delegation will not be downgraded, qualified or withdrawn
as a result of such assignment, sale and delegation, as evidenced by a letter to
such effect delivered to the Master Servicer and the Trustee; and (iii) the
Master Servicer assigning and selling the master servicing shall deliver to the
Trustee an officer's certificate and an opinion of independent counsel, each
stating that all conditions precedent to such action under the Pooling and
Servicing Agreement have been completed and such action is permitted by and
complies with the terms of the Pooling and Servicing Agreement. No such
assignment or delegation shall affect any liability of the Master Servicer
arising out of acts or omissions prior to the effective date thereof.
INDEMNIFICATION
The Master Servicer and any director, officer, employee or agent of the
Master Servicer will be indemnified and held harmless by the trust against any
loss, liability or expense as set forth in the Pooling and Servicing Agreement.
The Securities Administrator and any director, officer, employee or
agent of the Securities Administrator will be indemnified and held harmless by
the trust against any loss, liability or expense as set forth in the Pooling and
Servicing Agreement.
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The Custodian and any director, officer, employee or agent of the
Custodian will be indemnified and held harmless by the trust against any loss,
liability or expense as set forth in the Custodial Agreement.
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 2006-CW1 or at such other address as the Trustee may
designate from time to time.
As of June 30, 2006, HSBC Bank USA, National Association is acting as
Trustee for approximately 400 asset-backed securities transactions involving
similar pool assets to those found in this transaction.
The Trustee, prior to the occurrence of an Event of Default and after
the curing or waiver of all Events of Default which may have occurred,
undertakes to perform such duties and only such duties as are specifically set
forth in the Pooling and Servicing Agreement as duties of the Trustee, including
the following:
1. Upon receipt of all resolutions, certificates, statements, opinions,
reports, documents, orders or other instruments which are specifically
required to be furnished to the Trustee pursuant to the Pooling and
Servicing Agreement, the Trustee (or the Custodian) shall examine them to
determine whether they are in the required form; provided, however, that the
Trustee shall not be responsible for the accuracy or content of any
resolution, certificate, statement, opinion, report, document, order or
other instrument furnished hereunder; provided, further, that the Trustee
shall not be responsible for the accuracy or verification of any calculation
provided to it pursuant to the Pooling and Servicing Agreement.
2. The Trustee shall promptly remit to the Servicer any complaint, claim,
demand, notice or other document (collectively, the "Notices") delivered to
the Trustee as a consequence of the assignment of any Mortgage Loan
hereunder and relating to the servicing of the Mortgage Loans; provided than
any such notice (i) is delivered to the Trustee at its Corporate Trust
Office, (ii) contains information sufficient to permit the Trustee to make a
determination that the real property to which such document relates is a
Mortgaged Property (as defined in the Pooling and Servicing Agreement). The
Trustee shall have no duty hereunder with respect to any Notice it may
receive or which may be alleged to have been delivered to or served upon it
unless such Notice is delivered to it or served upon it at its Corporate
Trust Office and such Notice contains the information required pursuant to
clause (ii) of the preceding sentence.
3. Except for those actions that the Trustee is required to take under the
Pooling and Servicing Agreement, the Trustee shall not have any obligation
or liability to take any action or to refrain from taking any action in the
absence of written direction as provided in the Pooling and Servicing
Agreement.
If an Event of Default has occurred and has not been cured or waived,
the Trustee shall exercise such of the rights and powers vested in it by the
Pooling and Servicing Agreement, using the same degree of care and skill in
their exercise, as a prudent person would exercise under the circumstances in
the conduct of his own affairs.
Without limiting the generality of the foregoing, if an Event of Default
shall occur, the Trustee shall, at the direction of at least 51% of the Voting
Rights, by notice in writing to the Master
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Servicer and to the Depositor, with a copy to each Rating Agency, terminate all
of the rights and obligations of the Master Servicer in its capacity as Master
Servicer under the Pooling and Servicing Agreement, to the extent permitted by
law, and in and to the Mortgage Loans and the proceeds thereof. On or after the
receipt by the Master Servicer of such written notice, all authority and power
of the Master Servicer with respect to the Certificates (other than as a holder
of any Certificate) or the Mortgage Loans or otherwise including, without
limitation, the compensation payable to the Master Servicer under the Pooling
and Servicing Agreement, shall pass to and be vested in the Trustee, and,
without limitation, the Trustee shall be authorized and empowered, as
attorney-in-fact or otherwise, to execute and deliver, on behalf of and at the
expense of the Master Servicer, any and all documents and other instruments and
to do or accomplish all other acts or things necessary or appropriate to effect
the purposes of such notice of termination, whether to complete the transfer and
endorsement or assignment of the Mortgage Loans and related documents, or
otherwise. Notwithstanding the foregoing, The Trustee may, if is shall be
unwilling to so to act, or shall, if it is legally unable to act, appoint, or
petition a court of competent jurisdiction to appoint, a successor master
servicer in accordance with the terms of the Pooling and Servicing Agreement.
To the extent that the costs and expenses of the Trustee related to the
termination of the Master Servicer, appointment of a successor master servicer
or the transfer and assumption of the master servicing by the Trustee
(including, without limitation, (i) all legal costs and expenses and all due
diligence costs and expenses associated with an evaluation of the potential
termination of the Master Servicer as a result of an Event of Default and (ii)
all costs and expenses associated with the complete transfer of the master
servicing, including all servicing files and all servicing data and the
completion, correction or manipulation of such servicing data as may be required
by the successor master servicer to correct any errors or insufficiencies in the
servicing data or otherwise to enable the successor master servicer to master
service the Mortgage Loans in accordance with the Pooling and Servicing
Agreement) are not fully and timely reimbursed by the terminated master
servicer, the Trustee shall be entitled to reimbursement of such costs and
expenses from the Distribution Account.
FOR FURTHER DISCUSSION OF THE DUTIES OF THE TRUSTEE, PLEASE SEE
"DESCRIPTION OF THE AGREEMENTS--MATERIAL TERMS OF THE POOLING AND SERVICING
AGREEMENTS AND UNDERLYING SERVICING AGREEMENTS--DUTIES OF THE TRUSTEE" IN THE
PROSPECTUS.
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 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 Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor trustee. The Depositor may also remove the
Trustee if the Trustee ceases to be eligible to continue under the Pooling and
Servicing Agreement or if the Trustee becomes
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insolvent. Upon becoming aware of the circumstances, the Depositor will be
obligated to appoint a successor trustee. The Trustee may also be removed at any
time by the holders of the certificates evidencing not less a majority of the
voting rights in the trust fund. Any resignation or removal of the Trustee and
appointment of a successor trustee will not become effective until acceptance of
the appointment by the successor trustee. If the Trustee resigns or is removed
by the Depositor, the expenses associated with the change of trustees will be
paid by the former trustee and reimbursed from the Distribution Account. If the
Trustee is removed by holders of certificates, such holders shall be responsible
for paying any compensation payable to a successor trustee, in excess of the
amount paid to the predecessor trustee.
THE CREDIT RISK MANAGER
Clayton Fixed Income Services Inc. (formerly known as 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 the
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 one-twelfth of the product of
0.0140% multiplied by 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, 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") following 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 and the Servicing Agreement; (vi) the Reserve Fund and any
amounts on deposit in the Reserve Fund from time to time and any proceeds
thereof; (vii) the right to any Net Swap Payment and any Swap Termination
Payment made by the Swap Provider under the Interest Rate Swap Agreement; and
(viii) payments made pursuant to the Cap Agreements. For the avoidance of doubt,
the trust fund does not include the Supplemental Interest Trust. 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 in blank 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 in blank and the Related Documents. In lieu of delivery of original
mortgages or mortgage notes, if such original is not available or lost, the
Depositor may deliver or cause to be delivered true and correct copies thereof,
or, with respect to a lost mortgage note, a lost note affidavit. 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, except (i) in
states as to which an opinion of counsel is delivered to the effect that such
recording is not required to protect the Trustee's interest in the Mortgage Loan
against the claim of any subsequent transferee or any successor to or creditor
of the Depositor or the Sponsor, or (ii) with respect to any Mortgage Loan
electronically registered through the Mortgage Electronic Registration Systems,
Inc.
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
Custodial 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 Sponsor by the Trustee or the Servicer,
the Sponsor 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 unpaid Servicing Fees or 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
Sponsor 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 Sponsor 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.
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A "Qualified Substitute Mortgage Loan" is a mortgage loan substituted
for a Deleted Mortgage Loan which must, on the date of such substitution, (i)
have an outstanding principal balance (or in the case of a substitution of more
than one Mortgage Loan for a Deleted Mortgage Loan, an aggregate principal
balance), not in excess of the principal balance of the Deleted Mortgage Loan;
(ii) have a Mortgage Rate not less than the Mortgage Rate of the Deleted
Mortgage Loan and not more than 1% in excess of the Mortgage Rate of such
Deleted Mortgage Loan; (iii) 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 Sponsor 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 Sponsor will
represent and warrant, as of the Closing Date, that, among other things: (i) at
the time of transfer to the Depositor, the Sponsor has transferred or assigned
all of its right, title and interest in each Mortgage Loan and the Related
Documents, free of any lien; (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, Indiana 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, the
Sponsor 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) or
(iv) above (or certain other representations and warranties made by the Sponsor
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
Sponsor 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. The Depositor will file the Mortgage Loan
Purchase Agreement as an exhibit to the Pooling and Servicing Agreement with the
Securities and Exchange Commission in a Current Report on Form 8-K.
Mortgage Loans required to be transferred to the Sponsor as described in
the preceding paragraphs are referred to as "Deleted Mortgage Loans."
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EVENTS OF DEFAULT
Upon the occurrence of events of default described under "Description of
the Agreements-Material Terms of the Pooling and Servicing Agreements and
Underlying Servicing Agreements-Events of Default under the Agreement" and
"-Rights Upon Events of Default under the Agreements" in the prospectus, the
Servicer may be removed as the servicer of the Mortgage Loans in accordance with
the terms of the Pooling and Servicing Agreement. As further described in, and
in accordance with the provisions of, the Pooling and Servicing Agreement upon
the removal of the Servicer after the occurrence of an Event of Default, a
successor to the Servicer (which may be the Master Servicer) will become the
successor to the Servicer under the Pooling and Servicing Agreement. See
"Description of the Agreements-Material Terms of the Pooling and Servicing
Agreements and Underlying Servicing Agreements-Events of Default under the
Agreement" and "-Rights Upon Events of Default under the Agreements" in the
prospectus.
VOTING RIGHTS
At all times, 98% of all voting rights will be allocated among the
holders of the Class A Certificates, the Mezzanine Certificates and the Class CE
Certificates in proportion to the then outstanding Certificate Principal
Balances of their respective certificates, 1% of all voting rights will be
allocated to the holders of the Class P Certificates in proportion to the then
outstanding Certificate Principal Balances of their respective certificates and
1% of all voting rights will be allocated to the holders of the Residual
Certificates. The initial owner of the Residual Certificates is Deutsche Bank
Securities Inc.
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 Master
Servicer will have the right to purchase all remaining Mortgage Loans on a
servicing retained basis 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 or equal to 10% of the
aggregate principal balance of the Mortgage Loans as of the Cut-off Date. In the
event the Master Servicer does not exercise such right to purchase within two
years of the Optional Termination Date, the Servicer may exercise such right to
purchase, subject to the conditions set forth in the Pooling and Servicing
Agreement. In the event the Master Servicer or the Servicer (in each case, the
"Terminator") exercises its 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 and the Securities Administrator and the Swap Provider as of the
termination date and pursuant to the Pooling and Servicing Agreement and the
Interest Rate Swap Agreement. In the event the Terminator exercises this option,
the portion of the purchase price allocable to the Class A Certificates and
Mezzanine Certificates will be, to the extent of available funds, (i) 100% of
the then outstanding Certificate Principal Balance of the Class A Certificates
and Mezzanine Certificates, plus (ii) one month's interest on the then
outstanding Certificate Principal Balance of the Class A Certificates and
Mezzanine 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 Class A Certificates and Mezzanine 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
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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.
The Securities Administrator shall give notice of any termination to the
Certificateholders, upon which the Certificateholders shall surrender their
Certificates to the Securities Administrator for payment of the final
distribution and cancellation. Such notice shall be given by letter, mailed not
earlier than the 15th day and not later than the 25th day of the month next
preceding the month of such final distribution, and shall specify (i) the
Distribution Date upon which final payment of the Certificates will be made upon
presentation and surrender of the Certificates at the office of the Securities
Administrator therein designated, (ii) the amount of any such final payment and
(iii) that the Record Date otherwise applicable to such Distribution Date is not
applicable, payments being made only upon presentation and surrender of the
Certificates at the office of the Securities Administrator therein specified.
In the event such notice is given in connection with the purchase of all
of the Mortgage Loans by the Terminator, the Terminator shall deliver to the
Securities Administrator for deposit in the Distribution Account not later than
the Business Day prior to the Distribution Date on which the final distribution
on the certificates an amount in immediately available funds equal to the
above-described Termination Price. The Securities Administrator shall remit to
the Servicer, the Master Servicer, the Trustee and the Custodian from such funds
deposited in the Distribution Account (i) any amounts which the Servicer would
be permitted to withdraw and retain from the Collection Account as if such funds
had been deposited therein (including all unpaid Servicing Fees and all
outstanding P&I Advances and Servicing Advances) and (ii) any other amounts
otherwise payable by the Securities Administrator to the Master Servicer, the
Trustee, the Custodian, the Servicer and the Swap Provider from amounts on
deposit in the Distribution Account or Collection Account pursuant to the terms
of the Pooling and Servicing Agreement and the Servicing Agreement prior to
making any final distributions. Upon certification to the Trustee by the
Securities Administrator of the making of such final deposit, the Trustee shall
promptly release or cause to be released to the Terminator the Mortgage Files
for the remaining Mortgage Loans, and Trustee shall execute all assignments,
endorsements and other instruments delivered to it and necessary to effectuate
such transfer.
Upon presentation of the Certificates by the Certificateholders on the
final Distribution Date, the Securities Administrator shall distribute to each
Certificateholder so presenting and surrendering its Certificates the amount
otherwise distributable on such Distribution Date in respect of the Certificates
so presented and surrendered. Any funds not distributed to any Holder or Holders
of Certificates being retired on such Distribution Date because of the failure
of such Holder or Holders to tender their Certificates shall, on such date, be
set aside and held in trust and credited to the account of the appropriate
non-tendering Holder or Holders. If any Certificates as to which notice has been
given shall not have been surrendered for cancellation within six months after
the time specified in such notice, the Securities Administrator shall mail a
second notice to the remaining non-tendering Certificateholders to surrender
their Certificates for cancellation in order to receive the final distribution
with respect thereto. If within one year after the second notice all such
Certificates shall not have been surrendered for cancellation, the Securities
Administrator shall, directly or through an agent, mail a final notice to the
remaining non-tendering Certificateholders concerning surrender of their
Certificates. The costs and expenses of maintaining the funds in trust and of
contacting such Certificateholders shall be paid out of the assets remaining in
the trust funds. If within one (1) year after the final notice any such
Certificates shall not have been surrendered for cancellation, the Securities
Administrator shall pay to the Depositor all such amounts, and all rights of
non-tendering Certificateholders in or to such amounts shall thereupon cease. No
interest shall accrue or be payable to any Certificateholder on any amount held
in trust by the Securities Administrator as a result of such Certificateholder's
failure to surrender its Certificate(s) on the final Distribution Date for final
payment thereof. Any
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such amounts held in trust by the Securities Administrator shall be held
uninvested in an Eligible Account.
In the event that the Terminator purchases all the Mortgage Loans and
any properties acquired in respect thereof or the final payment on or other
liquidation of the last Mortgage Loan, the Trust Fund shall be terminated in
accordance with the following additional requirements:
(i) The Securities Administrator shall specify the first day in the
90-day liquidation period in a statement attached to each Trust REMIC's final
Tax Return pursuant to Treasury regulation Section 1.860F-1 and shall satisfy
all requirements of a qualified liquidation under Section 860F of the Code and
any regulations thereunder, as evidenced by an opinion of counsel obtained by
and at the expense of the Terminator;
(ii) During such 90-day liquidation period and, at or prior to the
time of making of the final payment on the Certificates, the Trustee shall sell
all of the assets of REMIC I to the Terminator for cash; and
(iii) At the time of the making of the final payment on the
Certificates, the Securities Administrator shall distribute or credit, or cause
to be distributed or credited, to the Holders of the Residual Certificates all
cash on hand in the Trust Fund (other than cash retained to meet claims), and
the Trust Fund shall terminate at that time.
At the expense of the Terminator (or, if the Trust Fund is being
terminated as a result of the Last Scheduled Distribution Date, at the expense
of the Trust Fund), the Terminator shall prepare or cause to be prepared the
documentation required in connection with the adoption of a plan of liquidation
of each Trust REMIC.
By their acceptance of Certificates, the Holders thereof hereby agree to
authorize the Securities Administrator to specify the 90-day liquidation period
for each Trust REMIC, which authorization shall be binding upon all successor
Certificateholders.
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 Class A Certificates, the Mezzanine Certificates and the Class CE
Certificates (exclusive of any right of the holder of such certificates to
receive payments from or any obligation to make payments to the Reserve Fund in
respect of Net WAC Rate Carryover Amounts or the Supplemental Interest Trust)
and the Class P 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, certain classes of Offered Certificates
may 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 adjustable-rate Mortgage Loans will prepay at a rate equal to
100% PPC (calculated based on the assumed prepayment rates set forth
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under "Yield on the Certificates--Weighted Average Lives" in this prospectus
supplement) and the fixed-rate Mortgage Loans will prepay at a rate equal to
100% PPC calculated based on the assumed prepayment rates set forth under "Yield
on the Certificates--Weighted Average Lives" in this prospectus supplement). No
representation is made that the Mortgage Loans will prepay at that rate or at
any other rate. See "Material Federal Income Tax Consideration-General" and
"-REMICs-Taxation of Owners of Regular Securities" in the prospectus.
The holders of the Offered Certificates will be required to include in
income interest on their certificates in accordance with the accrual method of
accounting.
The Internal Revenue Service (the "IRS") has issued original issue
discount regulations (the "OID Regulations") under sections 1271 to 1275 of the
Code that address the treatment of debt instruments issued with original issue
discount, Purchasers of the Offered Certificates should be aware that the OID
Regulations do not adequately address certain issues relevant to, or are not
applicable to, prepayable securities such as the Offered Certificates. In
addition, there is considerable uncertainty concerning the application of the
OID Regulations to REMIC Regular Certificates that provide for payments based on
an adjustable rate such as the 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 either the Reserve Fund or the Supplemental Interest Trust
in respect of any Net WAC Rate Carryover Amount or the obligation to make
payments to the Supplemental Interest Trust. The Reserve Fund, the Interest Rate
Swap Agreement and the Supplemental Interest Trust are not assets of any REMIC.
The REMIC regular interest corresponding to an Offered Certificate will be
entitled to receive interest and principal payments at the times and in the
amounts equal to those made on the certificate to which it corresponds, except
that (i) the maximum interest rate of that REMIC regular interest will equal the
Net WAC Pass-Through Rate computed for this purpose by limiting the Swap
Notional
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Amount of the Interest Rate Swap Agreement to the aggregate principal balance of
the Mortgage Loans and (ii) any Swap Termination Payment will be treated as
being payable solely from Net Monthly Excess Cashflow. As a result of the
foregoing, the amount of distributions on the REMIC regular interest
corresponding to an Offered Certificate may exceed the actual amount of
distributions on the Offered Certificate.
The treatment of amounts received by a holder of an Offered Certificate
under such holder's right to receive any Net WAC Rate Carryover Amount, will
depend on the portion, if any, of such holder's purchase price allocable
thereto. Under the REMIC Regulations, each holder of an Offered Certificate must
allocate its purchase price for the Offered Certificate among its undivided
interest in the regular interest of the related REMIC and its undivided interest
in the right to receive payments from the Reserve Fund and the Supplemental
Interest Trust in respect of any Net WAC Rate Carryover Amount in accordance
with the relative fair market values of each property right. The Securities
Administrator will, as required, treat payments made to the holders of the
Offered Certificates with respect to any Net WAC Rate Carryover Amount, as
includible in income based on the regulations relating to notional principal
contracts (the "Notional Principal Contract Regulations"). 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 right to
receive payments from the Reserve Fund and the Supplemental Interest Trust in
respect of Net WAC Rate Carryover Amount with respect to the Offered
Certificates may be treated as having more than a DE MINIMIS value as provided
in the pooling and servicing agreement. Upon request, the Securities
Administrator will make available information regarding such amounts as has been
provided to it. Under the REMIC Regulations, the Securities Administrator is
required to account for the REMIC regular interest, the right to receive
payments from the Reserve Fund and the Supplemental Interest Trust in respect of
any Net WAC Rate Carryover Amount 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 such 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, such 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 such regulations with respect to those
Certificates. If the Securities Administrator's treatment of payments of any Net
WAC Rate Carryover Amount is respected, ownership of the right to any Net WAC
Rate Carryover Amount will entitle the owner to amortize the price paid for the
right to any Net WAC Rate Carryover Amount under the Notional Principal Contract
Regulations.
Any payments made to a beneficial owner of an Offered Certificate in
excess of the amounts payable on the corresponding REMIC regular interest will
be treated as having been received as a payment on a notional principal
contract. To the extent the sum of such periodic payments for any year exceeds
that year's amortized cost of any Net WAC Rate Carryover Amount, such excess
represents net income for that year. Conversely, to the extent that the amount
of that year's amortized cost exceeds the sum of the periodic payments, such
excess will represent a net deduction for that year. In addition, any amounts
payable on such REMIC regular interest in excess of the amount of payments on
the Offered Certificate to which it relates will be treated as having been
received by the beneficial owners of such Certificates and then paid by such
owners to the Supplemental Interest Trust pursuant to the Interest Rate Swap
Agreement, and such excess should be treated as a periodic payment on a notional
principal contract that is made by the beneficial owner during the applicable
taxable year and that is taken into account in determining the beneficial
owner's net income or net deduction with respect to any Net WAC Rate Carryover
Amount for such taxable year. Although not clear, net income or a net deduction
with respect to any Net WAC Rate Carryover Amount should be treated as ordinary
income or as an ordinary
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deduction. Holders of the Offered Certificates are advised to consult their own
tax advisors regarding the tax characterization and timing issues relating to a
Swap Termination Payment.
Because a beneficial owner of any Net WAC Rate Carryover Amount will be
required to include in income the amount deemed to have been paid by such owner,
but may not be able to deduct that amount from income, a beneficial owner of an
Offered Certificate may have income that exceeds cash distributions on the
Offered Certificate, in any period and over the term of the Offered Certificate.
As a result, the Offered Certificates may not be a suitable investment for any
taxpayer whose net deduction with respect to any Net WAC Rate Carryover Amount
would be subject to the limitations described above.
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 and the Supplemental Interest Trust in respect of any Net WAC Rate
Carryover Amount would be considered a "termination payment" under the Notional
Principal Contract Regulations allocable to the related Offered Certificate, as
the case may be. A holder of an Offered Certificate will have gain or loss from
such a termination of the right to receive payments from the Reserve Fund and
the Supplemental Interest Trust in respect of any Net WAC Rate Carryover Amount
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 and the Supplemental Interest Trust in
respect of any Net WAC Rate Carryover Amount.
Gain or loss realized upon the termination of the right to receive
payments from the Reserve Fund and the Supplemental Interest Trust in respect of
any Net WAC Rate Carryover Amount 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.
It is possible that the right to receive payments in respect of any Net
WAC Rate Carryover Amount could be treated as a partnership among the holders of
all of the Certificates, in which case holders of such Certificates potentially
would be subject to different timing of income and foreign holders of such
Certificates could be subject to withholding in respect of any related Net WAC
Rate Carryover Amount. 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
their Certificates.
The REMIC regular interest component of each Offered Certificate will be
treated as assets described in Section 7701(a)(19)(C) of the Code, and as "real
estate assets" under Section 856(c)(5)(B) of the Code, generally, in the same
proportion that the assets of the Trust, exclusive of the assets not included in
any REMIC, would be so treated. In addition, the interest derived from the REMIC
regular interest component of each Offered Certificate will be interest on
obligations secured by interests in real property for purposes of section
856(c)(3) of the Code, subject to the same limitation in the preceding sentence.
The Notional Principal Contract component of each Regular Certificate will not
qualify, however, as an asset described in Section 7701(a)(19)(C) of the Code,
as a real estate asset under Section 856(c)(5)(B) of the Code or as a "qualified
mortgage" within the meaning of Section 860G(a)(3) of the Code. As a result, the
Offered Certificates generally may not be a suitable investment for a REMIC, a
real estate investment trust or an entity intending to qualify under Section
7701(a)(19)(C) of the Code.
Because any Net WAC Rate Carryover Amount is treated as separate rights
of the Offered Certificates not payable by any REMIC elected by the Trust, such
rights will not be treated as qualifying assets for any certificateholder that
is a mutual savings bank, domestic building and loan association, real estate
investment trust, or REMIC. In addition, any amounts received from
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the Reserve Fund and the Supplemental Interest Trust will not be qualifying real
estate income for real estate investment trusts or qualifying income for REMICs.
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 second amended and
restated underwriting agreement, dated as of June 24, 1999, as amended and
restated to and including, January 25, 2006 and a terms agreement to be executed
on or before the closing date (collectively, the "Underwriting Agreement"),
between 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 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.
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LEGAL MATTERS
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.
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
Ratings Service, 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 A-2D AAA Aaa
Class M-1 AA+ Aa1
Class M-2 AA Aa2
Class M-3 AA- Aa3
Class M-4 A+ A1
Class M-5 A A2
Class M-6 A- A3
Class M-7 BBB+ Baa1
Class M-8 BBB Baa2
Class M-9 BBB- Baa3
The ratings assigned to mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
the certificateholders are entitled. The rating process addresses structural and
legal aspects associated with the certificates, including the nature of the
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 from amounts received or
advanced on the Mortgage Loans.
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.
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The rating agencies have stated that it is their standard policy to
monitor ratings on publicly offered securities for which a rating has been
provided, as to each rating agency rating each class of Offered Certificates in
accordance with the rating agencies' particular surveillance policies, unless
the issuer requests a rating without surveillance. A rating agency will monitor
the rating it issues on an ongoing basis and may update the rating after
conducting its regular review of the issuer's creditworthiness or after
conducting a review of the status of the rating upon becoming aware of any
information that might reasonably be expected to result in a change of rating.
The Depositor has not requested that any rating agency not monitor their ratings
of the Offered Certificates, and the Depositor has not requested that any rating
agency use any monitoring procedures other than their standard monitoring
procedures.
LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Sponsor, the
Depositor, the Trustee, ACE Securities Corp. Home Equity Loan Trust, Series
2006-CW1, the Master Servicer, the Servicer, the Securities Administrator or the
Custodian, or with respect to which the property of any of the foregoing
transaction parties is subject, that are material to the Certificateholders. No
legal proceedings against any of the foregoing transaction parties is known to
be contemplated by governmental authorities, that are material to the
Certificateholders.
AFFILIATIONS, RELATIONSHIPS AND RELATED TRANSACTIONS
There are no affiliations between (a) the Sponsor, the Depositor or the
Issuing Entity and (b) any of the Master Servicer, the Securities Administrator,
the Custodian, the Originator, the Servicer, the Swap Provider, the Cap Provider
and the Trustee. There are no affiliations among the Master Servicer, the
Securities Administrator or the Custodian and any of the Servicer, the
Originator, the Swap Provider, the Cap Provider and the Trustee. The Originator
and the Servicer are affiliates. There are no affiliations between either of the
Servicer or the Originator and the Swap Provider, the Cap Provider and the
Trustee. There are currently no business relationships, agreements,
arrangements, transactions or understandings between (a) the Sponsor, the
Depositor or the Issuing Entity and (b) any of the Master Servicer, the
Securities Administrator, the Custodian, the Servicer, the Originator, the Cap
Provider, the Swap Provider or the Trustee, or any of their respective
affiliates, that were entered into outside the normal course of business or that
contain terms other than would be obtained in an arm's length transaction with
an unrelated third party and that are material to the investor's understanding
of the Certificates, or that relate to the Certificates or the pooled assets. No
such business relationship, agreement, arrangement, transaction or understanding
has existed during the past two years.
LEGAL INVESTMENT
The Offered Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984.
Institutions whose investment activities are subject to review by
certain regulatory authorities hereafter may be or may become subject to
restrictions on investment in the certificates, and such restrictions may be
retroactively imposed. The Federal Financial Institutions Examination Council,
the Federal Deposit Insurance Corporation, the Office of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the Office of
Thrift Supervision, or OTS, and the National Credit Union Administration, or
NCUA, have adopted guidelines, and have proposed policies, regarding the
suitability of investments in various types of derivative mortgage-backed
securities, including securities such as the certificates.
For example, on April 23, 1998, the Federal Financial Institutions
Examination Council issued a revised supervisory policy statement, referred to
as the 1998 Policy Statement, applicable
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to all depository institutions, setting forth guidelines for investments in
"high-risk mortgage securities." The 1998 Policy Statement has been adopted by
the Federal Reserve Board, the Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, the NCUA and the OTS. The 1998 Policy
Statement rescinds a 1992 policy statement that had required, prior to purchase,
a depository institution to determine whether a mortgage derivative product that
it is considering acquiring is high-risk, and, if so, that the proposed
acquisition would reduce the institution's overall interest rate risk. In
addition, The 1998 Policy Statement eliminates former constraints on investing
in certain "high-risk" mortgage derivative products and substitutes broader
guidelines for evaluating and monitoring investment risk. In addition, the NCUA
has issued regulations governing federal credit union investments which prohibit
investment in certain specified types of securities, which may include the
certificates. The NCUA has indicated that its regulations will take precedence
over the 1998 Policy Statement. Similar policy statements and regulations have
been issued by other regulators having jurisdiction over other types of
depository institutions.
The OTS has issued Thrift Bulletin 73a, or TB 73a, entitled "Investing
in Complex Securities", effective December 18, 2001 which applies to savings
associations regulated by the OTS, and Thrift Bulletin 13a, or TB 13a, entitled
"Management of Interest Rate Risk, Investment Securities, and Derivatives
Activities", effective December 1, 1998, which is applicable to thrift
institutions regulated by the OTS.
TB 73a requires savings associations, prior to taking any investment
position, to determine that the investment position meets applicable regulatory
and policy requirements and internal guidelines, is suitable for the
institution, and is safe and sound. The OTS recommends, with respect to
purchases of specific securities, additional analysis, including, among others,
analysis of repayment terms, legal structure, expected performance of the
issuing entity and any underlying assets as well as analysis of the effects of
payment priority, with respect to a security which is divided into separate
tranches with unequal payments, and collateral investment parameters, with
respect to a security that is prefunded or involves a revolving period. TB 73a
reiterates the OTS's due diligence requirements for investing in all securities
and warns that if a savings association makes an investment that does not meet
the applicable regulatory requirements, the savings association's investment
practices will be subject to criticism, and the OTS may require divestiture of
such securities. The OTS also recommends, with respect to an investment in any
"complex securities," that savings associations should take into account quality
and suitability, interest rate risk, and classification factors. For the
purposes of each of TB 73a and TB 13a, "complex security" includes, among other
things, any collateralized mortgage obligation or real estate mortgage
investment conduit security, other than any "plain vanilla" mortgage
pass-through security (that is, securities that are part of a single class of
securities in the related pool that are non-callable and do not have any special
features). Accordingly, all classes of Offered Certificates would likely be
viewed as "complex securities." With respect to quality and suitability factors,
TB 73a warns (i) that a savings association's sole reliance on outside ratings
for material purchases of complex securities is an unsafe and unsound practice,
(ii) that a savings association should only use ratings and analyses from
nationally recognized rating agencies in conjunction with, and in validation of,
its own underwriting processes, and (iii) that it should not use ratings as a
substitute for its own thorough underwriting analyses. With respect the interest
rate risk factor, TB 73a recommends that savings associations should follow the
guidance set forth in TB 13a.
TB 13a requires thrift institutions, prior to taking any investment
position, to (i) conduct a pre-purchase portfolio sensitivity analysis for any
"significant transaction" involving securities or financial derivatives, and
(ii) conduct a pre-purchase price sensitivity analysis of any "complex security"
or financial derivative. The OTS recommends that while a thrift institution
should conduct its own in-house pre-acquisition analysis, it may rely on an
analysis conducted by an independent third-party as long as management
understands the analysis and its key assumptions. Further, TB 13a recommends
that the use of "complex securities with high price
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sensitivity" be limited to transactions and strategies that lower a thrift
institution's portfolio interest rate risk. TB 13a warns that investment in
complex securities by thrift institutions that do not have adequate risk
measurement, monitoring and control systems may be viewed by OTS examiners as an
unsafe and unsound practice.
There may be other restrictions on the ability of some investors either
to purchase some classes of securities or to purchase any class of securities
representing more than a specified percentage of the investors' assets. The
Depositor will make no representations as to the proper characterization of any
class of securities for legal investment or other purposes, or as to the ability
of particular investors to purchase any class of securities under applicable
legal investment restrictions. These uncertainties may adversely affect the
liquidity of any class of securities. Accordingly, all investors whose
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements or review by regulatory authorities are
encouraged to consult with their own legal advisors in determining whether and
to what extent the securities of any class constitute legal investments or are
subject to investment, capital or other restrictions.
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), prohibits "parties in interest" with respect to an employee
benefit plan subject to ERISA from engaging in certain transactions involving
such plan and its assets unless a statutory, regulatory or administrative
exemption applies to the transaction. Section 4975 of the Code imposes certain
excise taxes on prohibited transactions involving "disqualified persons" and
employee benefit plans or other arrangements (including, but not limited to,
individual retirement accounts) described under that section (collectively with
employee benefit plans subject to ERISA, "Plans"). ERISA authorizes the
imposition of civil penalties for prohibited transactions involving Plans not
covered under Section 4975 of the Code. Any Plan fiduciary which proposes to
cause a Plan to acquire Offered Certificates is encouraged to consult with its
counsel with respect to the potential consequences under ERISA and the Code of
the Plan's acquisition and ownership of such Offered Certificates. See "ERISA
Considerations" in the prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
such plans may be invested in Offered Certificates without regard to the ERISA
considerations described herein and in the prospectus, subject to the provisions
of other applicable federal and state law. Any such plan which is qualified and
exempt from taxation under Sections 401(a) and 501(a) of the Code may
nonetheless be subject to the prohibited transaction rules set forth in Section
503 of the Code.
Except as noted above, investments by Plans are subject to ERISA's
general fiduciary requirements, including the requirement of investment prudence
and diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary which decides to
invest the assets of a Plan in a class of Offered Certificates should consider,
among other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the mortgage loans.
The U.S. Department of Labor has issued an Exemption, as described under
"ERISA Considerations" in the prospectus, to the Underwriters. The Exemption
generally exempts from the application of certain of the prohibited transaction
provisions of Section 406 of ERISA, and the excise taxes imposed on such
prohibited transactions by Section 4975(a) and (b) of the Code and Section
502(i) of ERISA, transactions relating to the purchase, sale and holding of
pass-through certificates rated at least "BBB-" (or its equivalent) by S&P,
Fitch Ratings or Moody's at the time of purchase and underwritten by the
Underwriters and the servicing and operation of asset pools consisting of
certain types of secured obligations, such as mortgage loans, provided that the
conditions of the Exemption are satisfied. However, the Exemption contains a
number of
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conditions which must be met for the Exemption, as amended, to apply (as
described in the prospectus), including the requirement that any such Plan must
be an "accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
A fiduciary of a Plan contemplating purchasing an Offered Certificate must make
its own determination that the conditions set forth in the Exemption, as
amended, will be satisfied with respect to such certificates, including the
requirement that the rating on a particular class of Certificates be "BBB-" or
higher at the time of purchase.
For so long as the holder of an Offered Certificate also holds an
interest in the Supplemental Interest Trust, the holder will be deemed to have
acquired and be holding the Offered Certificate without the right to receive
payments from the Supplemental Interest Trust and, separately, the right to
receive payments from the Supplemental Interest Trust. The Exemption is not
applicable to the acquisition, holding and transfer of an interest in the
Supplemental Interest Trust. In addition, while the Supplemental Interest Trust
is in existence, it is possible that not all of the requirements for the
Exemption to apply to the acquisition, holding and transfer of Offered
Certificates will be satisfied. However, if the Exemption is not available,
there may be other exemptions that may apply. Accordingly, no Plan or other
person using assets of a Plan may acquire or hold an Offered Certificate while
the Supplemental Interest Trust is in existence, unless (1) such Plan is an
accredited investor within the meaning of the Exemption and (2) such acquisition
or holding is eligible for the exemptive relief available under PTCE 84-14 (for
transactions by independent "qualified professional asset managers"), 91-38 (for
transactions by bank collective investment funds), 90-1 (for transactions by
insurance company pooled separate accounts), 95-60 (for transactions by
insurance company general accounts) or 96-23 (for transactions effected by
"in-house asset managers"). For so long as the Supplemental Interest Trust is in
existence, each beneficial owner of an Offered Certificate or any interest
therein, shall be deemed to have represented, by virtue of its acquisition or
holding of the Offered Certificate, or interest therein, that either (i) it is
not a Plan or (ii) (A) it is an accredited investor within the meaning of the
Exemption and (B) the acquisition and holding of such Certificate and the
separate right to receive payments from the Supplemental Interest Trust are
eligible for the exemptive relief available under one of the five prohibited
transaction class exemptions enumerated above.
A fiduciary of or other investor of Plan assets contemplating purchasing
an Offered Certificate should consult their legal counsel concerning the
availability of, and the scope of relief provided by, the Exemption and the
enumerated class Exemptions.
Each beneficial owner of a Mezzanine Certificate or any interest therein
that is acquired after the termination of the Supplemental Interest Trust (which
holds the Interest Rate Swap Agreement) 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 subordinated certificate in reliance on the Exemption, and that it
understands that there are certain conditions to the availability of the
Exemption, including that the subordinated certificate must be rated, at the
time of purchase, not lower than "BBB-" (or its equivalent) by Standard &
Poor's, Fitch or Moody's 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 Prohibited
Transaction Class Exemption ("PTCE") 95-60, and (3) the conditions in Sections I
and III of PTCE 95-60 have been satisfied.
If any Offered Certificate, or any interest therein, is acquired or held
in violation of the provisions of this section, the next preceding permitted
beneficial owner will be treated as the beneficial owner of that certificate,
retroactive to the date of transfer to the purported beneficial owner. Any
purported beneficial owner whose acquisition or holding of an Offered
Certificate, or interest therein, was effected in violation of the provisions of
this section shall indemnify to the extent permitted by law and hold harmless
the Depositor, the Sponsor, the Master Servicer, the
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Servicer, the Underwriter and the Trustee from and against any and all
liabilities, claims, costs or expenses incurred by such parties as a result of
such acquisition or holding.
Plan fiduciaries are encouraged to consult their legal counsel
concerning the availability of, and scope of relief provided by, the Exemption
and the enumerated class exemptions, and the potential consequences in their
specific circumstances, prior to making an investment in the Offered
Certificates. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification, an
investment in the Offered Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the composition of the
Plan's investment portfolio.
The sale of any class of Offered Certificates to a Plan is in no respect
a representation by the Depositor, the Trustee, the Securities Administrator,
the Master Servicer, the Servicer or the Underwriter that such an investment
meets all relevant legal requirements with respect to investments by Plans
generally or any particular Plan, or that such an investment is appropriate for
Plans generally or any particular Plan.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Exchange Act and in accordance therewith files reports and other information
with the Commission. Reports and other information filed by the Depositor can be
inspected and copied at the Public Reference Room maintained by the Commission
at 100 F Street NE, Washington, DC 20549, and its Regional Offices located as
follows: Chicago Regional Office, 500 West Madison, 14th Floor, Chicago,
Illinois 60661; New York Regional Office, 233 Broadway, New York, New York
10279. Copies of the material can also be obtained from the Public Reference
Section of the Commission, 100 F Street NE, Washington, DC 20549, at prescribed
rates and electronically through the Commission's Electronic Data Gathering,
Analysis and Retrieval system at the Commission's Website (http://www.sec.gov).
Information about the operation of the Public Reference Room may be obtained by
calling the Securities and Exchange Commission at (800) SEC-0330. Exchange Act
reports as to any series filed with the Commission will be filed under the
issuing entity's name. The Depositor does not intend to send any financial
reports to security holders.
The Issuing Entity's annual reports on Form 10-K (including reports of
assessment of compliance with the AB Servicing Criteria, attestation reports,
and statements of compliance, discussed in "Description of the Certificates --
Reports to Certificateholders" and "Servicing of the Mortgage Loans -- Evidence
as to Compliance", required to be filed under Regulation AB), periodic
distribution reports on Form 10-D, current reports on Form 8-K and amendments to
those reports, together with such other reports to security holders or
information about the securities as will have been filed with the Commission
will be posted on the Securities Administrator's internet web site as soon as
reasonably practicable after it has been electronically filed with, or furnished
to, the Commission. The address of the website is: www.ctslink.com
REPORTS TO CERTIFICATEHOLDERS
So long as the Issuing Entity is required to file reports under the
Exchange Act, those reports will be made available as described above under
"Available Information".
If the Issuing Entity is no longer required to file reports under the
Exchange Act, periodic distribution reports will be posted on the Securities
Administrator's website referenced above under "Available Information" as soon
as practicable. Annual reports of assessment of compliance with the AB Servicing
Criteria, attestation reports, and statements of compliance will be provided to
registered holders of the related securities upon request free of charge. See
"Servicing of the
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Mortgage Loans -- EVIDENCE AS TO COMPLIANCE" and "DESCRIPTION OF THE
CERTIFICATES -- REPORTS TO CERTIFICATEHOLDERS."
INCORPORATION OF INFORMATION BY REFERENCE
There are incorporated into this prospectus supplement by reference all
documents, including but not limited to the financial statements and reports
filed or caused to be filed or incorporated by reference by the Depositor with
respect to the trust fund pursuant to the requirements of Sections 13(a) or
15(d) of the Exchange Act, prior to the termination of the offering of the
Offered Certificates. All documents subsequently filed by the Depositor pursuant
to Sections 13(a) or 15(d) of the Exchange Act in respect of the offering prior
to the termination of the offering of the Offered Certificates will also be
deemed incorporated by reference into this prospectus supplement.
The Depositor will provide or cause to be provided without charge to
each person to whom this prospectus supplement is delivered in connection with
the offering of one or more classes of Offered Certificates, upon written or
oral request of the person, a copy of any or all the reports incorporated in
this prospectus supplement by reference, in each case to the extent the reports
relate to one or more of such classes of the Offered Certificates, other than
the exhibits to the documents, unless the exhibits are specifically incorporated
by reference in the documents. Requests should be directed in writing to ACE
Securities Corp., 6525 Morrison Blvd., Suite 318, Charlotte, North Carolina
28211, or by telephone at (704) 365-0569. The Depositor has determined that its
financial statements will not be material to the offering of any Offered
Certificates.
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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
Depositories, which in turn will hold such positions in accounts as DTC
Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and sellers
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
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TRADING BETWEEN CLEARSTREAM AND/OR EUROCLEAR PARTICIPANTS. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PURCHASER. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective Depository,
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 Depository 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 Depository for the benefit of Clearstream Participants
or Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
TRADING BETWEEN CLEARSTREAM OR EUROCLEAR SELLER AND DTC PURCHASER. Due
to time zone differences in their favor, Clearstream Participants and Euroclear
Participants may employ their customary procedures for transactions in which
Global Securities are to be transferred by the respective clearing system,
through the respective Depository, to a DTC Participant. The seller will send
instructions to Clearstream or Euroclear through a Clearstream Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Clearstream or Euroclear will instruct the respective Depository, as
appropriate, to deliver the Global Securities to the DTC
I-2
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.
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 is 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
I-3
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 OR REDUCED RATE FOR NON-U.S. PERSONS SUBJECT TO SPECIAL U.S.
FEDERAL INCOME TAX RULES (FORM W-8EXP). A non-U.S. Person that is a foreign
government, international organization, foreign central bank of issue, foreign
tax-exempt organization, foreign private foundation or government of a U.S.
possession may obtain an exemption or reduced tax rate on certain income by
filing Form W-8EXP (Certificate of Foreign Government or Other Foreign
Organization for United States Tax Withholding).
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 ISSUING ENTITIES:
Each issuing entity will be established to hold assets transferred to
it by ACE Securities Corp. The assets in each issuing entity will generally
consist of one or more of the following:
o mortgage loans, which may include closed-end and/or revolving
home equity loans or balances thereof, secured by one- to
four-family residential properties, commercial properties,
multifamily properties, mixed-use residential and commercial
properties or unimproved land;
o unsecured home improvement loans;
o manufactured housing installment sale contracts;
o mortgage pass-through notes or certificates issued or
guaranteed by Ginnie Mae, Fannie Mae, or Freddie Mac; or
o previously issued asset-backed or mortgage-backed notes or
certificates backed by mortgage loans secured by residential
properties or participations in those types of loans.
The assets in your issuing entity are specified in the prospectus
supplement for that particular issuing entity, while the types of assets that
may be included in an issuing entity, whether or not in your issuing entity, are
described in greater detail in this prospectus.
THE SECURITIES:
ACE Securities Corp. will sell the notes or certificates, as
applicable, pursuant to a prospectus supplement. The notes or certificates, as
applicable, 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 issuing entity's
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.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 1 OF THIS
PROSPECTUS:
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 April 18, 2006
TABLE OF CONTENTS
Risk Factors...................................................................1
Description of the Issuing Entities' Trust Funds...............................4
Use of Proceeds...............................................................24
Yield Considerations..........................................................24
Static Pool Information.......................................................31
The Sponsor...................................................................31
The Depositor.................................................................31
Description of the Securities.................................................32
Description of the Agreements.................................................49
Description of Credit Support.................................................75
Certain Legal Aspects of Mortgage Loans.......................................79
Certain Legal Aspects of the Contracts........................................95
Material Federal Income Tax Considerations....................................99
Penalty Avoidance............................................................139
State and Other Tax Considerations...........................................139
ERISA Considerations.........................................................140
Legal Investment.............................................................147
Methods of Distribution......................................................149
Additional Information.......................................................150
Incorporation of Certain Documents by Reference..............................151
Legal Matters................................................................151
Financial Information........................................................152
Rating.......................................................................152
Index of Defined Terms.......................................................153
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE CERTIFICATES AND THE NOTES. YOU SHOULD ALSO CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER "RISK FACTORS" IN THE PROSPECTUS SUPPLEMENT.
THE MORTGAGE LOANS WERE The underwriting standards of the
UNDERWRITTEN TO STANDARDS originators are intended to assess the
WHICH DO NOT CONFORM TO ability and willingness of the
THE STANDARDS OF FANNIE MAE OR mortgagor to repay the debt and to
FREDDIE MAC. 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, 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
THE OFFERED SECURITIES WILL BE The Offered Securities will not
LIMITED OBLIGATIONS SOLELY OF THE represent an interest in or obligation
ISSUING ENTITY AND NOT OF ANY of the depositor, the servicer, the
OTHER PARTY. master servicer, the securities
administrator, the originators, the
trustee or any of their respective
affiliates. Neither the Offered
Securities nor the underlying mortgage
loans or contracts 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 issuing entity will be
the sole source of payments on the
Offered Securities, and there will be
no recourse to the depositor, the
servicer, the originators, the master
servicer, the securities
administrator, the trustee or any
other entity in the event that these
proceeds are insufficient or otherwise
unavailable to make all payments
provided for under the Offered
Securities.
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VIOLATION OF CONSUMER Applicable state laws generally
PROTECTION LAWS MAY RESULT IN regulate interest rates and other
LOSSES ON THE MORTGAGE LOANS, charges, require certain disclosure,
THE CONTRACTS AND YOUR and require licensing of the
SECURITIES. 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 and contracts.
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 or contracts;
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
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 related mortgage loans
or contracts 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 or contracts
against the issuing entity. In
addition to federal law, some states
have enacted, or may enact, laws or
regulations that prohibit inclusion of
some provisions in mortgage loans or
contracts that have interest rates or
origination costs in excess of
prescribed levels, and require that
mortgagors be given certain
disclosures prior to the consummation
of the mortgage loans or contracts 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 or contracts against the trust
and/or limit the servicer's ability to
foreclose upon the related mortgaged
properties in the event of mortgagor
defaults.
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The sponsor will represent that each
mortgage loan is in compliance with
applicable federal and state laws and
regulations. In the event of a breach
of such representation, the sponsor
will be obligated to cure such breach
or repurchase or replace the affected
mortgage loan in the manner described
in the prospectus. If the sponsor is
unable or otherwise fails to satisfy
such obligations, the yield on the may
be materially and adversely affected.
THE LIQUIDITY OF YOUR SECURITIES The underwriter has no obligation to
MAY BE LIMITED. make a secondary market in the classes
of Offered Securities. 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 security readily or at
prices that will enable you to realize
your desired yield. The market values
of the securities are likely to
fluctuate; these fluctuations may be
significant and could result in
significant losses to you.
The secondary markets for asset-backed
securities have experienced periods of
illiquidity and can be expected to do
so in the future. Illiquidity can have
a severely adverse effect on the
prices of securities that are
especially sensitive to prepayment,
credit or interest rate risk, or that
have been structured to meet the
investment requirements of limited
categories of investors.
THE RETURN ON YOUR SECURITIES The Relief Act and similar state or
COULD BE REDUCED BY SHORTFALLS local laws provide relief to
DUE TO THE APPLICATION OF THE mortgagors who enter active military
RELIEF ACT. service and to mortgagors in reserve
status who are called to active
military service after the origination
of their mortgage loans or contracts.
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 the master servicer,
the servicer will not 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, the
servicer and, therefore, will reduce
the amount available to pay interest
to the securityholders on subsequent
Distribution Dates.
POSSIBLE REDUCTION OR Each rating agency rating the Offered
WITHDRAWAL OF RATINGS ON Securities may change or withdraw its
THE OFFERED SECURITIES. 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
3
classes of the Offered Securities, the
liquidity and market value of the
affected securities is likely to be
reduced.
DESCRIPTION OF THE ISSUING ENTITIES' TRUST FUNDS
ASSETS
The primary assets of each issuing entity's trust fund (the "Assets")
will include some or all of the following types of assets:
o mortgage loans on single family and multifamily residential
properties, which may include Home Equity Loans, home
improvement contracts and Land Sale Contracts (each as defined
in this prospectus), commercial properties, unimproved land
and mixed-use residential and commercial properties;
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 an issuing entity's 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. As to each series of
securities, the mortgage loans will be selected for inclusion in the mortgage
pool based on rating agency criteria, compliance with representations and
warranties, and conformity to criteria relating to the characterization of
securities for tax, ERISA, SMMEA, Form S-3 eligibility and other legal purposes.
The Assets included in the issuing entity's 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;
4
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;
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
5
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 (as defined in this
prospectus), will be entitled to payment only from the assets of the related
issuing entity and will not be entitled to payments from the assets of any other
issuing entity established by the depositor. The assets of an issuing entity may
consist of certificates representing beneficial ownership interests in, or
indebtedness of, another issuing entity that contains the Assets, if specified
in the prospectus supplement.
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), (2) a primarily residential rental property that consists of five or
more residential dwelling units ("Multifamily Property"), (3) a retail, office,
agricultural or other commercial property, including but not limited to
partially improved or unimproved ("Commercial Property"), (4) a mixed
residential/commercial property ("Mixed-Use Property" and together with Single
Family Property, Multifamily Property and Commercial Property, the "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 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
6
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.
FICO SCORES
The FICO Score is a statistical ranking of likely future credit
performance developed by Fair, Isaac & Company ("Fair, Isaac") and the three
national credit repositories-Equifax, Trans Union and First American (formerly
Experian which was formerly TRW). The FICO Scores available from the three
national credit repositories are calculated by the assignment of weightings to
the most predictive data collected by the credit repositories and range from the
300's to the 900's. Although the FICO Scores are based solely on the information
at the particular credit repository, such FICO Scores have been calibrated to
indicate the same level of credit risk regardless of which credit repository is
used. The FICO Scores is used along with, but not limited to, mortgage payment
history, seasoning on bankruptcy and/or foreclosure, and is not a substitute for
the underwriter's judgment.
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 issuing entity (the
"Cut-off Date");
7
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 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. In the event that mortgage loans are added to or deleted from
the issuing entity after the date of the related prospectus supplement but on or
before the date of issuance of the securities if any material pool
characteristic differs by 5% or more from the description in the prospectus
supplement, revised disclosure will be provided either in a supplement or in a
Current Report on Form 8-K.
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.
8
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 "Lock-out Period" and, the date of expiration thereof, a "Lock-out
Date") or require payment of a premium or a yield maintenance penalty (a
"Prepayment Premium") in connection with a prepayment, in each case as described
in the 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.
HELOCS
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 ("HELOCs"). Interest on each HELOC,
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 HELOC, principal amounts on that HELOC 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 HELOCs will automatically become part of the issuing entity described in the
prospectus supplement. As a result, the total balance of the HELOCs will
fluctuate from day to day as new draws by borrowers are added to the issuing
entity 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 HELOC, 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.
9
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;
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.
COMMERCIAL, MULTIFAMILY AND MIXED-USE MORTGAGE LOANS
The mortgage loans may include mortgage loans secured by first or
junior mortgages, deeds of trust or similar security instruments on, or
installment contracts for the sale of, fee simple
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or leasehold interests in commercial real property ("Commercial Mortgage
Loans"), multifamily residential property ("Multifamily Mortgage Loans"), and/or
mixed residential and commercial property ("Mixed-Use Mortgage Loans" ), and
related property and interests.
Certain of the Commercial, Multifamily and Mixed-Use Mortgage Loans may
be simple interest loans, and other mortgage loans may provide for payment of
interest in advance rather than in arrears.
Commercial, Multifamily and Mixed-Use Mortgage Loans also may be
secured by one or more assignments of leases and rents, management agreements or
operating agreements relating to the Mortgaged Property and in some cases by
certain letters of credit, personal guarantees or both, and/or other collateral.
Pursuant to an assignment of leases and rents, the related borrower assigns its
right, title and interest as landlord under each related lease and the income
derived therefrom to the related lender, while retaining a license to collect
the rents for so long as there is no default. If the borrower defaults, the
license terminates and the related lender is entitled to collect the rents from
tenants to be applied to the monetary obligations of the borrower. State law may
limit the enforcement of the assignment of leases and rents by a lender until
the lender takes possession of the related mortgaged property and a receiver is
appointed. See "Certain Legal Aspects of the Mortgage Loans -- Leases and
Rents."
Certain of the Commercial, Multifamily and Mixed-Use Mortgage Loans may
require the borrower to make an initial escrow deposit and/or an ongoing monthly
deposit to fund a reserve for any of a variety of purposes, including repairs to
the Mortgaged Property or replacement of fixtures or equipment, tenant
improvements, and payment in the event of certain lease contingencies. In some
cases, the initial deposit amount may have been funded with a letter of credit
in lieu of a cash deposit. These amounts may be held in a custodial account by
the applicable servicer or an agent. The loan documents will generally provide
for release of the reserve amounts to the borrowers from time to time upon the
satisfaction of certain conditions.
Such amounts may not continue to be escrowed in the future. In some
instances, the borrower may be released from its obligation to fund a monthly
reserve upon specified conditions being met, such as a maximum escrow balance
being attained, a certain date being reached, or a certain tenant signing or
extending its lease. Likewise, there may be cases where, although there is
currently no monthly escrow amount, one may be required to be funded in the
future, upon certain trigger events. In the event of default by a borrower,
amounts in a related reserve account may generally be applied to pay amounts
owed on the mortgage loan.
Originators of Commercial, Multifamily and Mixed-Use Mortgage Loans may
include, among others, commercial banks, savings and loan associations, other
financial institutions, insurance companies or real estate developers, which may
apply varying underwriting criteria in connection with originating mortgage
loans.
Commercial, multifamily and mixed-use real estate lending is generally
viewed as exposing the lender to a greater risk of loss than one- to four-family
residential lending. Commercial, multifamily and mixed-use real estate lending
typically involves larger loans to single borrowers or groups of related
borrowers than residential one- to four-family mortgage loans. Furthermore, the
repayment of loans secured by income producing properties is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced, for example, if leases are not obtained or
renewed, the borrower's ability to repay the loan may be impaired. Commercial,
multifamily and mixed-use real estate can be affected significantly by supply
and demand in the market for the type of property securing the loan and,
therefore, may be subject to adverse economic conditions. Market values may vary
as a result of economic events or governmental regulations outside the control
of the borrower or lender, such as rent control laws, that affect the future
cash flow of the property. Corresponding to
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the greater lending risk is a generally higher interest rate applicable to
commercial, multifamily and mixed-use real estate lending.
A borrower (or the borrowers) under a Commercial, Multifamily or
Mixed-Use Mortgage Loan may be one or more individuals or may be a corporation
or other registered organization. In some cases a borrower, such as a special
purpose entity, will have no material assets other than the mortgaged property.
In addition, in some cases the loans will have been made on a non-recourse basis
- -- in the event of default by the borrower, the only source of repayment will be
the proceeds of liquidation of the related property.
There are various risks associated with different types of commercial,
multifamily and mixed-use loans. For example, the performance of a multifamily
loan and the value of the related mortgaged property may be affected by many
factors, including:
o local and regional economic conditions;
o the physical condition of the property;
o the types of services and amenities provided;
o the tenant population -- i.e., predominantly students or
elderly persons, or workers in a particular industry;
o availability of alternative rental properties;
o changes in the surrounding neighborhood;
o management;
o the level of mortgage interest rates;
o dependence upon government rent subsidies;
o any applicable rent control laws; and
o state and local regulations.
The performance of a commercial loan secured by one or more retail properties
and the value of the related mortgaged property may be affected by many factors,
including:
o the quality and success of a retail property's tenants;
o closing of a major store in the shopping center where the
related property is located;
o changes in consumer preferences;
o declines in consumer spending;
o competition from local merchants and from catalog and internet
retailers; and
o product obsolescence.
12
The performance of a commercial loan secured by one or more office properties
and the value of the related mortgaged property may be affected by many factors,
including:
o quality and nature of tenants;
o tenant concentration -- i.e., predominantly high tech firms,
law firms, government agencies, etc.;
o the physical condition of the property;
o the types of services and amenities provided;
o changes in the surrounding neighborhood; and
o availability of alternative office space.
The performance of a commercial loan secured by one or more industrial
properties and the value of the related mortgaged property may be affected by
many factors, including:
o the design and adaptability of the building;
o success or failure of the business of the tenant, which is
frequently the sole tenant of the property;
o availability of alternative space; and
o quality of the local and regional transportation system.
The value of a commercial, multifamily or mixed-use property may also
be affected by a variety of other factors. In general, such factors as location,
changing demographics or traffic patterns, increases in operating expenses,
competitive factors and economic conditions generally, among others, may affect
the value of a commercial property.
Hospitals, nursing homes and other health care properties may receive a
substantial portion of their revenues from government programs, which are
subject to statutory and regulatory changes and funding limitations. With
respect to commercial, multifamily and mixed-use loans generally, such factors
as the management skill, experience and financial resources of the operator
(which may be other than the borrower), national and regional economic
conditions and other factors may affect the ability of borrowers to make
payments when due.
Unimproved land generates no current income to support payment of the
related mortgage loan and other expenses, may prove to be unsuitable for its
intended purpose and may be difficult to sell for an amount at least equal to
the unpaid principal balance of the related loan.
Leasehold mortgages are subject to risks not associated with mortgage
loans secured by a lien on the fee estate of a borrower. If the borrower's
leasehold were to be terminated upon a lease default, the leasehold mortgagee
would lose its security. However, such leases generally require the lessor to
give the leasehold mortgagee notice of lessee defaults and an opportunity to
cure them, and permit the leasehold estate to be assigned to and by the
leasehold mortgagee.
The risk that a mortgaged property may be, or become, contaminated with
hazardous materials is greater with respect to commercial and mixed-use loans
than with respect to residential mortgage loans. Under the laws of certain
states, contamination of a property may
13
give rise to a lien on the property to assure the costs of cleanup. In several
states, such a lien has priority over the lien of an existing mortgage against
such property. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), a lender may be liable, as an "owner" or "operator," for costs of
addressing releases or threatened releases of hazardous substances that require
remedy at a property, if agents or employees of the lender have become
sufficiently involved in the operations of the borrower, regardless of whether
or not the environmental damage or threat was caused by a prior owner. See
"Certain Legal Aspects of the Mortgage Loans -- Environmental Considerations." A
lender also risks such liability on foreclosure of the mortgage. Any such lien
arising with respect to a mortgaged property would adversely affect the value of
that mortgaged property and could make impracticable the foreclosure on that
mortgaged property in the event of a default by the related borrower. In
addition, certain environmental laws impose liability for releases of asbestos
into the air. Third parties may seek recovery from owners or operators of real
property for personal injury associated with exposure to asbestos, lead paint,
radon or other hazardous substances. Property owners in some areas have been
subject to liability claims associated with mold.
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 an issuing entity 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;
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;
14
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 an issuing entity 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 an issuing
entity may be presented in the prospectus supplement in combination with similar
information regarding the mortgage loans in the issuing entity.
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 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
15
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. The mortgage loans may be secured by Manufactured Homes, Single
Family Property or Multifamily Property. 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 issuing entity 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 an issuing entity 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 holder of the Ginnie Mae certificates
16
included in an issuing entity, 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 an issuing entity 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 an issuing entity
will consist of conventional mortgage loans secured by Single Family Property or
Multifamily Property, FHA loans, or VA loans. If the issuing entity 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,
17
monthly distributions to the holders of Fannie Mae certificates would be
affected by delinquent payments and defaults on those loans.
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 an issuing entity 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 issuing
entity 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
18
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;
(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 an issuing entity 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 issuing entity 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.
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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. 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 depositor will register the offering of the relevant Mortgage
Securities as a primary offering of such securities, unless the Mortgage
Securities are themselves exempt from registration under the Securities Act. The
offering of Mortgage Securities included in a trust fund will not be separately
registered if all of the following are true:
(1) neither the issuer of the Mortgage Securities nor any
of its affiliates has a direct or indirect agreement, arrangement,
relationship or understanding, written or otherwise, relating to the
Mortgage Securities and the related trust fund;
(2) neither the issuer of the Mortgage Securities nor any
of its affiliates is an affiliate of the depositor, sponsor, issuing
entity or any underwriter relating to such trust fund and series of
securities; and
(3) the depositor would be free to publicly resell the
Mortgage Securities without registration under the Securities Act.
If all the conditions for the Mortgage Securities described above are
not met, the offering of the relevant Mortgage Securities itself will be
registered as a primary offering of such securities under the Securities Act.
The prospectus supplement for the Notes or Certificates, as applicable,
of each series evidencing interests in an issuing entity 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 issuing entity 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 issuing entity. 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.
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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 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 issuing entity 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 proceeds of the offering
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 issuing entity, 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 issuing entity, 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. The related pooling and
servicing agreement or other agreement
21
providing for the transfer of Subsequent Assets will generally provide that the
transfers must be made within up to three months (with respect to any series of
Notes or Certificates) or up to, but not in excess of, one year (with respect to
any series of Notes or Certificates) after the Closing Date, and that 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 issuing entity 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 issuing
entity. This 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." Such
accounts will be established so as to comply with the standards of each Rating
Agency that has rated any one or more classes of securities of the related
series. Such accounts shall be maintained as Eligible Accounts, and the funds
held therein may be held as cash or invested in Permitted Investments. The
person designated in the prospectus supplement will have sole discretion to
determine the particular investments made so long as it complies with the
investment terms of the related pooling and servicing agreement or the related
servicing agreement and indenture. Any Permitted Investments shall not cause the
depositor to register under the Investment Company Act of 1940. Any interest or
other income earned on funds in such accounts will be paid to the related master
servicer or trustee as additional compensation or will be available for payments
on the securities as provided in the prospectus supplement. If permitted by the
Rating Agency or Agencies and so specified in the related prospectus supplement,
such accounts may contain funds relating to more than one series of Certificates
and may contain other funds representing payments on mortgages owned by the
related master servicer or serviced by it on behalf of others. CREDIT SUPPORT
If so provided in the prospectus supplement, partial or full protection
against some defaults and losses on the Assets in the related issuing entity may
only 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 of
only the following types of credit support: a letter of credit, insurance
policy, guarantee, reserve fund, 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."
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CASH FLOW AGREEMENTS
The trust fund may include one or more derivative instruments, (each a
"Cash Flow Agreement"), as described in this section. All Cash Flow Agreements
included in any trust fund will be used only in a manner that reduces or alters
risk resulting from the mortgage loans or other assets in the pool, and only in
a manner such that the return on the offered securities will be based primarily
on the performance of the mortgage loans or other assets in the pool. Cash Flow
Agreements may include only 1) interest rate swaps (or caps, floors and collars)
and yield supplement agreements as described below, 2) currency swaps, and 3)
market value swaps that are referenced to the value of one or more of the
mortgage loans or other assets included in the trust fund or to a class of
offered securities.
An interest rate swap is an agreement between two parties to exchange a
stream of interest payments on an agreed hypothetical or "notional" principal
amount. No principal amount is exchanged between the counterparties to an
interest rate swap. In a typical swap, one party agrees to pay a fixed rate on a
notional principal amount, while the counterparty pays a floating rate based on
one or more reference interest rates including the London Interbank Offered
Rate, or LIBOR, a specified bank's prime rate or U.S. Treasury Bill rates.
Interest rate swaps also permit counterparties to exchange a floating rate
obligation based upon one reference interest rate, such as LIBOR, for a floating
rate obligation based upon another referenced interest rate, such as U.S.
Treasury Bill rates. An interest rate cap, collar or floor is an agreement where
the counterparty agrees to make payments representing interest on a notional
principal amount when a specified reference interest rate is above a strike
rate, outside of a range of strike rates, or below a strike rate as specified in
the agreement, generally in exchange for a fixed amount paid to the counterparty
at the time the agreement is entered into. A yield supplement agreement is a
type of cap agreement, and is substantially similar to a cap agreement as
described above.
The trustee on behalf of a trust fund may enter into interest rate
swaps, caps, floors and collars, or yield supplement agreements, to minimize the
risk to securityholders from adverse changes in interest rates or to provide
supplemental credit support. Cap agreements and yield supplement agreements may
be entered into to supplement the interest rate or other rates available to make
interest payments on one or more classes of the securities of any series.
A market value swap might be used in a structure where the pooled
assets are hybrid ARMs, or mortgage loans that provide for a fixed rate period
and then convert by their terms to adjustable rate loans. Such a structure might
provide that at a specified date near the end of the fixed rate period, the
investors must tender their securities to the trustee who will then transfer the
securities to other investors in a mandatory auction procedure. The market value
swap would ensure that the original investors would receive at least par at the
time of tender, by covering any shortfall between par and the then current
market value of their securities.
Any Cash Flow Agreements will be documented based upon the standard
forms provided by the International Swaps and Derivatives Association, or ISDA.
These forms generally consist of an ISDA master agreement, a schedule to the
master agreement, and a confirmation, although in some cases the schedule and
confirmation will be combined in a single document and the standard ISDA master
agreement will be incorporated therein by reference. Standard ISDA definitions
also will be incorporated by reference. Each confirmation will provide for
payments to be made by the Cash Flow Agreement counterparty to the trust, and in
some cases by the trust to the Cash Flow Agreement counterparty, generally based
upon specified notional amounts and upon differences between specified interest
rates or values. For example, the confirmation for an interest rate cap
agreement will contain a schedule of fixed interest rates, generally referred to
as strike rates, and a schedule of notional amounts, for each distribution date
during the term of the interest rate cap agreement. The confirmation also will
specify a reference rate, generally a floating or adjustable interest rate, and
will provide that payments will be made by the Cash Flow
23
Agreement counterparty to the trust on each distribution date, based on the
notional amount for that distribution date and the excess, if any, of the
specified reference rate over the strike rate for that distribution date.
In the event of the withdrawal of the credit rating of a Cash Flow
Agreement counterparty or the downgrade of such credit rating below levels
specified in the Cash Flow Agreement (where the Cash Flow Agreement is relevant
to the ratings of the offered securities, such levels generally are set by the
rating agencies rating the offered securities), the Cash Flow Agreement
counterparty may be required to post collateral for the performance of its
obligations under the Cash Flow Agreement, or to take certain other measures
intended to assure performance of those obligations. Posting of collateral will
be documented using the ISDA Credit Support Annex.
There can be no assurance that the trustee will be able to enter into
Cash Flow Agreements at any specific time or at prices or on other terms that
are advantageous. In addition, although the terms of the Cash Flow Agreements
may provide for termination under various circumstances, there can be no
assurance that the trustee will be able to terminate a Cash Flow Agreement when
it would be economically advantageous to the trust fund to do so.
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 issuing entity (which may be affected by prepayments,
defaults, liquidations or repurchases).
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 issuing entity. 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
24
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 issuing entity (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 issuing
entity (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 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
25
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 issuing entity 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.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets
included in or comprising an issuing entity 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 issuing
entity 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
26
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 an
issuing entity. If any Assets in a particular issuing entity 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 Issuing Entities."
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 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 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.
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OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF LOAN
Mortgage Loans secured by Multifamily Properties may have provisions
that prevent prepayment for a number of years and may provide for payments of
interest only during a certain period followed by amortization of principal on
the basis of a schedule extending beyond the maturity of the related mortgage
loan. There can be no assurance as to the respective rates of prepayment of
these mortgage loans in either stable or changing interest rate environments.
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 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
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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 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 HELOCs 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 issuing entity 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,
29
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 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 issuing entity 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 issuing entity 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
30
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.
STATIC POOL INFORMATION
For each mortgage pool, the issuing entity will provide static pool
information with respect to the experience of the sponsor, or other appropriate
entity, in securitizing asset pools of the same type to the extent material.
With respect to each series of securities, the information referred to
in this section will be provided through an internet web site at the address
disclosed in the related prospectus supplement.
THE SPONSOR
The sponsor will be DB Structured Products, Inc., a Delaware
corporation, referred to herein as the Sponsor, for each series of securities
unless otherwise indicated in the related prospectus supplement. The Sponsor
maintains its principal office at 60 Wall Street, New York, New York 10005. Its
telephone number is (212) 250-2500.
During fiscal year 2005, the Sponsor and its affiliates securitized
approximately $18.4 billion of residential mortgages.
With respect to any series of securities, if so specified in the
related prospectus supplement, the Sponsor will also act as servicer or master
servicer for the mortgage pool. If so, the Sponsor will service the Designated
Mortgage Assets in accordance with the description of the applicable servicing
procedures contained in this prospectus under "Description of the Securities."
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.
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DESCRIPTION OF THE SECURITIES
GENERAL
The Securities issued in each series will include either asset-backed
certificates (the "Certificates") or asset-backed notes (the "Notes", and
together with the Certificates, the "Securities"). The Certificates of each
series (including any class of Certificates not offered by this prospectus) will
represent the entire beneficial ownership interest in the issuing entity created
pursuant to the related Agreement. The "Notes" of each series will represent
indebtedness of the related issuing entity and will be issued and secured
pursuant to an indenture. Each series of Notes or Certificates, as applicable,
will consist of one or more of the following classes of Notes or Certificates:
ACCRETION DIRECTED A class of securities designated to receive
principal payments primarily from the
interest that accrues on specified Accrual
Classes.
ACCRUAL A class of securities where the accrued
interest otherwise payable to such
certificates or notes is allocated to
specified classes of certificates as
principal payments in reduction of their
certificate principal balance or note
principal balance. The certificate principal
balance or note principal balance of the
Accrual Class will be increased to the
extent such accrued interest is so
allocated.
COMPANION A class that receives principal payments on
any distribution date only if scheduled
payments have been made on specified planned
principal classes, targeted principal
classes or scheduled principal classes.
COMPONENT A class consisting of "components." The
components of a class of component
securities may have different principal
and/or interest payment characteristics but
together constitute a single class. Each
component of a class of component securities
may be identified as falling into one or
more of the categories in this list.
FIXED RATE A class with an interest rate that is fixed
throughout the life of the class.
FLOATING RATE A class that receives interest payments
based on an interest rate that fluctuates
each payment period based on a designated
index plus a specified margin.
INTEREST ONLY OR IO A class of securities with no principal
balance and which is not entitled to
principal payments. Interest usually accrues
based on a specified notional amount.
INVERSE FLOATING RATE A class of securities where the pass-through
rate adjusts based on the excess between a
specified rate and LIBOR or another index.
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LOCK OUT A class of securities which is "locked out"
of certain payments, usually principal, for
a specified period of time.
PARTIAL ACCRUAL A class that accretes a portion of the
amount of accrued interest thereon, which
amount will be added to the principal
balance of such class on each applicable
distribution date, with the remainder of
such accrued interest to be distributed
currently as interest on such class. Such
accretion may continue until a specified
event has occurred or until such Partial
Accrual class is retired.
PRINCIPAL ONLY A class of securities which is not entitled
to interest payments.
PLANNED AMORTIZATION CLASS A class of securities with a principal
balance that is reduced based on a schedule
of principal balances, assuming a certain
range of prepayment rates on the underlying
assets.
SCHEDULED PRINCIPAL A class that is designed to receive
principal payments using a predetermined
principal balance schedule but is not
designated as a Planned Principal Class or
Targeted Principal Class. In many cases, the
schedule is derived by assuming two constant
prepayment rates for the underlying assets.
These two rates are the endpoints for the
"structuring range" for the scheduled
principal class.
SENIOR SUPPORT A class that absorbs the realized losses
other than excess losses that would
otherwise be allocated to a Super Senior
Class after the related classes of
subordinated securities are no longer
outstanding.
SEQUENTIAL PAY Classes that receive principal payments in a
prescribed sequence, that do not have
predetermined principal balance schedules
and that under all circumstances receive
payments of principal continuously from the
first distribution date on which they
receive principal until they are retired. A
single class that receives principal
payments before or after all other classes
in the same series of securities may be
identified as a sequential pay class.
SUPER SENIOR A class that will not bear its proportionate
share of realized losses (other than excess
losses) as its share is directed to another
class, referred to as the "support class"
until the class principal balance of the
support class is reduced to zero.
TARGET AMORTIZATION A class of securities with a principal
balance that is reduced based on a scheduled
of principal balances,
33
assuming a certain targeted rate of
prepayments on the related collateral.
VARIABLE RATE A class with an interest rate that resets
periodically and is calculated by reference
to the rate or rates of interest applicable
to specified assets or instruments (e.g.,
the Loan Rates borne by the underlying
loans).
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 issuing
entity (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.
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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:
(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 issuing entity ("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
issuing entity, and
(d) all amounts received for a repurchase of an
Asset from the issuing entity 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.
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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 issuing entity 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.
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 indices applicable to variable rate and adjustable
rate classes will only be of a type that are customarily used in the debt and
fixed income markets to measure the cost of borrowed funds and will not be
indices linked to stocks or commodities. 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 issuing entity 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,
36
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 issuing entity. 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 issuing entity 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 other assets
included in the related issuing entity. 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 issuing entity
may issue notes or certificates, as applicable, from time to time and use the
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 HELOCs or asset-backed or mortgage backed securities during a
specified period rather than used to distribute payments of principal to
noteholders or certificateholders, as applicable, 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 or revolving period may terminate prior to the end of the
37
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.
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 issuing entity 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 an issuing entity against losses and
shortfalls on Assets comprising that issuing entity. 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 issuing entity,
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 issuing entity 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
38
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 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;
39
(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,
(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 issuing
entity through foreclosure or otherwise (an "REO Property") relating to
a mortgage loan or contract and included in the issuing entity 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 issuing entity 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,
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(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;
(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
41
(c) assumption and modification fees collected
during the related Due Period.
Reports, whether monthly or annual, will be transmitted in paper format
to the holder of record of the class of securities contemporaneously with the
distribution on that particular class. In addition, the monthly reports will be
posted on a website as described below under "Available Information."
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 Internal Revenue Code of 1986, as
amended (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 issuing entity 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 issuing entity 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.
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 issuing entity 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 issuing entity, 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 issuing entity will be
without recourse to the issuing entity 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). In the event that
any series of certificates or notes which provides for such a purchase, the
certificates or notes will use the word "Callable" in their title.
42
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 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
43
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".
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
44
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 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.
45
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 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,
46
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 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.
47
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, in writing, with the
consent of the applicable Participants, elects to end the book-entry
system through DTC or
(3) in accordance with any other provisions described in
the prospectus supplement.
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.
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DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC SECURITIES AND GRANTOR TRUST SECURITIES
Notes or Certificates, as applicable, representing interests in an
issuing entity, or a portion of an issuing entity, that the trustee will elect
to have treated as a real estate mortgage investment conduit ("REMIC") under
Sections 860A through 860G of the Code ("REMIC Securities"), or Grantor Trust
Securities (as defined in this prospectus), will be issued, and the related
issuing entity 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 issuing entity
will be transferred to the issuing entity 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 issuing entity, or in the event the
Securities consist of Notes, each servicer will perform its servicing functions
pursuant to a related underlying servicing agreement. Forms of the agreements
have been filed as exhibits to the registration statement of which this
prospectus is a part. However, the provisions of each agreement will vary
depending upon the nature of the related securities and the nature of the
related issuing entity. The summaries included herein describe provisions that
may appear in a pooling and servicing agreement with respect to a series of
Certificates or in either the servicing agreement or indenture with respect to a
series of Notes. The prospectus supplement for a series of securities will
describe material provisions of the related agreements that differ from and
supplement the description thereof set forth below. The depositor will provide a
copy of each agreement (without exhibits) that relates to any series of
securities without charge upon written request of a holder of an offered
security of the series addressed to it at its principal executive offices
specified in this prospectus under "The Depositor". As to each series of
securities, the related agreements will be filed with the Commission in a
current report on Form 8-K following the issuance of the securities to the
extent required to comply with the Securities Act of 1933 and Regulation AB.
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 issuing
entity will be created, pursuant to the pooling and servicing agreement or trust
agreement.
A series of Notes issued by an issuing entity 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 issuing entity and an indenture
trustee named in the prospectus supplement. The issuing entity 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
49
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 issuing entity and the
description of those provisions in the prospectus supplement. The 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
issuing entity. 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: Evelyn
Echevarria.
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 an issuing entity, a
master servicer will perform some of the administration, calculation and
reporting functions for that issuing entity 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 issuing entity to
administer that issuing entity.
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 issuing entity,
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 issuing entity 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 issuing entity, 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;
(2) in respect of each contract included in the related
issuing entity, 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
50
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, an issuing entity 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 mortgage loans, the trustee (or its
nominee) may not be able to enforce the mortgage note against the related
borrower. The Asset Seller or other entity specified in the prospectus
supplement will be required to agree to repurchase, or substitute for, each of
these mortgage loans that is subsequently in default if the enforcement thereof
or of the related Mortgage is materially adversely affected by the absence of
the original mortgage note. The related Agreement will generally require the
depositor or another party specified in the prospectus supplement to promptly
cause each of these assignments of Mortgage to be recorded in the appropriate
public office for real property records, except in the State of California or in
other states where, in the opinion of counsel acceptable to the trustee,
recording is not required to protect the trustee's interest in the related
mortgage loan against the claim of any subsequent transferee or any successor to
or creditor of the depositor, the servicer, the relevant Asset Seller or any
other prior holder of the mortgage loan.
The trustee (or a custodian) will review the mortgage loan documents
within a specified period of days after receipt of the mortgage loan documents,
and the trustee (or a custodian) will hold those documents in trust for the
benefit of the securityholders. If any of these documents are found to be
missing or defective in any material respect, the trustee (or that custodian)
will immediately notify the servicer and the depositor, and the servicer will
immediately notify the relevant Asset Seller or other entity specified in the
prospectus supplement. If the Asset Seller cannot cure the omission or defect
within a specified number of days after receipt of that notice, then the Asset
Seller or other entity specified in the prospectus supplement will be obligated,
within a specified number of days of receipt of that notice, to either (1)
repurchase the related mortgage loan from the trustee at a price equal to the
sum of the unpaid principal balance of the mortgage loan, plus unpaid accrued
interest at the interest rate for that Asset from the date as to which interest
was last paid to the due date in the Due Period in which the relevant purchase
is to occur, plus servicing expenses that are payable to the servicer, or
another price as specified in the prospectus supplement (the "Purchase Price")
or (2) substitute a new mortgage loan. There can be no assurance that an Asset
Seller or other named entity will fulfill this repurchase or substitution
obligation, and neither the servicer nor the depositor will be obligated to
repurchase or substitute for that mortgage loan if the Asset Seller or other
named entity defaults on its obligation.
This repurchase or substitution obligation constitutes the sole remedy
available to the securityholders or the trustee for omission of, or a material
defect in, a constituent document. To the extent specified in the prospectus
supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for that Asset, the Asset Seller or other named
entity may agree to cover any losses suffered by the issuing entity 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
51
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 issuing entity 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.
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 issuing entity 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 issuing entity 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
52
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 Warranting Party will be obligated to reimburse the issuing
entity 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
issuing entity 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 issuing entity 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 under the
Agreement" and "Rights Upon Event of Default under the Agreements."
53
COLLECTION ACCOUNT AND RELATED ACCOUNTS
GENERAL. The servicer and/or the trustee will, as to each issuing
entity, 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
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. The master servicer will have sole
discretion to determine the particular investments made so long as it complies
with the investment terms of the related pooling and servicing agreement or the
related servicing agreement and indenture. 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 issuing entities 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;
54
(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 Issuing Entities--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;"
(8) any amounts paid by a servicer to cover interest
shortfalls arising out of the prepayment of Assets in the issuing
entity 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 issuing entity 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
55
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;
(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
issuing entity or designated portions of the issuing entity as a REMIC,
to pay any federal, state or local taxes imposed on the issuing entity
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;
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(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 issuing entity 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 issuing entity.
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 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 issuing entity 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").
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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
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, Commercial or Mixed-Use Mortgage 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, Commercial or Mixed-Use
Mortgage Loan that is unable to make mortgage loan payments may also be unable
to make timely payment of all required taxes and otherwise to maintain and
insure the related Mortgaged Property. In general, the servicer will be required
to monitor any Multifamily, Commercial or Mixed-Use Mortgage Loan that is in
default, evaluate whether the causes of the default can be corrected over a
reasonable period without significant impairment of the value of related
Mortgaged Property, initiate corrective action in cooperation with the borrower
if cure is likely, inspect the related Mortgaged 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, Commercial or Mixed-Use Mortgage Loan, the related
Mortgaged Property, the borrower, the presence of an acceptable party to assume
the mortgage loan and the laws of the jurisdiction in which the Mortgaged
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.
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Any Agreement relating to an issuing entity 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 issuing entity 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
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 an issuing entity as
to which a REMIC election has been made, the servicer, on behalf of the issuing
entity, 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 issuing entity 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 issuing entity or cause the issuing entity 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
issuing entity) on the ownership and management of any Mortgaged Property
acquired on behalf of the issuing entity may result in the recovery of an amount
less than the amount that would otherwise be recovered.
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
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connection with those proceedings and which are reimbursable under the
Agreement, the issuing entity 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.
With respect to a Multifamily Mortgage Loan, the market value of any
property obtained in foreclosure or by deed in lieu of foreclosure will be based
substantially on the operating income obtained by renting the dwelling units. As
a default on a Multifamily Mortgage Loan is likely to have occurred because
operating income, net of expenses, is insufficient to make debt service payments
on the mortgage loan, it can be anticipated that the market value of the
property will be less than anticipated when the mortgage loan was originated. To
the extent that equity does not cushion the loss in market value and the loss is
not covered by other credit support, a loss may be experienced by the related
issuing entity.
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 issuing entity
may realize a loss in that amount.
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."
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HAZARD INSURANCE POLICIES
MORTGAGE LOANS. Generally, each Agreement for an issuing entity
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
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 an issuing entity 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
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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.
OTHER HAZARD-RELATED INSURANCE; LIABILITY INSURANCE
With respect to Multifamily Loans, certain additional insurance
policies may be required with respect to the related Multifamily Property; for
example, general liability insurance for bodily injury or death and property
damage occurring on the property or the adjoining streets and sidewalks, steam
boiler coverage where a steam boiler or other pressure vessel is in operation,
interest coverage insurance, and rent loss insurance to cover operating income
losses following damage or destruction of the mortgaged property. With respect
to a series for which Multifamily Loans are included in the issuing entity, the
prospectus supplement will specify the required types and amounts of additional
insurance and describe the general terms of the insurance and conditions to
payment thereunder.
CONTRACTS. Generally, the terms of the agreement for an issuing entity
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
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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.
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 an issuing
entity 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
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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.
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.
ENVIRONMENTAL INSURANCE
If specified in the applicable prospectus supplement, the trust or
trustee will be the beneficiary, for the benefit of the securityholders, of
insurance policies ("Environmental Policies") providing limited coverage against
certain environmental risks with respect to the mortgaged properties securing
certain Commercial, Multifamily and Mixed-Use Mortgage Loans. Subject to various
exceptions and exclusions (including asbestos and lead paint), Environmental
Policies will generally cover losses, clean-up costs, third-party claims and
legal expenses up to pre-determined limits. Subject to the terms of the
applicable policy, if a Mortgaged Property securing a covered loan is subject to
environmental contamination, in the event of default by the borrower the
outstanding principal balance of the loan, plus accrued interest, will be
payable under the applicable Environmental Policy.
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.
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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 issuing entity.
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 an issuing entity 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
issuing entity.
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 issuing
entity during that period before their due dates.
EVIDENCE AS TO COMPLIANCE
Each pooling and servicing agreement and servicing agreement will
provide that on or before a specified date in March of each year, beginning with
the first year after the year in which the cut-off date occurs, each party
responsible for the servicing function will provide to the depositor and the
trustee a report on an assessment of compliance with the minimum servicing
criteria established in Item 1122(a) of Regulation AB (the "AB Servicing
Criteria"). The AB Servicing Criteria include specific criteria relating to the
following areas: general servicing considerations, cash collection and
administration, investor remittances and reporting, and pool
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asset administration. Such report will indicate that the AB Servicing Criteria
were used to test compliance on a platform level basis and will set out any
material instances of noncompliance.
Each pooling and servicing agreement and servicing agreement will also
provide that the each party responsible for the servicing function will deliver
along with its report on assessment of compliance, an attestation report from a
firm of independent public accountants on the assessment of compliance with the
AB Servicing Criteria.
Each pooling and servicing agreement and servicing agreement will also
provide for delivery to the trustee, on or before a specified date in March of
each year, of a separate annual statement of compliance from each entity
responsible for the servicing function to the effect that, to the best knowledge
of the signing officer, the servicer has fulfilled in all material respects its
obligations under the pooling and servicing agreement or servicing agreement
throughout the preceding year or, if there has been a material failure in the
fulfillment of any obligation, the statement shall specify such failure and the
nature and status thereof. This statement may be provided as a single form
making the required statements as to more than one pooling and servicing
agreement or servicing agreement.
Copies of the annual reports of assessment of compliance, attestation
reports, and statements of compliance may be obtained by securityholders without
charge upon written request to the master servicer or trustee. These items will
be filed with the issuing entity's annual report on Form 10-K, to the extent
required under Regulation AB.
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:
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 issuing entity 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 issuing
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entity 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
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.
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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.
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,
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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 cure any
ambiguity or mistake;
(1) 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;
(2) 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
(3) 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
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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 independent
counsel to the effect that that amendment will not result in the imposition of a
tax on the related issuing entity or, if applicable, cause the related issuing
entity 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.
If an Event of Default shall occur, the trustee shall, at the direction
of 51% of the holders of the Certificates, by notice in writing to the master
servicer and to the Depositor, with a copy to each Rating Agency, terminate all
of the rights and obligations of the master servicer in its capacity as Master
Servicer under the related pooling and servicing agreement, to the extent
permitted by law, and in and to the mortgage loans and the proceeds thereof. On
or after the receipt by the master servicer of such written notice, all
authority and power of the master servicer with respect to the Certificates
(other than as a holder of any Certificate) or the mortgage loans or otherwise
including, without limitation, the compensation payable to the master servicer
under the related pooling and servicing agreement, shall pass to and be vested
in the trustee, and, without limitation, the trustee shall be authorized and
empowered, as attorney-in-fact or otherwise, to execute and deliver, on behalf
of and at the expense of the master servicer, any and all documents and other
instruments and to do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement or assignment of the mortgage loans and
related documents, or otherwise.
To the extent that the costs and expenses of the trustee related to the
termination of the master servicer, appointment of a successor master servicer
or the transfer and assumption of the master servicing by the trustee
(including, without limitation, (i) all legal costs and expenses and all due
diligence costs and expenses associated with an evaluation of the potential
termination of the master servicer as a result of an event of default and (ii)
all costs and expenses associated with the complete transfer of the master
servicing, including all servicing files and all servicing data and the
completion, correction or manipulation of such servicing data as may be required
by the
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successor master servicer to correct any errors or insufficiencies in the
servicing data or otherwise to enable the successor master servicer to master
service the mortgage loans in accordance with the related pooling and servicing
agreement) are not fully and timely reimbursed by the terminated master
servicer, the trustee shall be entitled to reimbursement of such costs and
expenses from the Distribution Account.
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 an issuing entity 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 resign at any time, in which event the depositor will
be obligated to appoint a successor trustee. The depositor may also remove the
trustee if the trustee ceases to be eligible to continue under the pooling and
servicing agreement or if the trustee becomes insolvent. Upon becoming aware of
the circumstances, the depositor will be obligated to appoint a successor
trustee. The trustee may also be removed at any time by the holders of
securities evidencing not less a majority of the aggregate undivided interests
(or, if applicable, voting rights) in the related issuing entity. Any
resignation or removal of the trustee and appointment of a successor trustee
will not become effective until acceptance of the appointment by the successor
trustee. If the trustee resigns or is removed by the depositor, the expenses
associated with the change of trustees will be paid by the former trustee and
reimbursed from the Distribution Account. If the trustee is removed by holders
of securities, such holders shall be responsible for paying any compensation
payable to a successor trustee, in excess of the amount paid to the predecessor
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: Evelyn Echevarria.
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
issuing entity 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
issuing entity 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 issuing entity; 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,
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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 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
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that cannot be modified without the waiver or consent of all the holders of the
outstanding Notes of that series affected.
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 issuing entity 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 only may be in the form of one or more of the following features:
o letters of credit;
o Pool Insurance Policies;
o special hazard insurance policies;
o Bankruptcy Bonds;
o guarantees; or
o the establishment of one or more reserve funds.
Alternatively, the prospectus supplement relating to a series of
securities will specify if credit support may be provided by subordination of
one or more classes of securities or by overcollateralization, in combination
with or in lieu of any one or more of the instruments set forth above.
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.
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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,
(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 issuing
entity. 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. Any
guarantee specified in the prospectus supplement, if any, will be exempt from
registration under the Securities Act.
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.
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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 issuing entity will be obtained. The pool insurance policy will
cover any loss (subject to the limitations described in the prospectus
supplement) by reason of default to the extent a related mortgage loan is not
covered by any primary mortgage insurance policy. The amount and principal terms
of any 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
issuing entity, 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 an issuing entity 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
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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 issuing entity.
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
an issuing entity 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,
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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 loans. See "Description of The Issuing Entities--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 Issuing Entities--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.
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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 Servicemembers' Civil Relief Act) and,
in some cases, in deed of trust transactions, the directions of the beneficiary.
The mortgages that encumber multifamily properties may contain an
assignment of rents and leases, pursuant to which the 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.
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
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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.
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
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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.
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
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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.
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
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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.
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
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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 issuing entity or a
part of the issuing entity 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 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.
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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 issuing entity 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 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
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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 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.
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.
FEDERAL BANKRUPTCY LAWS RELATING TO MORTGAGE LOANS SECURED BY
MULTIFAMILY PROPERTY
Section 365(a) of the Bankruptcy Code generally provides that a trustee
or a debtor-in-possession in a bankruptcy or reorganization case under the
Bankruptcy Code has the power to assume or to reject an executory contract or an
unexpired lease of the debtor, in each case subject
87
to the approval of the bankruptcy court administering the case. If the trustee
or debtor-in- possession rejects an executory contract or an unexpired lease,
rejection generally constitutes a breach of the executory contract or unexpired
lease immediately before the date of the filing of the petition. As a
consequence, if the mortgagor is the other party or parties to the executory
contract or unexpired lease, such as a lessor under a lease, the mortgagor would
have only an unsecured claim against the debtor for damages resulting from the
breach, which could adversely affect the security for the related mortgage loan.
Moreover, under Section 502(b)(6) of the Bankruptcy Code, the claim of a lessor
for damages from the termination of a lease of real property will be limited to
the sum of (1) the rent reserved by the lease, without acceleration, for the
greater of one year or 15 percent, not to exceed three years, of the remaining
term of the lease, following the earlier of the date of the filing of the
petition and the date on which the lender repossessed, or the lessee
surrendered, the leased property, and (2) any unpaid rent due under the lease,
without acceleration, on the earlier of these dates.
Under Section 365(h) of the Bankruptcy Code, if a trustee for a lessor,
or a lessor as a debtor-in-possession, rejects an unexpired lease of real
property, the lessee may treat the lease as terminated by rejection or, in the
alternative, may remain in possession of the leasehold for the balance of the
term and for any renewal or extension of the term that is enforceable by the
lessee under applicable nonbankruptcy law. The Bankruptcy Code provides that if
a lessee elects to remain in possession after rejection of a lease, the lessee
may offset against rents reserved under the lease for the balance of the term
after the date of rejection of the lease, and any renewal or extension thereof,
any damages occurring after that date caused by the nonperformance of any
obligation of the lessor under the lease after that date.
Under Section 365(f) of the Bankruptcy Code, if a trustee assumes an
executory contract or an unexpired lease of the debtor, the trustee or
debtor-in-possession generally may assign the executory contract or unexpired
lease, notwithstanding any provision therein or in applicable law that
prohibits, restricts or conditions the assignment, provided that the trustee or
debtor-in-possession provides adequate assurance of future performance by the
assignee. In addition, no party to an executory contract or an unexpired lease
may terminate or modify any rights or obligations under an executory contract or
an unexpired lease at any time after the commencement of a case under the
Bankruptcy Code solely because of a provision in the executory contract or
unexpired lease or in applicable law conditioned upon the assignment of the
executory contract or unexpired lease. Thus, an undetermined third party may
assume the obligations of the lessee or a mortgagor under a lease in the event
of commencement of a proceeding under the Bankruptcy Code with respect to the
lessee or a mortgagor, as applicable.
Under Sections 363(b) and (f) of the Bankruptcy Code, a trustee for a
lessor, or a lessor as debtor-in-possession, may, despite the provisions of the
related mortgage loan to the contrary, sell the Mortgaged Property free and
clear of all liens, which liens would then attach to the proceeds of the sale.
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
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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 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
issuing entity. 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
89
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.
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 issuing entity and occasion a loss to the issuing entity 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.
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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, "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; DEBT-ACCELERATION CLAUSES
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.
Some of the Commercial, Multifamily and Mixed-Use Mortgage Loans
included in a trust will include a "debt-acceleration " clause, which permits
the lender to accelerate the full debt upon a monetary or nonmonetary default of
the borrower. The courts of all states will enforce clauses providing for
acceleration in the event of a material payment default after giving effect to
any appropriate notices. The courts of any state, however, may refuse to permit
foreclosure of a mortgage or deed of trust when an acceleration of the
indebtedness would be inequitable or
91
unjust or the circumstances would render the acceleration unconscionable.
Furthermore, in some states, the borrower may avoid foreclosure and reinstate an
accelerated loan by paying only the defaulted amounts and the costs and
attorneys' fees incurred by the lender in collecting such defaulted payments.
SUBORDINATE FINANCING
Where a borrower encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risks, such as:
o The borrower may have difficulty repaying multiple loans. In
addition, if the junior loan permits recourse to the borrower
(as junior loans often do) and the senior loan does not, a
borrower may be more likely to repay sums due on the junior
loan than those on the senior loan.
o Acts of the senior lender that prejudice the junior lender or
impair the junior lender's security may create a superior
equity in favor of the junior lender. For example, if the
borrower and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior
loan, the senior lender may lose its priority to the extent
any existing junior lender is harmed or the borrower is
additionally burdened.
o If the borrower defaults on the senior loan and/or any junior
loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the
senior lender and can interfere with or delay the taking of
action by the senior lender. Moreover, the bankruptcy of a
junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations will not apply to some types of residential first mortgage
loans originated by lenders after March 31, 1980. A similar federal statute was
in effect for mortgage loans made during the first three months of 1980. The
Office of Thrift Supervision is authorized to issue rules and regulations and to
publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose interest rate limits by adopting, 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 an issuing entity 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
92
state under which the interest rate, discount points and charges would not be
usurious and the borrower's counsel has rendered an opinion that the choice of
law provision would be given effect.
Statutes differ in their provisions as to the consequences of a
usurious loan. One group of statutes requires the lender to forfeit the interest
due above the applicable limit or impose a specified penalty. Under this
statutory scheme, the borrower may cancel the recorded mortgage or deed of trust
upon paying its debt with lawful interest, and the lender may foreclose, but
only for the debt plus lawful interest. A second group of statutes is more
severe. A violation of this type of usury law results in the invalidation of the
transaction, thus permitting the borrower to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Those
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St. Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, before October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of those provisions. Some states have
taken that action.
SERVICEMEMBERS' CIVIL RELIEF ACT
Under the terms of the Servicemembers' Civil Relief Act and similar
state and local laws (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
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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.
COMMERCIAL, MULTIFAMILY AND MIXED USE LOANS
The market value of any Commercial, Multifamily or Mixed-Use Mortgaged
Property obtained in foreclosure or by deed in lieu of foreclosure will be based
substantially on the operating income obtained from renting the commercial or
dwelling units, the sale price, the value of any alternative uses, or such other
factors as are considered by the originator. Because a default on a Commercial,
Multifamily or Mixed-Use Mortgage Loan is likely to have occurred because
operating income, net of expenses, is insufficient to make debt service payments
on such mortgage loan, it can be anticipated that the market value of such
property will be less than was anticipated when such mortgage loan was
originated. To the extent that the equity in the property does not absorb the
loss in market value and such loss is not covered by other credit enhancement, a
loss may be experienced. With respect to any Multifamily Mortgaged Property
consisting of an apartment building owned by a cooperative, the cooperative's
ability to meet debt service obligations on the mortgage loan, as well as all
other operating expenses, will be dependent in large part on the receipt of
maintenance payments from the tenant-stockholders. Unanticipated expenditures
may in some cases have to be paid by special assessments of the
tenant-stockholders. The cooperative's ability to pay the principal balance of
the mortgage loan at maturity may depend on its ability to refinance the
mortgage loan. The depositor, the seller and the master servicer will have no
obligation to provide refinancing for any such mortgage.
In most states, hotel and motel room rates are considered accounts
receivable under the UCC. Room rates are generally pledged by the borrower as
additional security for the loan when a mortgage loan is secured by a hotel or
motel. In general, the lender must file financing statements in order to perfect
its security interest in the room rates and must file continuation statements,
generally every five years, to maintain that perfection. Mortgage loans secured
by hotels or motels may be included in the trust even if the security interest
in the room rates was not perfected or the requisite UCC filings were allowed to
lapse. A lender will generally be required to commence a foreclosure action or
otherwise take possession of the property in order to enforce its rights to
collect the room rates following a default, even if the lender's security
interest in room rates is perfected under applicable nonbankruptcy law.
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In the bankruptcy setting, the lender will be stayed from enforcing its
rights to collect hotel and motel room rates. However, the room rates will
constitute cash collateral and cannot be used by the bankrupt borrower without a
hearing or the lender's consent, or unless the lender's interest in the room
rates is given adequate protection.
For purposes of the foregoing, the adequate protection may include a
cash payment for otherwise encumbered funds or a replacement lien on
unencumbered property, in either case equal in value to the amount of room rates
that the bankrupt borrower proposes to use.
LEASES AND RENTS
Some of the Commercial, Multifamily and Mixed-Use Mortgage Loans are
secured by an assignment of leases (each, a "lease") and rents of one or more
lessees (each, a "lessee"), either through a separate document of assignment or
as incorporated in the mortgage. Under such assignments, the borrower under the
mortgage loan typically assigns its right, title and interest as landlord under
each lease and the income derived therefrom to the lender, while retaining a
license to collect the rents for so long as there is no default under the
mortgage loan documentation. The manner of perfecting the lender's interest in
rents may depend on whether the borrower's assignment was absolute or one
granted as security for the loan. Failure to properly perfect the lender's
interest in rents may result in the loss of a substantial pool of funds that
otherwise could serve as a source of repayment for the loan. In the event the
borrower defaults, the license terminates and the lender may be entitled to
collect rents. Some state laws may require that to perfect its interest in
rents, the lender must take possession of the property and/or obtain judicial
appointment of a receiver before becoming entitled to collect the rents. Lenders
that actually take possession of the property, however, may incur potentially
substantial risks attendant to being a mortgagee in possession. Such risks
include liability for environmental clean-up costs and other risks inherent to
property ownership. In addition, if bankruptcy or similar proceedings are
commenced by or in respect of the borrower, the lender's ability to collect the
rents may be adversely affected. In the event of borrower default, the amount of
rent the lender is able to collect from the tenants can significantly affect the
value of the lender's security interest.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and
rules promulgated thereunder (collectively, the "ADA"), owners of public
accommodations (such as hotels, restaurants, shopping centers, hospitals,
schools and social service center establishments) must remove architectural and
communication barriers that are structural in nature from existing places of
public accommodation to the extent "readily achievable." In addition, under the
ADA, alterations to a place of public accommodation or a commercial facility are
to be made so that, to the maximum extent feasible, such altered portions are
readily accessible to and useable by disabled individuals. The "readily
achievable" standard takes into account, among other factors, the financial
resources of the affected site, owner, landlord or other applicable person. In
addition to imposing a possible financial burden on the borrower in its capacity
as owner or landlord, the ADA may also impose such requirements on a foreclosing
lender who succeeds to the interest of the borrower as owner or landlord.
Furthermore, because the "readily achievable" standard may vary depending on the
financial condition of the owner or landlord, a foreclosing secured party who is
financially more capable than the borrower of complying with the requirements of
the ADA may be subject to more stringent requirements than those to which the
borrower is subject.
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
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reflect the laws of any particular state, nor to encompass the laws of all
states in which the security for the contracts is situated. The summaries are
qualified in their entirety by reference to the appropriate laws of the states
in which contracts may be originated.
GENERAL
As a result of the assignment of the contracts to the trustee, the
trustee will succeed collectively to all of the rights including the right to
receive payment on the contracts, of the obligee under the contracts. Each
contract evidences both
(a) the obligation of the 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
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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
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
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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, 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.
SERVICEMEMBERS' CIVIL RELIEF ACT
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-Civil Act."
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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 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 opinions 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. These
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opinions assume 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,
investors that do not buy in the original offering 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 are encouraged to consider the state, local and
other tax consequences, if any, of the purchase, ownership and disposition of
the Notes or Certificates, as applicable. See "State and Other Tax
Considerations." The depositor recommends that securityholders consult their own
tax advisors concerning the federal, state, local or other tax consequences to
them of the purchase, ownership and disposition of the Notes or Certificates, as
applicable, offered under this prospectus.
The following discussion addresses securities of four general types:
o securities ("REMIC Securities") representing interests in an
issuing entity, or a portion of an issuing entity, 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 ("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 from the owner of its equity 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 issuing entity, will identify
all "regular interests" and "residual interests" in the REMIC. 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.
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"), and in part upon the REMIC Provisions and the
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Treasury regulations promulgated thereunder (the "REMIC Regulations"). In
addition, the OID Regulations do not adequately address some issues relevant to,
and in some instances provide that they are not applicable to, prepayable
securities such as the Notes or Certificates, as applicable.
TAXABLE MORTGAGE POOLS
Corporate income tax can be imposed on the net income of some entities
issuing non-REMIC debt obligations secured by real estate mortgages ("Taxable
Mortgage Pools"). Any entity other than a REMIC 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
(determined by adjusted tax basis) 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 Securities to
avoid the application of the Taxable Mortgage Pool rules.
REMICS
CLASSIFICATION OF REMICS
For each series of REMIC Securities, McKee Nelson LLP or Thacher
Proffitt & Wood LLP (as applicable, "Federal Tax Counsel") will deliver an
opinion that, assuming compliance with all provisions of the related pooling and
servicing agreement, the related issuing entity (or each applicable portion of
the issuing entity) 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, 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
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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 transferred to the REMIC Pool on the
Startup Day, is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day or is
attributable to an advance made to the mortgagor pursuant to the original terms
of the obligation and is purchased by the REMIC pursuant to a fixed price
contract in effect on the Startup Day. Qualified mortgages include whole
mortgage loans and, certain certificates of beneficial interest in a grantor
trust that holds mortgage loans and regular interests in another REMIC, such as
lower-tier regular interests in a tiered REMIC. The REMIC Regulations specify
that loans secured by timeshare interests, shares held by a tenant stockholder
in a cooperative housing corporation, and manufactured housing that qualifies as
a "single family residence" under Code Section 25(e)(10) can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage, which
is any property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either:
(1) in exchange for any qualified mortgage within a
three-month period from the Startup Day; or
(2) in exchange for a "defective obligation" within a
two-year period from the Startup Day.
A "defective obligation" includes:
(1) a mortgage in default or as to which default is
reasonably foreseeable;
(2) a mortgage as to which a customary representation or
warranty made at the time of transfer to the REMIC Pool has been
breached;
(3) a mortgage that was fraudulently procured by the
borrower; and
(4) a mortgage that was not in fact principally secured
by real property (but only if the sponsor had a reasonable belief the
mortgage loan was principally secured by real estate at the time the
mortgage was acquired by the REMIC and the mortgage is disposed of
within 90 days of discovery of this defect).
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, sold or exchanged, within 90
days of discovery, ceases to be a qualified mortgage after that 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in that fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced "promptly and appropriately" to the extent no longer reasonably
required.
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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 an extension of up to three additional years is 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 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 Federal Tax Counsel, 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 issuing entity'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 issuing entity's status as
a REMIC under the REMIC Provisions. It is not anticipated that the status of any
issuing entity 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,
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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 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 issuing entity as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any of
these series of REMIC Securities, Federal Tax Counsel 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 interests issued by each Tiered REMIC will be considered to evidence
ownership of regular interests or residual interests 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.
Interest, original issue discount, and market discount (other than de minimis
original issue discount market discount the holder does not elect to include
currently) on a Regular Security will be treated as ordinary income to a holder
of the Regular Security (the "Regular Securityholder"), and principal payments
(other than payments treated as payments of accrued market discount not
previously included in income) 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.
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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 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,
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 an expected 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.
In limited circumstances multiple Regular Securities can be aggregated
and treated as a single debt instrument for purposes of applying the original
issue discount rules. Otherwise 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
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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. Interest is unconditionally payable only if reasonable
legal remedies exist to compel timely payment or the terms of the debt
instrument otherwise make the likelihood of late payment (beyond a grace period)
or non-payment sufficiently remote. 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, although there is no guidance
directly addressing the issue, because the underlying mortgage loans provide for
remedies in the event of default it is anticipated that the trustee will treat
interest for the Regular Securities as qualified stated interest. Distributions
of interest on an Accrual Security, or on other Regular Securities for which
deferred interest will accrue, will not constitute qualified stated interest, in
which case the stated redemption price at maturity of those Regular Securities
includes all distributions of interest as well as principal on the Regular
Securities. Likewise, although there is no guidance directly addressing the
issue, 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
106
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:
(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.
107
(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 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) single fixed rate and a single objective rate that is
a "qualified inverse floating rate."
A floating rate is a qualified floating rate if variations can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. A multiple of a qualified floating rate is considered a qualified
floating rate only if the rate is equal to either (a) the product of a qualified
floating rate and a fixed multiple that is greater than 0.65 but not more than
1.35 or (b) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35, increased or decreased by a fixed
rate. That rate may also be subject to a fixed cap or floor, or a cap or floor
that is not reasonably expected as of the issue date to affect the yield of the
instrument significantly. An objective rate is any rate (other than a qualified
floating rate) that is determined using a single fixed formula and that is based
on objective financial or economic information, provided that the information is
not (1) within the control of the issuer or a related party or (2) unique to the
circumstances of the issuer or a related party. However, an objective rate does
not include a rate if it is reasonably expected that the average value of such
rate during the first half of the Regular Security's term will be either
significantly less than or significantly greater than the average value of the
rate during the final half of the Regular Security's term. A qualified inverse
floating rate is a rate equal to a fixed rate minus a qualified floating rate
that inversely reflects contemporaneous variations in the qualified floating
rate; an inverse floating rate that is not a qualified inverse floating rate may
nevertheless be an objective rate. A Class of Regular Securities may be issued
under this prospectus that does not have a qualified variable rate under the
foregoing rules, for example, a Class that bears different rates at different
times during the period it is outstanding that it is considered significantly
"front-loaded" or "back-loaded" within the meaning of the OID Regulations. It is
possible that a Class may be considered to bear "contingent interest" within the
meaning of the OID Regulations. The OID Regulations, as they relate to the
treatment of contingent interest, are by their terms not applicable to Regular
Securities. However, if final regulations dealing with contingent interest for
Regular Securities apply the same principles as the OID Regulations, those
regulations may lead to
108
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 are encouraged to 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). 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. Unless required otherwise by applicable final
regulations, although there is no guidance directly addressing the issue, 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.
(5) Market Discount
A subsequent purchaser of a Regular Security also may be subject to the
market discount rules of Code Sections 1276 through 1278. Under these sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Security (1) is exceeded by the remaining
outstanding principal payments and interest payments other than qualified stated
interest payments due on a Regular Security, or (2) in the case of a Regular
Security having original issue discount, is exceeded by the adjusted issue price
of that Regular Security at the time of purchase. The purchaser generally will
be required to recognize ordinary income to the extent of accrued market
discount on that Regular Security as distributions includible in the stated
redemption price at maturity of the Regular Security are received, in an amount
not exceeding that distribution. The market discount would accrue in a manner to
be provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
these regulations are issued, the market discount would accrue either (1) on the
basis of a constant interest rate, or (2) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for that period plus
the remaining interest as of the end of that period, or in the case of a Regular
Security issued with original issue discount, in the ratio of original issue
discount accrued for the relevant period to the sum of the original issue
discount accrued for that period plus the remaining original issue discount as
of the end of that period. The purchaser also generally will be required to
treat a portion of any gain on a sale or exchange of the Regular Security as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market discount
previously reported as ordinary income as partial distributions in reduction of
the stated redemption price at maturity were received. The purchaser will be
required to defer deduction of a portion of the excess of the interest paid or
accrued on indebtedness incurred to purchase or carry a Regular Security over
the interest distributable on the Regular Security. The deferred portion of the
interest expense in any taxable year generally will not exceed the accrued
market discount on the Regular Security for that year. Any deferred interest
expense is, in general, allowed as a deduction not later than the year in which
the related market discount income is recognized or the Regular Security is
disposed of.
As an alternative to the inclusion of market discount in income on the
foregoing basis, the Regular Securityholder may elect to include market discount
in income currently as it accrues on
109
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 are encouraged to consult their own tax advisors
regarding the application of the market discount rules to the Regular Securities
and the elections to include market discount in income currently and to accrue
market discount on the basis of the constant yield method.
(6) Amortizable Premium
A Regular Security purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds that Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize the premium under a constant yield
method that reflects compounding based on the interval between payments on the
Regular Security. The election will apply to all taxable debt obligations
(including REMIC regular interests) acquired by the Regular Securityholder at a
premium held in that taxable year or thereafter, unless revoked with the
permission of the Internal Revenue Service. The Conference Committee Report to
the 1986 Act indicates a Congressional intent that the same rules that apply to
the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations as the
Regular Securities, although it is unclear whether the alternatives to the
constant interest method described above under "Market Discount" are available.
Amortizable bond premium generally will be treated as an offset to interest
income on a Regular Security, rather than as a separate deductible item. See
"--Election to Treat All Interest Under the Constant Yield Method" below
regarding an alternative manner in which the Code Section 171 election may be
deemed to be made.
(7) Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Security may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to this election, (1) "interest" includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (2) the debt instrument is treated
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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 are encouraged to
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 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 issuing entity 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 encouraged 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
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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").
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
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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 or as a result of a
Certificateholder, particularly an interest only Regular Security, not
recovering its adjusted issue price. 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 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
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"--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 are encouraged to 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, but is not available
to a subsequent Residual Holder.
A Residual Holder will not be permitted to amortize directly the cost
of its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, if, in any year, cash distributions to a Residual
Holder exceed its share of the REMIC's taxable income, the excess will
constitute a return of capital to the extent of the holder's basis in its
Residual Security. A return of capital is not treated as income for federal
income tax purposes, but will reduce the tax basis of the Residual Holder (but
not below zero). If a Residual Security's basis is reduced to zero, any cash
distributions with respect to that Residual Security in any taxable year in
excess of its share of the REMIC's income would be taxable to the holder as gain
on the sale or exchange of its interest in the REMIC.
A Residual Security may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of the residual
interest as zero rather than the negative amount for purposes of determining the
REMIC Pool's basis in its assets. The preamble to the REMIC Regulations states
that the Internal Revenue Service may provide future guidance on the proper tax
treatment of payments made by a transferor of the residual interest to induce
the transferee to acquire the interest, and Residual Holders are encouraged to
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
114
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 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.
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(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 carryforwards, on the Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of 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.
(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
116
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
(including the District of Columbia) or political subdivision thereof, 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,
except for the Federal Home Loan Mortgage Corporation, 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 521)
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 any
organization treated as a cooperative under Code Section 1381. 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(e) of the Code. The exception to this tax, otherwise available to a
Pass-Through Entity that is furnished particular affidavits by record holders of
interests in the entity and that does not know those affidavits are false, is
not available to an electing large partnership.
The pooling and servicing agreement for a series will provide that no
legal or beneficial interest in a Residual Security may be transferred or
registered unless (1) the proposed transferee furnished to the transferor and
the trustee an affidavit providing its taxpayer identification number
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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 disregard
transfers of Residual Securities under certain circumstances, 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 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
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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 a cooperative corporation to which
subchapter T of Chapter 1 of subtitle A of the Code applies
(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, the formula test will not be
treated as satisfied in the case of any transfer or assignment of the Residual
Security to a foreign branch of an Eligible Corporation or any other arrangement
by which the Residual Security is at any time subject to net tax by a foreign
country or possession of the United States.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule applies 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 calendar taxable year following the calendar year of
accrual. A safe harbor in the REMIC Regulations provides that the reasonable
expectation requirement will be satisfied if the above test would be met at all
assumed prepayment rates for the mortgage loans from 50 percent to 200 percent
of the Prepayment Assumption. If the non-U.S. Person transfers the Residual
Security back to a U.S. Person, the transfer will be disregarded and the foreign
transferor will continue to be treated as the owner unless arrangements are made
so that the transfer does not have the effect of allowing the transferor to
avoid tax on accrued excess inclusions.
The prospectus supplement relating to the Certificates of a series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which the transfer may be made. The term "U.S. Person"
means a citizen or resident of the United States, a corporation or partnership
(or other entity properly treated as a partnership or as a corporation for
federal income tax purposes) created or organized in or under the laws of the
United States or of any state (including, for this purpose, the District of
Columbia), an estate that is subject to U.S. federal income tax regardless of
the source of its income, or a trust if a court within the United States is able
to exercise primary supervision over the administration of the trust and one or
more U.S. Persons have the authority to control all substantial decisions of the
trust (or, to the extent provided in applicable Treasury regulations, trusts in
existence on August 20, 1996, which are eligible to elect and do elect to be
treated as U.S. Persons). In addition, a REMIC Residual Interest held by an
entity treated as a partnership for federal tax purposes may be treated as held
by its equity owners.
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(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 loss 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.
(8) Inducement Fees
Regulations have been adopted regarding the federal income tax
treatment of "inducement fees" received by transferees of non-economic REMIC
residual interests. The 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.
Prospective purchasers of the Residual Certificates are encouraged to consult
their tax advisors regarding the effect of these regulations and the tax
consequences of receiving any inducement fee.
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TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
(1) Prohibited Transactions
Income from transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include:
(1) the disposition of a qualified mortgages other than
for:
(a) substitution for a defective (including a
defaulted) obligation within two years of the Startup
Day (or repurchase in lieu of substitution of a
defective (including a defaulted) obligation at any
time) or for any qualified mortgage within three
months of the Startup Day;
(b) foreclosure, default, or imminent default of
a qualified mortgage;
(c) bankruptcy or insolvency of the REMIC Pool;
or
(d) a qualified (complete) liquidation;
(2) the receipt of income from assets that are not
qualified 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 of a class of REMIC regular interest
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 for this purpose 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 that do not qualify for an exception from the 100% penalty
tax.
(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 foreclosure or 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, unless an
extension of up to three additional years is granted. 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 income that would be 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
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partnership that has 100 or more partners and elects to be treated as an
"electing large partnership," 70% of that partnership's miscellaneous itemized
deductions will be disallowed, although the remaining deductions will generally
be allowed at the partnership level and will not be subject to the 2% floor that
would otherwise be applicable to individual partners. In addition, Code Section
68, provides that itemized deductions otherwise allowable for a taxable year of
an individual taxpayer will be reduced by the lesser or (1) 3% of the excess of
adjusted gross income in excess of a specified threshold amount (which is
adjusted annually for inflation), or (2) 80% of the amount of itemized
deductions otherwise allowable for that year. The reduction under Code Section
68 is itself reduced by one-third for taxable years beginning in 2006 and 2007,
two-thirds for taxable years beginning in 2008 and 2009, and fully reduced for
taxable years beginning in 2010 with no reduction thereafter. 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 is
encouraged to consult its tax advisors regarding the tax documentation and
certifications that must be provided to secure the exemption from United States
withholding taxes.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Regular Security by a Non-U.S. Person generally will be
exempt from United States federal income and withholding tax, provided that (i)
such gain is not effectively connected with the conduct of a trade or business
in the United States by the Non-U.S. Person and (ii) in the case of an
individual Non-U.S. Person, the Non-U.S. Person is not present in the United
States for 183 days or more in the taxable year.
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If the interest on the Regular Security is effectively connected with
the conduct of a trade or business within the United States by that Non-U.S.
Person, the Non-U.S. Person, although exempt from the withholding tax previously
discussed if the holder provides an appropriate statement establishing that such
income is so effectively connected, will be subject to United States federal
income tax at regular rates. Investors who are Non-U.S. Persons are encouraged
to consult their own tax advisors regarding the specific tax consequences to
them of owning a Regular Security. The term "Non-U.S. Person" means any person
who is not a U.S. Person.
(2) Residual Securities
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as "portfolio interest," subject to the conditions
described in "Regular Securities" above, but only to the extent that (1) the
mortgage loans were issued after July 18, 1984, and (2) the issuing entity or
segregated pool of assets in the issuing entity (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 are
encouraged to 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 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.
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 chapter 1 of subtitle A of the Code. In this case, beneficial owners of
Grantor Trust Securities (referred to in this Prospectus as "Grantor Trust
Securityholders") will be treated for federal income tax purposes as owners of a
portion of the Grantor Trust Fund's assets as described below.
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TAXATION OF GRANTOR TRUST SECURITYHOLDERS. Subject to the discussion
below under "Stripped Certificates" and "Subordinated Certificates," each
Grantor Trust Securityholder will be treated as the owner of a pro rata
undivided interest in the assets of the Grantor Trust Fund. Accordingly, and
subject to the discussion below of the recharacterization of the servicing fee,
each Grantor Trust Securityholder must include in income its pro rata share of
the interest and other income from the assets of the Grantor Trust Fund,
including any interest, original issue discount, market discount, prepayment
fees, assumption fees, and late payment charges with respect to the assets, and,
subject to limitations discussed below, may deduct its pro rata share of the
fees and other deductible expenses paid by the Grantor Trust Fund, at the same
time and to the same extent as these items would be included or deducted by the
Grantor Trust Securityholder if the Grantor Trust Securityholder held directly a
pro rata interest in the assets of the Grantor Trust Fund and received and paid
directly the amounts received and paid by the Grantor Trust Fund. Any amounts
received by a Grantor Trust Securityholder in lieu of amounts due with respect
to any asset of the Grantor Trust Fund because of a default or delinquency in
payment will be treated for federal income tax purposes as having the same
character as the payments they replace.
Each Grantor Trust Securityholder will be entitled to deduct its pro
rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late payment charges retained by the servicer,
provided that these amounts are reasonable compensation for services rendered to
the Grantor Trust Fund. Grantor Trust Securityholders that are individuals,
estates or trusts will be entitled to deduct their share of expenses only to the
extent these expenses plus all other miscellaneous itemized deductions exceed
two percent of the Grantor Trust Securityholder's adjusted gross income, and
will be allowed no deduction for these expenses in determining their liabilities
for alternative minimum tax. In addition, Section 68 of the Code, provides that
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds a prescribed threshold amount
will be reduced by the lesser of (1) 3% of the excess of adjusted gross income
over the specified threshold amount (adjusted annually for inflation) or (2) 80%
of the amount of itemized deductions otherwise allowable for the applicable
taxable year. The reduction under Code Section 68 is itself reduced by one-third
for taxable years beginning in 2006 and 2007, two-thirds for taxable years
beginning in 2008 and 2009, and fully reduced for taxable years beginning in
2010 with no reduction thereafter. 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
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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 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
Grantor 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
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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 encouraged to consult
their own tax advisors concerning the characterization of the securityholder's
investment for federal income tax purposes.
STRIPPED CERTIFICATES. Some classes of certificates may be subject to
the stripped bond rules of Section 1286 of the Code and for purposes of this
discussion will be referred to as "Stripped Certificates." In general, a
Stripped Certificate will be subject to the stripped bond rules where there has
been a separation of ownership of the right to receive some or all of the
principal payments on a mortgage loan held by the Grantor Trust Fund from
ownership of the right to receive some or all of the related interest payments.
Generally, where a separation has occurred, under the stripped bond rules of
Section 1286 of the Code, the holder of a right to receive a principal or
interest payment on the bond is required to accrue into income, on a constant
yield basis under rules governing original issue discount (see "REMICs--Taxation
of Owners of Regular Securities--Original Issue Discount"), the difference
between the holder's initial purchase price for the right to receive principal
or interest, and the principal or interest payment to be received with respect
to that right. However, a holder of a Stripped Certificate will account for any
discount on the Stripped Certificate (other than an interest treated as a
"stripped coupon") as market discount rather than original issue discount if
either (i) the amount of original issue discount with respect to the Stripped
Certificate was treated as zero under the original issue discount de minimis
rule when the Stripped Certificate was stripped or (ii) no more than 100 basis
points (including any amount of servicing in excess of reasonable servicing) is
stripped 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. Holders may be obligated to perform
such calculation based on the day they acquire their Trust Certificates rather
than based on when the Grantor Trust Fund acquires the Stripped Certificates.
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"
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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 loan'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 purposes 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 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 therefor (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
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the Grantor Trust Fund Stripped Coupon, if any, and accordingly each Subordinate
Certificateholder will be treated as owning its pro rata share in both assets.
The Grantor Trust Fund Stripped Bond will be treated as a "stripped bond" and
the Grantor Trust Fund Stripped Coupon will be treated as "stripped coupons"
within the meaning of Section 1286 of the Code.
Although not entirely clear, the interest income on the Subordinate
Certificates and the portion of the servicing fee allocable to such certificates
that does not constitute excess servicing will be treated by the Grantor Trust
Fund as qualified stated interest, assuming the interest with respect to the
mortgage loans held by the Grantor Trust Fund would otherwise qualify as
qualified stated interest. Accordingly, except to the extent modified below, the
income of the Subordinate Certificates will be reported in the same manner as
described generally above for holders of Senior Certificates.
If the Subordinate Certificateholders receive distribution of less than
their share of the Grantor Trust Fund's receipts of principal or interest (the
"Shortfall Amount") because of the subordination of the Subordinate
Certificates, holders of Subordinate Certificates would probably be treated for
federal income tax purposes as if they had
o received as distributions their full share of receipts;
o paid over to the Senior Certificateholders an amount equal to
the Shortfall Amount; and
o retained the right to reimbursement of the relevant amounts to
the extent these amounts are otherwise available as a result
of collections on the mortgage loans or amounts available from
a reserve account or other form of credit enhancement, if any.
Under this analysis,
o Subordinate Certificateholders would be required to accrue as
current income any interest income, original issue discount,
or (to the extent paid on assets of the Grantor Trust Fund)
accrued market discount of the Grantor Trust Fund that was a
component of the Shortfall Amount, even though that amount was
in fact paid to the Senior Certificateholders;
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 encouraged 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.
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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.
SALE OR EXCHANGE OF A GRANTOR TRUST SECURITY. Sale or exchange of a
Grantor Trust Security prior to its maturity will result in gain or loss equal
to the difference, if any, between the amount realized, exclusive of amounts
attributable to accrued and unpaid interest (which will be treated as ordinary
income allocable to the related asset of the Grantor Trust Fund), and the
owner's adjusted basis in the Grantor Trust Security. The adjusted basis
generally will equal the seller's cost for the Grantor Trust Security, increased
by the original issue discount and any market discount included in the seller's
gross income with respect to the Grantor Trust Security, and reduced, but not
below zero, by any premium amortized by the seller and by principal payments on
the Grantor Trust Security previously received by the seller. The gain or loss
will, except as discussed below, be capital gain or loss to an owner for which
the assets of the Grantor Trust Fund represented by a Grantor Trust Security are
"capital assets" within the meaning of Section 1221. A capital gain or loss will
be long-term or short-term depending on whether or not the Grantor Trust
Security has been owned for the long-term capital gain holding period, currently
more than one year.
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
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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 are encouraged
to 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 if, in general, the Grantor Trust Securityholder fails
to comply with particular identification procedures, unless the holder is an
exempt recipient under applicable provisions of the Code and, if necessary,
demonstrates such status. Any amounts so withheld would be refunded by the IRS
or allowable as a credit against the Grantor Trust Securityholder's federal
income tax.
PARTNERSHIP TRUST FUNDS AND DISREGARDED ENTITIES
CLASSIFICATION OF ISSUING ENTITIES
For each series of Partnership Certificates or Debt Securities, Federal
Tax Counsel will deliver its opinion that the issuing entity 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
will comply with the terms of those 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, Federal Tax Counsel 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.
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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 a
Partnership Trust Fund. If so treated, the Partnership 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 Partnership 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 the Partnership Trust Fund's expenses, and
income from the Partnership 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 issuer of the Notes for federal
tax purposes. Whether the Notes are governed by the loss rules for bad debts
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 Partnership Trust Fund, then the issuing entity will be
a disregarded entity as separate from its equity owner and if such equity owner
is a corporation, the Notes will be considered issued by a corporation subject
to the loss rules of Code Section 165 (which affects 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
Certificateholders (e.g., if some Certificateholders are natural persons 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 are encouraged to 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
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(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 as a Partnership Trust Fund
The correct characterization of an issuing entity that has issued debt
and is not otherwise taxed as a corporation is uncertain. If the issuing entity
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 within 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 needed
to pay the Noteholders) the issuing entity 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 issuing entity's assets, earning income
thereon and incurring the expenses of the issuing entity (including the interest
expense on the Notes). See "Grantor Trusts." If an issuing entity 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 an issuing entity 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 as 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 an issuing
entity. If an issuing entity 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 Certificateholder in an issuing entity that represents all of the
equity of the issuing entity for federal income tax purposes, the separate
existence of the issuing entity is disregarded, and the Certificateholder is
treated as the owner of all of the assets of the issuing entity and as the
issuer of the Notes of the issuing entity for federal income tax purposes. For
all other Issuing entities that 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 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
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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 one class of equity) the
related prospectus supplement will describe the manner in which income from the
assets of the issuing entity 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.
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. The reduction under Code Section 68 is itself
reduced by one-third for taxable years beginning in 2006 and 2007, two-thirds
for taxable years beginning in 2008 and 2009, and fully reduced for taxable
years beginning in 2010 with no reduction thereafter. In the case of a
partnership that has 100 or more partners and elects to be treated as an
"electing
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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 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
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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 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 there is a "substantial basis reduction" within the meaning of Section
734 of the Code or unless the trust were to file an election under Section 754
of the Code. Because the trust will most likely
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qualify as a "securitization partnership" within the meaning of Section 743(f)
of the Code, there will not be a substantial basis reduction with respect to the
sale of the certificates. With respect to the 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.
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
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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 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.
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(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 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.
(12) Reportable Transactions
Pursuant to recently enacted legislation, a penalty in the amount of
$10,000 in the case of a natural person and $50,000 in any other case in imposed
on any taxpayer that fails to timely file an information return with the IRS
with respect to a "reportable transaction" (as defined in Section 6011 of the
Code). The rules defining "reportable transactions" are complex, and include,
but are not limited to, transactions that result in certain losses that exceed
threshold amounts. Prospective investors are advised to consult their own tax
advisers regarding any possible disclosure obligations in light of their
particular circumstances.
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, 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.
PENALTY AVOIDANCE
The summary of tax considerations contained herein was written to
support the promotion and marketing of the securities, and was not intended or
written to be used, and cannot be used, by a taxpayer for the purpose of
avoiding United States federal income tax penalties that may be imposed. Each
taxpayer is encouraged to seek advice based on the taxpayer's particular
circumstances from an independent tax advisor.
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 and local 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 are encouraged to consult their own tax advisors with
respect to the various state and other tax consequences of investments in the
Notes and Certificates, as applicable, offered under this prospectus and the
prospectus supplement. In particular, individuals should consider the
deductability of the expenses (including interest expense) of a partnership.
139
ERISA CONSIDERATIONS
GENERAL
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA should consider the fiduciary standards
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
in the context of the plan's particular circumstances before authorizing an
investment of a portion of such plan's assets in the Securities. Accordingly,
pursuant to Section 404 of ERISA, such fiduciary should consider among other
factors (i) whether the investment is for the exclusive benefit of plan
participants and their beneficiaries; (ii) whether the investment satisfies the
applicable diversification requirements; (iii) whether the investment is in
accordance with the documents and instruments governing the plan; and (iv)
whether the investment is prudent, considering the nature of the investment.
Fiduciaries of plans also should consider ERISA's prohibition on improper
delegation of control over, or responsibility for, plan assets.
In addition, employee benefit plans or other retirement arrangements
subject to ERISA, as well as individual retirement accounts, certain types of
Keogh plans not subject to ERISA but subject to Section 4975 of the Code, or any
entity (including insurance company separate or general accounts) whose
underlying assets include plan assets by reason of such plans, arrangements or
accounts investing in the entity (each, a "Plan") are prohibited from engaging
in a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 of ERISA and excise taxes and/or other
penalties are imposed upon such persons under ERISA and/or Section 4975 of the
Code unless an exemption applies. The depositor, underwriter, each master
servicer or other servicer, any insurer, the trustee, the indenture trustee and
certain of their affiliates might be considered "parties in interest" or
"disqualified persons" with respect to a Plan. If so, the acquisition, holding
or disposition of Securities by or on behalf of such Plan could be considered to
give rise to a "prohibited transaction" within the meaning of ERISA and the Code
unless a statutory, regulatory or administrative exception or exemption is
available.
ERISA CONSIDERATIONS RELATING TO CERTIFICATES
PLAN ASSETS
In 29 C.F.R 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
issuing entity 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
issuing entity 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
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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 issuing
entity, together with all funds inuring to its benefit for administering the
issuing entity, represent no more than "adequate consideration" for selling the
mortgage loans, plus reasonable compensation for services provided to the
issuing entity. In addition, PTCE 83-1 exempts the initial sale of Certificates
to a Plan with respect to which the depositor, the insurer, the master servicer
or other servicer or the trustee is a party in interest if the Plan does not pay
more than fair market value for such Certificates and the rights and interests
evidenced by such Certificates are not subordinated to the rights and interests
evidenced by other Certificates of the same pool.
PTCE 83-1 also exempts from the prohibited transaction rules any
transactions in connection with the servicing and operation of the mortgage
pool, provided that any payments made to the master servicer in connection with
the servicing of the issuing entity 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 issuing entity 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"), Prohibited
Transaction Exemption 2000-58 ("PTE 2000-58") and Prohibited Transaction
Exemption 2002-41 ("PTE 2002-41") (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
141
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, guaranteed governmental mortgage pool certificates and previously issued
securities eligible under the Exemption 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 issuing entity 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 backed by fully-secured loans,
they may not be subordinated. Fourth, except as described below, the
Certificates at the time of acquisition by the Plan must generally be rated in
one of the 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" other than any underwriter as defined in the Exemption. The
"Restricted Group" consists of any (i) underwriter as defined in the Exemption,
(ii) the depositor, (iii) the master servicer, (iv) each servicer, (v) the
insurer, (vi) the counterparty of any "interest rate swap" (as described below)
held as an Asset of the issuing entity and (vii) any obligor with respect to
loans constituting more than 5% of the aggregate unamortized principal balance
of the loans held in the issuing entity 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 issuing
entity 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 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.
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 transactions are: (a) not subordinated to the rights
and interests evidenced by Securities of the same issuing entity; (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 issuing
entity is secured by collateral whose fair market
142
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 issuing entity and (ii) the outstanding principal
balance(s) of any other loan(s) of higher priority (whether or not held by the
issuing entity) which are secured by the same collateral.
TYPES OF ISSUING ENTITIES
The Exemption permits the issuer to be an owner-trust, a REMIC or a
grantor trust. 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.
COVERAGE FOR CERTIFICATES NOT EXEMPTION ELIGIBLE
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 agreement and a yield
supplement agreement to be Assets of an issuing entity which issues Certificates
acquired by Plans in an initial offering or in the secondary market. An
interest-rate swap (or if purchased by or on behalf of the issuing entity) an
interest-rate cap contract (collectively, a "Swap" or "Swap Agreement") is a
permitted issuing entity 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
issuing entity 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 issuing entity 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 issuing entity 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
143
the Rating Agencies rating the Certificates; provided that, if a counterparty is
relying on its short-term rating to establish eligibility hereunder, such
counterparty must either have a long-term rating in one of the three highest
long-term rating categories or not have a long-term rating from the applicable
Rating Agency.
A "qualified plan investor" is a Plan or Plans where the decision to
buy such class of Certificates is made on behalf of the Plan by an independent
fiduciary qualified to understand the Swap transaction and the effect the Swap
would have on the rating of the Certificates and such fiduciary is either (a) a
"qualified professional asset manager" ("QPAM") under Prohibited Transaction
Class Exemption 84-14 ("PTCE 84-14") (see below), (b) an "in-house asset
manager" under Prohibited Transaction Class Exemption 96-23 ("PTCE 96-23") (see
below) or (c) has total assets (both Plan and non-Plan) under management of at
least $100 million at the time the Certificates are acquired by the Plan.
In "ratings dependent Swaps" (where the rating of a class of
Certificates is dependent on the terms and conditions of the Swap), the Swap
Agreement must provide that if the credit rating of the counterparty is
withdrawn or reduced by any Rating Agency below a level specified by the Rating
Agency, the servicer must, within the period specified under the Pooling and
Servicing 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 issuing entity 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 issuing
entity) an interest rate cap contract to supplement the interest rates otherwise
payable on obligations held by the issuing entity ("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 issuing entity 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 issuing entity and an eligible counterparty and
(f) it has an Allowable Notional Amount.
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PRE-FUNDING ACCOUNTS
If Certificates issued in transactions using pre-funding accounts
whereby a portion of the loans backing the Certificates are transferred to the
issuing entity 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. Exemptive relief
is available provided that the following conditions are met. First, the ratio of
the amount allocated to the Pre-Funding Account to the total principal amount of
the Certificates being offered ("Pre-Funding Limit") must not exceed twenty-five
percent (25%). Second, all loans transferred after the closing date (referred to
here as "additional loans") must meet the same terms and conditions for
eligibility as the original loans used to create the issuing entity, which terms
and conditions have been approved by the Rating Agency. Third, the transfer of
such additional loans to the issuing entity 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
issuing entity. 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 issuing entity 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 issuing entity 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 issuing entity 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 issuing entities 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
145
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 issuing entity provided that: (i) the Plan is not an Excluded
Plan, (ii) each Plan's investment in each class of Certificates does not exceed
25% of the outstanding Certificates in the class, (iii) after the Plan's
acquisition of the Certificates, no more than 25% of the assets over which the
fiduciary has investment authority are invested in Certificates of a trust
containing assets which are sold or serviced by the same entity and (iv) in the
case of initial issuance (but not secondary market transactions), at least 50%
of each class of Certificates and at least 50% of the aggregate interests in the
issuing entity are acquired by persons independent of the Restricted Group.
ERISA CONSIDERATIONS RELATING TO NOTES
Under the Plan Asset Regulations, the Assets of the issuing entity
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 issuing entity 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 issuing
entity 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 issuing entity 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 issuing entities which are
grantor trusts, owner-trusts or REMICs 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 issuing entity'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 issuing
entity and its Assets would not be necessary with respect to Notes with no
substantial equity features which are issued as obligations of the issuing
entity. However, with respect to the acquisition, holding or transfer of Notes
between a Plan and a party in interest, 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
146
Investor-Based Exemptions are met, the scope of the relief provided under such
Exemptions might or might not cover all acts which might be construed as
prohibited transactions.
EACH PROSPECTUS SUPPLEMENT WILL CONTAIN INFORMATION CONCERNING
CONSIDERATIONS RELATING TO ERISA AND THE CODE THAT ARE APPLICABLE TO THE RELATED
SECURITIES. BEFORE PURCHASING SECURITIES IN RELIANCE ON PTCE 83-1, THE
EXEMPTION, THE INVESTOR-BASED EXEMPTIONS OR ANY OTHER EXEMPTION, A FIDUCIARY OF
A PLAN SHOULD ITSELF CONFIRM THAT REQUIREMENTS SET FORTH IN SUCH EXEMPTION WOULD
BE SATISFIED.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO
PURCHASE SECURITIES OF ANY SERIES OR CLASS IS ENCOURAGED TO 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, an issuing entity' 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
147
of their assets represented thereby, federal credit unions may invest in these
securities, and national banks may purchase these securities for their own
account without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. ss.24 (Seventh), subject in each case to
regulations that the applicable federal regulatory authority may prescribe. In
this connection, the Office of the Comptroller of the Currency (the "OCC") has
amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with general standards concerning "safety
and soundness" and retention of credit information in 12 C.F.R. ss.1.5), some
"Type IV securities," defined in 12 C.F.R. ss.1.2(l) to include some
"residential mortgage related securities." As so defined, "residential
mortgage-related security" means, in relevant part, "mortgage related security"
within the meaning of SMMEA. The National Credit Union Administration ("NCUA")
has adopted rules, codified at 12 C.F.R. Part 703, which permit federal credit
unions to invest in "mortgage related securities" under some limited
circumstances, other than stripped mortgage related securities, residual
interests in mortgage related securities, and commercial mortgage related
securities, unless the credit union has obtained written approval from the NCUA
to participate in the "investment pilot program" described in 12 C.F.R.
ss.703.140. Thrift institutions that are subject to the jurisdiction of the
Office of Thrift Supervision (the "OTS") should consider the OTS' Thrift
Bulletin 13a (December 1, 1998), "Management of Interest Rate Risk, Investment
Securities, and Derivatives Activities," before investing in any of the Offered
Notes or Offered Certificates, as applicable.
All depository institutions considering an investment in the
Certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" (the "1998 Policy Statement") of
the Federal Financial Institutions Examination Council ("FFIEC"), which has been
adopted by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the OCC and the OTS, effective May 26, 1998, and
by the NCUA, effective October 1, 1998. The 1998 Policy Statement sets forth
general guidelines which depository institutions must follow in managing risks
(including market, credit, liquidity, operational (transaction), and legal
risks) applicable to all securities (including mortgage pass-through securities
and mortgage-derivative products) used for investment purposes.
If specified in the prospectus supplement, other classes of Offered
Notes or Offered Certificates, as applicable, offered pursuant to this
prospectus will not constitute "mortgage related securities" under SMMEA. The
appropriate characterization of those classes under various legal investment
restrictions, and thus the ability of investors subject to these restrictions to
purchase these Offered Notes or Offered Certificates, as applicable, may be
subject to significant interpretive uncertainties.
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
148
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 are encouraged to consult with their own legal
advisors in determining whether and to what extent the Offered Notes or Offered
Certificates, as applicable, of any class constitute legal investments for them
or are subject to investment, capital or other restrictions, and, if applicable,
whether SMMEA has been overridden in any jurisdiction relevant to that investor.
METHODS OF DISTRIBUTION
The Notes or Certificates, as applicable, offered by this prospectus
and by the supplements to this prospectus will be offered in series. The
distribution of the Notes or Certificates, as applicable, may be effected from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices to be determined at the time
of sale or at the time of commitment therefor. If specified in the prospectus
supplement, the Notes or Certificates, as applicable, will be distributed in a
firm commitment underwriting, subject to the terms and conditions of the
underwriting agreement, by Deutsche Bank Securities 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.
As to any offering of securities, in additions to the method of
distribution as described in the prospectus supplement and this base prospectus,
the distribution of any class of the offered securities may be effected through
one or more resecuritization transactions, in accordance with Rule 190(b).
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.
149
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 are
encouraged to consult with their legal advisors in this regard before any
reoffer or sale of Notes or Certificates, as applicable.
As to each series of Notes or Certificates, as applicable, only those
classes rated in one of the four highest rating categories by any rating agency
will be offered by this prospectus. Any lower rated or unrated class may be
initially retained by the depositor, and may be sold by the depositor at any
time to one or more institutional investors.
ADDITIONAL INFORMATION
The Depositor has filed with the Commission a registration statement on
Form S-3 under the Securities Act of 1933, as amended, with respect to the Notes
or Certificates, as applicable (the "Registration Statement"). This prospectus,
which forms a part of the Registration Statement, omits some of the information
contained in the Registration Statement pursuant to the rules and regulations of
the Commission. The Registration Statement and the exhibits to the Registration
Statement can be inspected and copied at the public reference facilities
maintained by the Commission at 100 F Street NE, 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, 3 World Financial Center, Room 4300,
New York, New York 10281.
Copies of these materials can also be obtained from the Public Reference Section
of the Commission, 100 F Street NE, 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.
150
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.
As to each issuing entity that is no longer required to file reports
under the Exchange Act, periodic distribution reports will be posted on the
depositor's website referenced above as soon as practicable. Annual reports of
assessment of compliance with the AB Servicing Criteria, attestation reports,
and statements of compliance will be provided to registered holders of the
related securities upon request free of charge. See "Description of the
Agreements - Material Terms of the Pooling and Servicing Agreement and
Underlying Servicing Agreements -- Evidence as to Compliance" and "Description
of the Securities -- Reports to Securityholders."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by or on behalf of the issuing entity
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 issuing entity will be deemed to be incorporated by
reference in this prospectus and to be a part of this prospectus from the date
of the filing of those documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference in this prospectus will
be deemed to be modified or superseded for all purposes of this prospectus to
the extent that a statement contained in this prospectus (or in the prospectus
supplement) or in any other subsequently filed document that also is or is
deemed to be incorporated by reference modifies or replaces that statement. Any
statement so modified or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this prospectus. All documents subsequently
filed by the depositor pursuant to Sections 13(a) or 15(d) of the Exchange Act
in respect of any offering prior to the termination of the offering of the
offered securities shall also be deemed incorporated by reference into this
prospectus and the related prospectus supplement.
The Trustee on behalf of any issuing entity 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.
151
FINANCIAL INFORMATION
A new issuing entity will be formed for each series of Notes or
Certificates, as applicable, and no issuing entity 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 an issuing entity 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.
152
INDEX OF DEFINED TERMS
110% yield rule...................................112 Debt Securities...................................100
1986 Act..........................................105 Definitive Certificates............................34
1997 Act..........................................130 Definitive Notes...................................34
1998 Policy Statement.............................148 Definitive Securities..............................34
AB Servicing Criteria..............................66 Determination Date.................................34
Acceptable Investments............................145 Disqualified Organization.........................117
Accrual Period.....................................25 disqualified persons..............................140
ADA................................................95 Distribution Date..................................25
Agency Securities...................................4 DOL...............................................140
Agreement..........................................50 DOL Pre-Funding Period............................145
Allowable Interest Rate...........................143 DTC................................................43
Allowable Notional Amount.........................143 EDGAR.............................................150
ARM Loans...........................................8 Eligible Corporation..............................119
Asset Conservation Act.............................90 Environmental Policies.............................64
Asset Group........................................34 ERISA.............................................140
Asset Seller........................................4 Euroclear..........................................43
Assets..............................................4 Euroclear Operator.................................45
Bankruptcy Code....................................87 European Depositaries..............................45
Beneficial Owner...................................43 Exchange Act.......................................44
Book-Entry Certificates............................34 Exemption.........................................141
Book-Entry Notes...................................34 EYS Agreement.....................................144
Book-Entry Securities..............................34 Fair, Isaac.........................................7
Buydown Mortgage Loans.............................28 Fannie Mae..........................................4
Buydown Period.....................................28 FDIC...............................................54
Capitalized Interest Account.......................22 Federal Tax Counsel...............................101
Cash Flow Agreement................................23 FFIEC.............................................148
CERCLA.........................................14, 89 FHA.................................................7
Certificates.......................................32 Financial Intermediary.............................46
Charter Act........................................17 Freddie Mac.........................................4
CI.................................................44 Freddie Mac Act....................................18
Clearstream Luxembourg.............................43 Freddie Mac Certificate Group......................18
Clearstream, Luxembourg............................44 Garn-St. Germain Act...............................91
Clearstream, Luxembourg Participants...............44 Ginnie Mae..........................................4
Code..........................................42, 100 Grantor Trust Fund................................100
Collection Account.................................54 Grantor Trust Fund Stripped Bond..................128
Commercial Mortgage Loans..........................11 Grantor Trust Fund Stripped Coupon................128
Commercial Property.................................6 Grantor Trust Securities..........................100
Commission..........................................8 Grantor Trust Securityholders.....................124
contract borrower..................................81 HELOCs..............................................9
contract lender....................................81 Home Equity Loans...................................6
Cooperative........................................80 Housing Act........................................16
Cooperative Corporation............................45 HUD................................................63
Cooperative Loans..................................80 Increasing Payment Asset............................5
Cooperatives........................................6 Indirect Participants..............................43
Covered Trust......................................75 Insurance Proceeds.................................35
CPR................................................27 Interest Rate......................................36
Crime Control Act..................................94 Investor-Based Exemptions.........................146
CSSF...............................................44 land sale contract.................................81
Cut-off Date........................................7 Land Sale Contracts.................................6
DBC................................................44 lease..............................................95
DBS...............................................149 lessee.............................................95
153
Leveraged.........................................143 Purchase Price.....................................51
Liquidation Proceeds...............................35 QPAM..............................................144
loans.............................................142 Rating Agency.....................................142
Loan-to-Value Ratio.................................7 RCRA...............................................89
Lock-out Date.......................................9 Record Date........................................34
Lock-out Period.....................................9 Refinance Loans.....................................7
Mixed Use Mortgage Loans...........................11 Registration Statement............................150
Mixed-Use Property..................................6 Regular Securities................................101
Mortgage Securities.................................4 Regular Securityholder............................104
Mortgaged Properties................................6 Related Proceeds...................................39
Mortgages...........................................6 Relevant Depositary................................45
Multifamily Mortgage Loans.........................11 Relief Act.........................................93
Multifamily Property................................6 REMIC.........................................49, 100
NCUA..............................................148 REMIC Provisions..................................100
New CI.............................................44 REMIC qualified floating rate.....................105
noneconomic residual interest.....................118 REMIC Regulations.................................101
Nonrecoverable Advance.............................39 REMIC Securities..............................49, 100
Notes..............................................32 REO Property.......................................40
OCC...............................................148 Residual Holders..................................113
Offered Certificates...............................34 Residual Securities...............................101
Offered Notes......................................34 RICO...............................................94
Offered Securities.................................34 Rules..............................................46
Offering Documents................................145 Securities.........................................32
OID Regulations...................................101 Servicemen's Readjustment Act......................21
OTS...........................................91, 148 Servicing Standard.................................58
Parity Act.........................................91 Shortfall Amount..................................129
Participants.......................................43 Similar Law.......................................147
parties in interest...............................140 Single Family Property..............................6
Partnership Certificate Owners....................133 SMMEA.............................................147
Partnership Certificates..........................100 SPA................................................27
Pass-Through Entity...............................117 Special Servicer...................................67
PCBs...............................................88 Stripped Agency Securities.........................19
Permitted Investments..............................54 Subsequent Assets..................................21
Plan..............................................140 Superliens.........................................89
Plan Asset Regulations............................140 Swap..............................................143
Pre-Funded Amount..................................21 Swap Agreement....................................143
Pre-Funding Account................................21 Taxable Mortgage Pools............................101
Pre-Funding Limit.................................145 Terms and Conditions...............................45
Pre-Funding Period.................................21 Tiered REMICs.....................................104
Prepayment Assumption.............................106 Title V............................................92
Prepayment Premium..................................9 Title VIII.........................................93
PTCE 83-1.........................................140 U.S. Person.......................................119
PTCE 84-14........................................144 UCC................................................43
PTCE 95-60........................................143 UST................................................89
PTCE 96-23........................................144 VA..................................................7
PTE 2000-58.......................................141 VA Guaranty Policy.................................64
PTE 2002-41.......................................141 Value...............................................7
PTE 97-34.........................................141 Warranting Party...................................52
154
$809,240,000 (APPROXIMATE)
ACE SECURITIES CORP.
DEPOSITOR
ACE SECURITIES CORP. HOME EQUITY LOAN TRUST,
SERIES 2006-CW1
ISSUING ENTITY
ACE SECURITIES CORP. HOME EQUITY LOAN
TRUST, SERIES 2006-CW1
ASSET BACKED PASS-THROUGH CERTIFICATES
PROSPECTUS SUPPLEMENT
DATED JULY 19, 2006
COUNTRYWIDE HOME LOANS SERVICING LP
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.
JULY 19, 2006