Filed Pursuant to Rule 424(b)(5)
Registration No. 333-131727-12
Prospectus Supplement dated August 23, 2006 (to Prospectus dated April 18, 2006)
$331,500,000 (APPROXIMATE)
ACE SECURITIES CORP. HOME EQUITY LOAN TRUST, SERIES 2006-SL4
ASSET BACKED PASS-THROUGH CERTIFICATES
ACE SECURITIES CORP. HOME EQUITY LOAN TRUST, SERIES 2006-SL4
Issuing Entity
DB STRUCTURED PRODUCTS, INC.
Sponsor
ACE SECURITIES CORP.
Depositor
GMAC MORTGAGE CORPORATION
Servicer
WELLS FARGO BANK, NATIONAL ASSOCIATION
Master Servicer
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YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-11 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 September 2006.
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OFFERED CERTIFICATES The trust created for the Series 2006-SL4
certificates will hold a pool of second lien,
fixed-rate, one- to four-family, residential mortgage
loans. The trust will issue thirteen classes of
Offered Certificates. You can find a list of these
classes, together with their initial certificate
principal balances and pass-through rates, in the
table below. Credit enhancement for all of the
Offered Certificates will be provided in the form of
excess interest, overcollateralization and
subordination. In addition, the Offered Certificates
may benefit from net swap payments made pursuant to
an interest rate swap agreement.
INITIAL CERTIFICATE SCHEDULED FINAL
CLASS PRINCIPAL BALANCE(1) PASS-THROUGH RATE MATURITY DATE
- ------------------- -------------------------- ------------------------------------ -------------------------
A-1............. $ 202,685,000 One-Month LIBOR + 0.12% (2)(3) September 25, 2036
A-2............. $ 48,890,000 One-Month LIBOR + 0.20% (2)(3) September 25, 2036
A-3............. $ 12,038,000 6.14% (2)(3) September 25, 2036
M-1............. $ 13,785,000 6.19% (2)(3) September 25, 2036
M-2............. $ 13,440,000 6.23% (2)(3) September 25, 2036
M-3............. $ 4,825,000 6.27% (2)(3) September 25, 2036
M-4............. $ 7,926,000 One-Month LIBOR + 0.52% (2)(3) September 25, 2036
M-5............. $ 5,514,000 One-Month LIBOR + 0.57% (2)(3) September 25, 2036
M-6............. $ 4,825,000 6.50% (2)(3) September 25, 2036
M-7............. $ 3,790,000 One-Month LIBOR + 1.10% (2)(3) September 25, 2036
M-8............. $ 2,411,000 One-Month LIBOR + 1.25% (2)(3) September 25, 2036
M-9............. $ 6,030,000 One-Month LIBOR + 2.50% (2)(3) September 25, 2036
M-10............ $ 5,341,000 One-Month LIBOR + 2.50% (2)(3) September 25, 2036
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(1) Approximate.
(2) The pass-through rate for each class of Offered Certificates will be
subject to the applicable Net WAC Pass-Through Rate as described in this
prospectus supplement under "Description of the
Certificates-Pass-Through Rates."
(3) After the optional termination date, the margin applicable to the Class
A-1 Certificates and Class A-2 Certificates will increase by 100%, the
fixed rate applicable to the Class A-3, Class M-1, Class M-2, Class M-3
and Class M-6 Certificates will increase by 0.50% and the margins
applicable to the Class M-4, Class M-5, Class M-7, Class M-8, Class M-9
and Class M-10 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 99.68% of their initial Certificate Principal
Balance, plus accrued interest, if any, 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-11
USE OF PROCEEDS.............................................................S-20
THE MORTGAGE POOL...........................................................S-20
UNDERWRITING STANDARDS......................................................S-30
YIELD ON THE CERTIFICATES...................................................S-34
DESCRIPTION OF THE CERTIFICATES.............................................S-55
THE ORIGINATORS.............................................................S-91
STATIC POOL INFORMATION.....................................................S-91
ISSUING ENTITY..............................................................S-92
THE DEPOSITOR...............................................................S-92
THE SPONSOR.................................................................S-92
SERVICING OF THE MORTGAGE LOANS.............................................S-93
THE SECURITIES ADMINISTRATOR, THE MASTER SERVICER AND THE CUSTODIANS.......S-101
THE TRUSTEE................................................................S-104
THE CREDIT RISK MANAGER....................................................S-106
POOLING AND SERVICING AGREEMENT............................................S-106
FEDERAL INCOME TAX CONSEQUENCES............................................S-111
METHOD OF DISTRIBUTION.....................................................S-115
SECONDARY MARKET...........................................................S-115
LEGAL MATTERS..............................................................S-116
RATINGS....................................................................S-116
LEGAL PROCEEDINGS..........................................................S-117
AFFILIATIONS, RELATIONSHIPS AND RELATED TRANSACTIONS.......................S-117
LEGAL INVESTMENT...........................................................S-117
CONSIDERATIONS FOR BENEFIT PLAN INVESTORS..................................S-119
AVAILABLE INFORMATION......................................................S-121
REPORTS TO CERTIFICATEHOLDERS..............................................S-122
INCORPORATION OF INFORMATION BY REFERENCE..................................S-122
ANNEX I......................................................................I-1
ii
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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.
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iii
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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-SL4.
Title of Series................ ACE Securities Corp. Home Equity Loan Trust,
Series 2006-SL4 Asset Backed Pass-Through
Certificates.
Cut-off Date................... August 1, 2006.
Closing Date................... On or about August 29, 2006.
Depositor...................... ACE Securities Corp., a Delaware
corporation. SEE "THE DEPOSITOR" in this
prospectus supplement.
Originators.................... American Home Mortgage Corp., a New York
corporation, with respect to approximately
70.91% of the mortgage loans and People's
Choice Home Loan, Inc., a Wyoming
corporation with respect to approximately
10.85% of the mortgage loans, in each case
by aggregate principal balance as of the
Cut-off Date. The remainder of the mortgage
loans were originated by various
originators, none of which have originated
more than approximately 7.25% of the
mortgage loans. SEE "THE ORIGINATORS" 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 CUSTODIANS" in this
prospectus supplement.
Servicer....................... GMAC Mortgage Corporation, a Pennsylvania
corporation. 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 will
be the securities administrator. SEE "THE
SECURITIES ADMINISTRATOR, THE MASTER
SERVICER AND THE CUSTODIANS" in this
prospectus supplement.
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S-1
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Custodians..................... Wells Fargo Bank, National Association and
Deutsche Bank National Trust Company. SEE
"THE SECURITIES ADMINISTRATOR, THE MASTER
SERVICER AND THE CUSTODIANS" in this
prospectus supplement.
Swap Provider.................. Deutsche Bank AG New York Branch. See "The
Interest Rate Swap Agreement and the Swap
Provider" 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 September 2006. The assumed final
Distribution Date for the Offered
Certificates is the Distribution Date in
September 2036.
Credit Risk Manager............ Clayton Fixed Income Services Inc. (formerly
known as The Murrayhill Company). SEE "THE
CREDIT RISK MANAGER" in this prospectus
supplement.
Offered Certificates........... Only the certificates listed on the cover of
this prospectus supplement are being offered
by this prospectus supplement. Each class of
Offered Certificates will have the initial
certificate principal balance and pass
through rate set forth or described in the
table appearing on the cover of this
prospectus supplement.
THE TRUST
The Depositor will establish a trust with respect to the certificates under the
pooling and servicing agreement dated as of the Cut-off Date among the
Depositor, the Servicer, the Master Servicer, the Securities Administrator and
the Trustee. There are seventeen classes of certificates representing the trust.
SEE "DESCRIPTION OF THE CERTIFICATES" in this prospectus supplement.
The certificates represent in the aggregate the entire beneficial ownership
interest in the trust. In general, distributions of interest and principal, if
applicable, on the Offered Certificates will be made only from payments received
or advanced in respect of the mortgage loans and payments made by the swap
provider under the interest rate swap agreement.
THE MORTGAGE LOANS
The trust will contain 5,661 conventional, one- to four-family, second lien,
fixed-rate mortgage loans on residential real properties (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 Mortgage Loans have an aggregate principal balance of approximately
$344,592,203 as of the Cut-off Date and have the following characteristics as of
the Cut-off Date:
Range of mortgage rates: 5.750% to 18.125%.
Weighted average mortgage rate: 10.817%.
Weighted average remaining term
to stated maturity: 209 months.
Range of principal balances: $5,331 to $499,276.
Average principal balance: $60,871.
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S-2
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Range of original combined
loan-to-value ratios: 21.00% to 100.00%.
Weighted average original combined
loan-to value ratio: 95.60%.
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-1, Class A-2 and Class A-3 Certificates
(collectively, 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, Class M-9 and Class
M-10 Certificates (collectively, the "Mezzanine Certificates") are the only
classes of certificates offered by this prospectus supplement. The Class A
Certificates and Mezzanine Certificates 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 rates on the Class A-1, Class A-2, Class M-4, Class M-5, Class
M-7, Class M-8, Class M-9 and Class M-10 Certificates (collectively, the
"Floating Rate Certificates") are 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 Floating Rate Certificates is a rate per annum based on one-month LIBOR
plus an applicable spread, subject to a rate cap calculated based on the
weighted average mortgage rate of the Mortgage Loans, less the fee rates payable
to the Servicer, the Master 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 and
(ii) 12, divided by (y) the aggregate principal balance of the Mortgage Loans as
of the due date in the month preceding the month in which the Distribution Date
occurs (or as of the Cut-off Date with respect to the first Distribution Date),
after giving effect to principal prepayments received during the related
prepayment period, and adjusted for the actual number of days which have elapsed
in the related interest accrual period. The initial spread relating to the Class
A-1 Certificates is 0.12% per annum. The initial spread relating to the Class
A-2 Certificates is 0.20% per annum. The initial spread relating to the Class
M-4 Certificates is 0.52% per annum. The initial spread relating to the Class
M-5 Certificates is 0.57% per annum. The initial spread relating to the Class
M-7 Certificates is 1.10% per annum. The initial spread relating to the Class
M-8 Certificates is 1.25% per annum. The initial spread relating to the Class
M-9 Certificates is 2.50% per annum. The initial spread relating to the Class
M-10 Certificates is 2.50% per annum. The pass-through rates on the Class A-3,
Class M-1, Class M-2, Class M-3 and Class M-6 Certificates (collectively, the
"Fixed Rate Certificates") are fixed and will be calculated for each
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S-3
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Distribution Date as described below and under "Description of the Certificates-
Pass-Through Rates" in this prospectus supplement, and are subject to a rate cap
calculated based on the weighted average mortgage rate of the Mortgage Loans,
less 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 and (ii) 12, divided by (y) the aggregate principal balance of the
Mortgage Loans as of the due date in the month preceding the month in which the
Distribution Date occurs (or as of the Cut-off Date with respect to the first
Distribution Date), after giving effect to principal prepayments received during
the related prepayment period. The interest rates applicable to the Offered
Certificates are 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 CE-1 CERTIFICATES AND CLASS CE-2 CERTIFICATES. The Class CE-1 Certificates
and Class CE-2 Certificates are not offered by this prospectus supplement. The
Class CE-1 Certificates will have an initial certificate principal balance of
approximately $13,092,103, which represents approximately 3.80% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date. The Class CE-2
Certificates will not have a certificate principal balance but will be entitled
to amounts described under "SERVICING OF THE MORTGAGE LOANS--SERVICING AND OTHER
COMPENSATION AND PAYMENT OF EXPENSES" in this prospectus supplement.
CLASS P CERTIFICATES. The Class P Certificates are not offered by this
prospectus supplement. The Class P Certificates will have an initial certificate
principal balance of $100 and will not be entitled to distributions in respect
of interest. The Class P Certificates will be entitled to all prepayment charges
received in respect of the Mortgage Loans.
RESIDUAL CERTIFICATES. The Class R Certificates or Residual Certificates, which
are not offered by this prospectus supplement, represent the residual interests
in the trust.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the Offered
Certificates consists of excess interest, overcollateralization and
subordination, each as described in this section and under "Description of the
Certificates-Credit Enhancement" and "-Overcollateralization Provisions" in this
prospectus supplement.
EXCESS INTEREST. The Mortgage Loans bear interest each month in an amount that
in the aggregate is expected to exceed the amount needed to distribute monthly
interest on the Offered Certificates and to pay certain fees and expenses of the
trust 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 Class
CE-1 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.
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S-4
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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 and Class CE-1
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 and Class CE-1 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 and Class CE-1 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 and Class CE-1 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 and Class CE-1 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 and Class CE-1 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 and
Class CE-1 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 and Class CE-1
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 Certificates and Class CE-1
Certificates will be subordinated to the rights of the holders of the Class M-9
Certificates; and
o the rights of the holders of the Class CE-1 Certificates will be
subordinated to the rights of the holders of the Class M-10 Certificates.
Subordination is intended to enhance the likelihood of regular distributions on
the more senior certificates in respect of interest and principal and to afford
the more senior certificates protection against realized losses on the Mortgage
Loans, as described under "DESCRIPTION OF THE CERTIFICATES--ALLOCATION OF
LOSSES; SUBORDINATION" in this prospectus supplement.
OVERCOLLATERALIZATION. The aggregate principal balance of the Mortgage Loans as
of the Cut-off Date is expected to exceed the aggregate certificate principal
balance of the Class A Certificates, the Mezzanine Certificates and the Class P
Certificates on the Closing Date by approximately $13,092,103, which represents
approximately 3.80% of the aggregate principal balance of the Mortgage Loans as
of the Cut-off Date and is the initial amount of overcollateralization required
by the pooling and servicing agreement. SEE "DESCRIPTION OF THE
CERTIFICATES--OVERCOLLATERALIZATION PROVISIONS" in this prospectus supplement.
INTEREST RATE SWAP AGREEMENT.
The Offered 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 September 2006 and terminating immediately
following the Distribution Date in December 2011, 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
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S-5
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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
Offered 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 Swap Payment
exceeds the corresponding Swap Provider Payment, or (b) by the Swap Provider to
the Securities Administrator, to the extent Swap Provider Payment exceeds the
corresponding Securities Administrator Swap 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 Offered Certificates in respect of any interest and
principal shortfall amounts and any realized losses allocated to the Offered
Certificates as described in this prospectus supplement. If, on any Distribution
Date, the Net Swap Payment with respect to the Offered Certificates exceeds the
amount of the interest and principal shortfall amounts and any realized losses
allocated to the Offered Certificates for such Distribution Date, after making
the distributions set forth under "The Certificates--The Interest Rate Swap
Agreement and the Swap Provider" in this prospectus supplement, any remaining
amounts will be distributed to the Class CE-1 Certificates. See "Description of
the Certificates--The Interest Rate Swap Agreement and the Swap Provider" 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
to the Swap Provider (to the extent not 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 supplemental interest trust trustee),
such amount generally will be paid by the Securities Administrator on the
related Distribution Date and on any subsequent Distribution Dates until paid in
full, prior to any distribution of interest and principal to the
certificateholders. In the case of Swap Termination Payments resulting from an
event of default or certain termination events with respect to the Swap Provider
as described in this prospectus supplement, however, the Security
Administrator's payment to the Swap Provider will be subordinated to all
distributions to the certificateholders.
Except as described in the preceding sentence, amounts payable by the Securities
Administrator will be deducted from available funds before distributions to
certificateholders.
ALLOCATION OF LOSSES. If, on any Distribution Date, there is not sufficient
excess interest, overcollateralization (represented by the Class CE-1
Certificates) or Net Swap Payments (in this case, to the extent not necessary to
cover interest shortfalls allocated to the Offered Certificates) to absorb
realized losses on the Mortgage Loans as described under "Description of the
Certificates--Overcollateralization Provisions" in this prospectus supplement,
then realized losses on the Mortgage Loans will be allocated to the Class M-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, sequentially 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
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S-6
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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 and interest
will not accrue on such reduction. However, the amount of any realized losses
allocated to the Mezzanine Certificates may be distributed to the holders of
those certificates according to the priorities set forth under "DESCRIPTION OF
THE CERTIFICATES--OVERCOLLATERALIZATION PROVISIONS" in this prospectus
supplement.
RETENTION OF CERTAIN SERVICING RIGHTS
The Sponsor, as owner of the Mortgage Loans to be sold to the trust fund, will
retain certain rights relating to the servicing of the Mortgage Loans, including
the right to sell the servicing rights with respect to the Mortgage Loans at any
time to a successor servicer as further specified in the pooling and servicing
agreement. See "SERVICING OF THE MORTGAGE LOANS--SERVICING AND OTHER
COMPENSATION AND PAYMENT OF EXPENSES" 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
"Servicing of the Mortgage Loans--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 the
pooling and servicing agreement. The Servicer or any successor servicer, as the
case may be, is entitled to be reimbursed for these advances, and therefore
these advances are not a form of credit enhancement. SEE "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; provided, however, that for so long as GMAC
Mortgage Corporation is the servicer of the Mortgage Loans, a portion of the
servicing fee representing the excess of (i) one-twelfth of the product of (a)
0.50% and (b) the outstanding principal balance of such Mortgage Loan over (ii)
the amount paid to the Servicer will be paid to the holder of the Class CE-2
Certificate as described under "DESCRIPTION OF THE CERTIFICATES--TABLE OF FEES
AND EXPENSES" in this prospectus supplement. 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 the pooling and servicing agreement.
MASTER SERVICING FEE
With respect to each Mortgage Loan, the amount of the annual master servicing
fee that shall be paid to the Master Servicer is, for a period of one full
month, equal to one-twelfth of the product of (a) 0.0160% 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 master servicing fee is limited to, and the master
servicing fee is payable from the interest portion of such monthly payments
collected. The Master Servicer will pay the trustee fee from its fee.
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CREDIT RISK MANAGER'S FEE
With respect to each Mortgage Loan, the amount of the annual credit risk
manager's fee that shall be paid to the credit risk manager is a fee, for a
period of one full month, equal to one-twelfth of the product of (a) 0.0150% and
(b) the outstanding principal balance of such Mortgage Loan. Such fee will be
payable monthly, computed on the basis of the same principal amount and period
with respect to which any related interest payment on such Mortgage Loan is
computed. The obligation to pay the credit risk manager's fee will be limited
to, and the credit risk manager's fee will be payable from the interest portion
of such monthly payments collected.
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 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. Subject to certain additional conditions set forth in the
pooling and servicing agreement, in the event that the Master Servicer fails to
exercise its optional termination right, the Servicer may, at its option,
exercise such optional termination right. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" in this prospectus supplement AND "DESCRIPTION OF THE
SECURITIES--TERMINATION" IN THE PROSPECTUS.
FEDERAL INCOME TAX CONSEQUENCES
Multiple elections will be made to treat designated portions of the trust
(exclusive of the reserve fund, the Interest Rate Swap Agreement, 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, 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-2 AAA Aaa
Class A-3 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 A- Baa1
Class M-8 BBB+ Baa2
Class M-9 BBB Baa3
Class M-10 BBB- Ba1
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 ("SMMEA"). SEE
"LEGAL
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S-8
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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. Investors are encouraged consult with their
counsel with respect to the consequences under ERISA and the Code of a Plan's
acquisition and ownership of such certificates. SEE "CONSIDERATIONS FOR BENEFIT
PLAN INVESTORS" in this prospectus supplement AND "ERISA CONSIDERATIONS" IN THE
PROSPECTUS.
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S-9
TRANSACTION STRUCTURE
[GRAPHIC OMITTED]
S-10
RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CONSIDER CAREFULLY,
IDENTIFIES SIGNIFICANT RISKS ASSOCIATED WITH AN INVESTMENT IN THE CERTIFICATES.
THE MORTGAGE LOANS WERE UNDERWRITTEN TO STANDARDS WHICH DO NOT CONFORM TO THE
STANDARDS OF FANNIE MAE OR FREDDIE MAC.
The underwriting standards of the Originators are intended to assess
the ability and willingness of the mortgagor to repay the debt and to evaluate
the adequacy of the property as collateral for the mortgage loan. The
Originators consider, among other things, a mortgagor's credit history,
repayment ability and debt service-to-income ratio, as well as the value, type
and use of the mortgaged property. As further described in this prospectus
supplement, the underwriting standards of the Originators do not conform to
Fannie Mae and Freddie Mac guidelines.
In addition, mortgage loans originated by the Originators generally
bear higher rates of interest than mortgage loans originated in accordance with
Fannie Mae and Freddie Mac guidelines and may experience rates of delinquency,
foreclosure and bankruptcy that are higher, and that may be substantially
higher, than those experienced by mortgage loans underwritten in accordance with
Fannie Mae and Freddie Mac guidelines.
Furthermore, changes in the values of mortgaged properties may have a
greater effect on the delinquency, foreclosure, bankruptcy and loss experience
of the Mortgage Loans than on mortgage loans originated in accordance with
Fannie Mae and Freddie Mac guidelines. No assurance can be given that the values
of the related mortgaged properties have remained or will remain at the levels
in effect on the dates of origination of the related Mortgage Loans. SEE
"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 95.27% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, had a combined loan-to-value ratio at
origination in excess of 80%.
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-11
DEVELOPMENTS IN SPECIFIED STATES COULD HAVE A DISPROPORTIONATE EFFECT ON THE
MORTGAGE LOANS DUE TO THE GEOGRAPHIC CONCENTRATION OF THE MORTGAGED PROPERTIES.
Approximately 19.75%, 12.47%, 6.15%, 6.00% and 5.45% of the Mortgage
Loans by aggregate principal balance as of the Cut-off Date, are secured by
mortgaged properties located in the State of California, Florida, Arizona,
Illinois and Virginia, respectively. Approximately 0.34% of the aggregate
principal balance of the Mortgage Loans as of the Cut-off Date, are located in a
single Arizona zip code, which is the largest concentration of Mortgage Loans in
a single zip code. If the residential real estate market in those states 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 LOAN RISK.
All of the Mortgage Loans 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
the 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 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 the 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 80.03% of the Mortgage Loans, by
aggregate principal balance as of the Cut-off Date, are balloon loans.
INTEREST ONLY MORTGAGE LOAN RISK.
Approximately 3.99% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, require the borrowers to make monthly payments
only of accrued interest for the first five or ten years following origination.
After such interest-only period, the borrower's monthly payment will be
recalculated to cover both interest and principal so that the Mortgage Loan will
amortize fully prior to its final payment date. If the monthly payment
increases, the related borrower may not be able to pay the increased amount and
may default or may refinance the related Mortgage Loan to avoid the higher
payment. Because no principal payments may be made or advanced on such Mortgage
Loans for five or ten years following origination, the certificateholders will
receive smaller principal distributions during such period than they would have
received if the related borrowers were required to make monthly payments of
interest and principal for the entire lives of such Mortgage Loans. This slower
rate of principal distributions may reduce the return on an investment in the
Offered Certificates that are purchased at a discount.
S-12
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 and Class M-10 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 remaining
after application thereof to cover interest shortfalls allocated to the Offered
Certificates, will reduce the certificate principal balances of the Mezzanine
Certificates on a sequential basis, 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 Interest Rate Swap Agreement and the Swap
Provider" in this prospectus supplement.
THE MEZZANINE CERTIFICATES GENERALLY WILL NOT BE ENTITLED TO RECEIVE PRINCIPAL
PAYMENTS UNTIL SEPTEMBER 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 September 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 Offered
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 Offered 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 Sponsor, the Servicer, the Master Servicer, the
Securities Administrator, the Originators, the Trustee or any of their
respective affiliates. Neither the Offered Certificates nor the underlying
Mortgage Loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the Depositor, the Sponsor, 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
S-13
trust will be the sole source of payments on the Offered Certificates, and there
will be no recourse to the Depositor, the Sponsor, 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 Certificates.
THE RATE AND TIMING OF PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES AND
THE MEZZANINE CERTIFICATES WILL BE AFFECTED BY PREPAYMENT SPEEDS AND BY THE
PRIORITY OF PAYMENT ON SUCH CERTIFICATES.
The rate and timing of distributions allocable to principal on the
Class A Certificates and the Mezzanine Certificates will depend, in general, on
the rate and timing of principal payments (including prepayments and collections
upon defaults, liquidations and repurchases) on the Mortgage Loans and the
allocation thereof to pay principal on such certificates as described in
"Description of the Certificates--Principal Distributions on the Offered
Certificates" in this prospectus supplement. As is the case with mortgage backed
pass-through certificates generally, the Offered Certificates are subject to
substantial inherent cash-flow uncertainties because the Mortgage Loans may be
prepaid at any time. However, with respect to approximately 12.66% of the
Mortgage Loans, by aggregate principal balance of the Mortgage Loans as of the
Cut-off Date, a prepayment may subject the related mortgagor to a prepayment
charge. A prepayment charge may or may not act as a deterrent to prepayment of
the related Mortgage Loan. SEE "THE MORTGAGE POOL" in this prospectus
supplement.
Generally, when prevailing interest rates are increasing, prepayment
rates on mortgage loans tend to decrease; a decrease in the prepayment rates on
the Mortgage Loans will result in a reduced rate of return of principal to
investors in the Class A Certificates and the Mezzanine Certificates at a time
when reinvestment at such higher prevailing rates would be desirable.
Conversely, when prevailing interest rates are declining, prepayment rates on
mortgage loans tend to increase; an increase in the prepayment rates on the
Mortgage Loans will result in a greater rate of return of principal to investors
in the Class A Certificates and Mezzanine Certificates at a time when
reinvestment at comparable yields may not be possible.
Distributions of principal will be made to the holders of the Mezzanine
Certificates according to the priorities described in this prospectus
supplement. The timing of commencement of principal distributions and the
weighted average life of each such class of certificates will be affected by the
rates of prepayment on the Mortgage Loans experienced both before and after the
commencement of principal distributions on such classes. For further information
regarding the effect of principal prepayments on the weighted average lives of
the Offered Certificates, SEE "YIELD ON THE CERTIFICATES" in this prospectus
supplement, including the tables entitled "PERCENT OF INITIAL CERTIFICATE
PRINCIPAL BALANCE OUTSTANDING AT THE SPECIFIED PERCENTAGES OF CPR."
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;
S-14
o the rate, timing and severity of realized losses on the
Mortgage Loans, the amount of excess interest generated by the
Mortgage Loans and the allocation to the Offered Certificates
of certain interest shortfalls; and
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 35% CPR as described in this prospectus supplement under "Yield on
the Certificates" and weighted average lives corresponding thereto. No
representation is made that the Mortgage Loans will prepay at such rate or at
any other rate. The yield assumptions for the Offered Certificates will vary as
determined at the time of sale.
THE YIELD TO MATURITY ON THE MEZZANINE CERTIFICATES WILL BE PARTICULARLY
SENSITIVE TO THE RATE OF PREPAYMENTS ON THE MORTGAGE LOANS.
The multiple class structure of the Mezzanine Certificates causes the
yield of these classes to be particularly sensitive to changes in the rates of
prepayment of the Mortgage Loans. Because distributions of principal will be
made to the holders of such certificates according to the priorities described
in this prospectus supplement, the yield to maturity on such classes of
certificates will be sensitive to the rates of prepayment on the Mortgage Loans
experienced both before and after the commencement of principal distributions on
such classes. The yield to maturity on such classes of certificates will also be
extremely sensitive to losses due to defaults on the Mortgage Loans (and the
timing thereof), to the extent these losses are not covered by excess cashflow
otherwise payable to the Class CE-1 Certificates, Net Swap Payments received
under the Interest Rate Swap Agreement (to the extent not necessary to cover
interest shortfalls allocated to the Offered Certificates) or to a class of
Mezzanine Certificates with a lower payment priority. Furthermore, as described
in this prospectus supplement, the timing of receipt of principal and interest
by the Mezzanine Certificates may be adversely affected by losses even if these
classes of certificates do not ultimately bear such loss.
VIOLATION OF CONSUMER PROTECTION LAWS MAY RESULT IN LOSSES ON THE MORTGAGE LOANS
AND YOUR CERTIFICATES.
Applicable state laws generally regulate interest rates and other
charges, require certain disclosure, and require licensing of the Originators.
In addition, other state laws, public policy and general principles of equity
relating to the protection of consumers, unfair and deceptive practices and debt
collection practices may apply to the origination, servicing and collection of
the Mortgage Loans.
The Mortgage Loans are also subject to federal laws, including:
o the Federal Truth-in-Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the
mortgagors regarding the terms of the Mortgage Loans;
S-15
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
Originators to comply with certain requirements of the Federal Truth-in-Lending
Act, as implemented by Regulation Z, could subject the trust to monetary
penalties, and result in the mortgagors' rescinding the Mortgage Loans against
the trust. In addition to federal law, some states have enacted, or may enact,
laws or regulations that prohibit inclusion of some provisions in Mortgage Loans
that have interest rates or origination costs in excess of prescribed levels,
and require that mortgagors be given certain disclosures prior to the
consummation of the Mortgage Loans and restrict the Servicer's ability to
foreclose in response to mortgagor defaults. The failure of the Originators to
comply with these laws could subject the trust to significant monetary
penalties, could result in the mortgagors rescinding the Mortgage Loans against
the trust and/or limit the Servicer's ability to foreclose upon the related
mortgaged properties in the event of mortgagor defaults.
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.
S-16
In addition, if the Servicer or the Master Servicer becomes bankrupt, a
bankruptcy trustee or receiver may have the power to prevent the appointment of
a successor servicer or a successor master servicer, as applicable. Any related
delays in servicing could result in increased delinquencies or losses on the
Mortgage Loans.
THE TRANSFER OF SERVICING MAY RESULT IN HIGHER DELINQUENCIES AND DEFAULTS WHICH
MAY ADVERSELY AFFECT THE YIELD ON YOUR CERTIFICATES.
The Sponsor owns the servicing rights with respect to the Mortgage
Loans and may elect to transfer the servicing from the Servicer to a successor
servicer as further described under "SERVICING OF THE MORTGAGE LOANS--SERVICING
AND OTHER COMPENSATION AND PAYMENT OF EXPENSES" in this prospectus supplement.
All transfers of servicing involve the risk of disruption in collections due to
data input errors, misapplied or misdirected payments, system incompatibilities
and other reasons. As a result, the rate of delinquencies and defaults is likely
to increase at least for a period of time. There can be no assurance as to the
extent or duration of any disruptions associated with the transfer of servicing
or as to the resulting effects on the yield on your certificates.
INTEREST GENERATED BY THE MORTGAGE LOANS MAY BE INSUFFICIENT TO MAINTAIN OR
RESTORE OVERCOLLATERALIZATION.
The Mortgage Loans are expected to generate more interest than is
needed to pay interest owed on the Offered Certificates and to pay certain fees
and expenses of the trust 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, charged off or
written off, excess interest may be reduced because such
Mortgage Loan will no longer be outstanding and generating
interest.
o If the rates of delinquencies, defaults or losses on the
Mortgage Loans are higher than expected, excess interest will
be reduced by the amount necessary to compensate for any
shortfalls in cash available to make required distributions on
the Offered Certificates.
o Since the Mortgage Loans have mortgage rates that do not
adjust, when the pass-through rates on the Floating Rate
Certificates increase, a greater portion of the interest
generated by the Mortgage Loans will be required to cover
interest on the Floating Rate Certificates.
S-17
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, but only up to the
servicing fee payable to the Servicer for the related interest accrual 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 master servicing fee
payable to the Master Servicer for the related interest accrual period. If the
credit enhancement is insufficient to cover this shortfall in excess of the
amount the Servicer covers, you may incur a loss. In addition, the Servicer will
not be required to cover shortfalls in interest collections due to bankruptcy
proceedings or the application of the Servicemembers Civil Relief Act (the
"Relief Act") or similar state or local laws.
On any Distribution Date, any shortfalls resulting from the application
of the Relief Act or similar state or local laws and any prepayment interest
shortfalls to the extent not covered by compensating interest paid by the
Servicer or the Master Servicer will be allocated, first, to the Class CE-1
Certificates, second, to the Class M-10 Certificates, third, to the Class M-9
Certificates, fourth, to the Class M-8 Certificates, fifth, to the Class M-7
Certificates, sixth, to the Class M-6 Certificates, seventh, to the Class M-5
Certificates, eighth, to the Class M-4 Certificates, ninth, to the Class M-3
Certificates, tenth, to the Class M-2 Certificates, eleventh, to the Class M-1
Certificates and twelfth, to the Class A Certificates on a pro rata basis based
on their respective senior interest distribution amounts for such Distribution
Date before such reduction. The holders of the Offered Certificates will be
entitled to reimbursement for any such interest shortfalls but only to the
extent of available funds and in the order of priority set forth under
"Description of the Certificates--Overcollateralization Provisions" and
"Description of the Certificates--The Interest Rate Swap Agreement and the Swap
Provider" in this prospectus supplement. If these shortfalls are allocated to
the Offered Certificates the amount of interest paid to those certificates will
be reduced, adversely affecting the yield on your investment.
THE LIQUIDITY OF YOUR CERTIFICATES MAY BE LIMITED.
The Underwriter has no obligation to make a secondary market in the
classes of Offered Certificates. There is therefore no assurance that a
secondary market will develop or, if it develops, that it will continue.
Consequently, you may not be able to sell your certificates readily or at prices
that will enable you to realize your desired yield. The market values of the
certificates are likely to fluctuate; these fluctuations may be significant and
could result in significant losses to you.
The secondary markets for asset-backed securities have experienced
periods of illiquidity and can be expected to do so in the future. Illiquidity
can have a severely adverse effect on the prices of securities that are
especially sensitive to prepayment, credit or interest rate risk, or that have
been structured to meet the investment requirements of limited categories of
investors.
THE 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, maintain or restore the required level of
overcollateralization and cover realized losses on the Mortgage Loans allocated
to the Offered Certificates. 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
S-18
in periods when one-month LIBOR (as determined pursuant to the Interest Rate
Swap Agreement) exceeds 5.49%. 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 maintain or restore the required level of
overcollateralization or to cover interest shortfalls and realized losses on the
Mortgage Loans. 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. If the rate of prepayments on the Mortgage Loans is faster than
anticipated, the schedule on which payments due under the Interest Rate Swap
Agreement are calculated may exceed the aggregate principal balance of the
Mortgage Loans, thereby increasing the relative proportion of interest
collections on the Mortgage Loans that must be applied to make Net Swap Payments
to the Swap Provider. The combination of a rapid rate of prepayment and low
prevailing interest rates could adversely affect the yields on the Offered
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 unless such Swap Termination Payment is due
to a Swap Provider trigger event. 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 and 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 Offered 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
Offered 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. As of
the date of this prospectus supplement, the credit ratings of the Swap Provider
are lower than the ratings assigned to the Class A Certificates. See
"Description of the Certificates--The Interest Rate Swap Agreement and the Swap
Provider" 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
S-19
interest shortfall because neither the Master Servicer nor the Servicer will be
able to collect the amount of interest which otherwise would be payable with
respect to such Mortgage Loan if the Relief Act or similar state or local law
was not applicable thereto. This shortfall will not be paid by the mortgagor on
future due dates or advanced by the Master Servicer or the Servicer and,
therefore, will reduce the amount available to pay interest to the
certificateholders on subsequent Distribution Dates. We do not know how many
Mortgage Loans in the mortgage pool have been or may be affected by the
application of the Relief Act or similar state or local law.
POSSIBLE REDUCTION OR WITHDRAWAL OF RATINGS ON THE OFFERED CERTIFICATES.
Each rating agency rating the Offered Certificates may change or
withdraw its initial ratings at any time in the future if, in its judgment,
circumstances warrant a change. No person is obligated to maintain the ratings
at their initial levels. If a rating agency reduces or withdraws its rating on
one or more classes of the Offered Certificates, the liquidity and market value
of the affected certificates is likely to be reduced.
SUITABILITY OF THE OFFERED CERTIFICATES AS INVESTMENTS.
The Offered Certificates are not suitable investments for any investor
that requires a regular or predictable schedule of monthly payments or payment
on any specific date. The Offered Certificates are complex investments that
should be considered only by investors who, either alone or with their
financial, tax and legal advisors, have the expertise to analyze the prepayment,
reinvestment, default and market risk, the tax consequences of an investment and
the interaction of these factors.
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 "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 Originators.
THE MORTGAGE POOL
GENERAL
The pool of mortgage loans (the "Mortgage Pool") will consist of 5,661
conventional, one- to four-family, second lien, fixed-rate mortgage loans (the
"Mortgage Loans") on residential real
S-20
properties (the "Mortgaged Properties") and having an aggregate principal
balance as of the Cut-off Date of approximately $344,592,203 after application
of scheduled payments due on or before the Cut-off Date whether or not received,
subject to a permitted variance of plus or minus 5%.
Approximately 16.15% 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. Approximately
80.03% 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 3.99% 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 five or ten years following origination. After such interest-only
period, the mortgagor's monthly payment will be recalculated to cover both
interest and principal so that such Mortgage Loan will amortize fully on or
prior to its final payment date. Approximately 0.17% of the Mortgage Loans, by
aggregate principal balance as of the Cut-off Date, are Balloon Loans that are
also Interest Only Loans.
All of the Mortgage Loans are secured by second mortgages or deeds of
trust or other similar security instruments creating second liens on Mortgaged
Properties. The Mortgaged Properties generally consist of attached, detached or
semi-detached, one to four-family dwelling units, individual condominium units,
individual units in planned unit developments, townhouses and rowhouses.
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 a
fixed rate specified in the related mortgage note as reduced by application of
the Relief Act or similar state or local laws and bankruptcy adjustments.
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 12.66% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date, 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 pooling and servicing agreement the Servicer
may waive the payment of any otherwise applicable Prepayment Charge with respect
to the Mortgage Loans. As of July 1, 2003, the Alternative Mortgage Parity Act
of 1982 (the "Parity Act"), which regulates the ability of originators to impose
prepayment charges, was amended, and as a result, the Originators will be
required to comply with state and local laws in originating mortgage loans with
prepayment charge provisions with respect to loans originated on or after July
1, 2003. The
S-21
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 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.
As of the Cut-off Date none of the Mortgage Loans were more than 60
days delinquent. The following table sets forth the historical delinquency
experience of the Mortgage Loans. The historical delinquency information is
based on the delinquency of each Mortgage Loan either (i) during the period from
the date the first monthly payment was due on such Mortgage Loan to the Cut-off
Date or (ii) during the twelve month period prior to the Cut-off Date, which
ever is less. With respect to item (ii) above, the Sponsor and the Depositor are
unable to provide the delinquency information as of origination of such Mortgage
Loans without unreasonable effort or expense because neither the Sponsor nor the
Depositor was the owner of the Mortgage Loan prior to the date such Mortgage
Loans were purchased by the Sponsor, the prior owner of such Mortgage Loans is
not affiliated with the Sponsor or the Depositor and the owner was not the
servicer of such Mortgage Loans and therefore, was not in a position to track or
monitor the delinquency status of such Mortgage Loans.
HISTORICAL DELINQUENCY
AGGREGATE % OF AGGREGATE
NUMBER OF REMAINING REMAINING
HISTORICAL DELINQUENCY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- ----------------- ---------------------- ----------------------
Never Delinquent................. 4,902 $ 301,743,647.83 87.57%
30 Days Delinquent............... 58 4,510,412.55 1.31
60 Days Delinquent............... 3 206,535.87 0.06
Not Available.................... 698 38,131,607.23 11.07
------- ------------------- --------
Total:........................... 5,661 $ 344,592,203.48 100.00%
======= =================== ========
For a further description of the underwriting or selection criteria
used to purchase the mortgage pool assets, please see "Underwriting Standards"
and "The Sponsor" in this prospectus supplement.
S-22
MORTGAGE LOAN CHARACTERISTICS
The average principal balance of the Mortgage Loans at origination was
approximately $61,183. No Mortgage Loan had a principal balance at origination
greater than approximately $500,000 or less than approximately $10,000. The
average principal balance of the Mortgage Loans as of the Cut-off Date was
approximately $60,871. No Mortgage Loan had a principal balance as of the
Cut-off Date greater than approximately $499,276 or less than approximately
$5,331.
The Mortgage Loans had Mortgage Rates as of the Cut-off Date ranging
from approximately 5.750% per annum to approximately 18.125% per annum, and the
weighted average Mortgage Rate was approximately 10.817% per annum.
The weighted average combined loan-to-value ratio of the Mortgage Loans
at origination was approximately 95.60%. At origination, no Mortgage Loan had a
combined loan-to-value ratio greater than approximately 100.00% or less than
approximately 21.00%.
The weighted average remaining term to stated maturity of the Mortgage
Loans was approximately 209 months as of the Cut-off Date. None of the Mortgage
Loans will have a first due date prior to May 1, 2005 or after September 1, 2006
or will have a remaining term to stated maturity of less than approximately 117
months or greater than approximately 360 months as of the Cut-off Date. The
latest maturity date of any Mortgage Loan is August 1, 2036.
As of the Cut-off Date, the weighted average FICO Score for the
Mortgage Loans is approximately 706. No Mortgage Loan had a FICO Score as of the
Cut-off Date greater than approximately 817 or less than approximately 580.
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-23
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 - 10 Year ........... 11 $ 579,856 0.17%
Fixed - 15 Year ........... 124 4,546,337 1.32
Fixed - 15 Year IO ........ 20 750,546 0.22
Fixed - 20 Year ........... 79 3,675,292 1.07
Fixed - 30 Year ........... 774 46,851,223 13.60
Fixed - 30 Year IO ........ 249 12,417,947 3.60
Balloon - 15/30 ........... 4,393 274,941,161 79.79
Balloon - 15/30 IO ........ 6 585,160 0.17
Balloon - 20/30 ........... 5 244,682 0.07
------------ ------------ ------
Total: .................... 5,661 $344,592,203 100.00%
============ ============ ======
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
- --------------------------- ------------ ----------------- -----------------
Second Lien ............... 5,661 $344,592,203 100.00%
---------- ------------ ------
Total: .................... 5,661 $344,592,203 100.00%
========== ============ ======
S-24
PRINCIPAL BALANCES OF THE MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE MORTGAGE OUTSTANDING AT OUTSTANDING AT
AT ORIGINATION ($) LOANS ORIGINATION ORIGINATION
- --------------------------- ------------ ----------------- -----------------
0.01 - 50,000.00 ... 2,976 $ 92,220,521 26.63%
50,000.01 - 100,000.00 ... 1,933 137,141,165 39.60
100,000.01 - 150,000.00 ... 464 56,528,893 16.32
150,000.01 - 200,000.00 ... 201 36,212,957 10.46
200,000.01 - 250,000.00 ... 36 8,397,760 2.42
250,000.01 - 300,000.00 ... 34 9,600,225 2.77
300,000.01 - 350,000.00 ... 8 2,590,650 0.75
350,000.01 - 400,000.00 ... 7 2,744,941 0.79
400,000.01 - 450,000.00 ... 1 420,000 0.12
450,000.01 - 500,000.00 ... 1 500,000 0.14
---------- ------------ ------
Total: .................... 5,661 $346,357,111 100.00%
========== ============ ======
PRINCIPAL BALANCES OF THE MORTGAGE LOANS
AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PRINCIPAL BALANCE MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
AS OF THE CUT-OFF DATE ($) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------- ------------ ----------------- -----------------
0.01 - 50,000.00 ... 2,980 $ 92,022,466 26.70%
50,000.01 - 100,000.00 ... 1,933 136,956,794 39.74
100,000.01 - 150,000.00 ... 463 56,326,081 16.35
150,000.01 - 200,000.00 ... 201 36,177,927 10.50
200,000.01 - 250,000.00 ... 37 8,636,524 2.51
250,000.01 - 300,000.00 ... 32 9,042,484 2.62
300,000.01 - 350,000.00 ... 8 2,588,349 0.75
350,000.01 - 400,000.00 ... 6 2,342,302 0.68
450,000.01 - 500,000.00 ... 1 499,276 0.14
---------- ------------ ------
Total: .................... 5,661 $344,592,203 100.00%
========== ============ ======
S-25
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 ................ 716 $ 68,064,915 19.75%
Florida ................... 688 42,959,314 12.47
Arizona ................... 343 21,188,410 6.15
Illinois .................. 356 20,667,966 6.00
Virginia .................. 255 18,775,151 5.45
New York .................. 169 16,117,735 4.68
Maryland .................. 236 15,877,665 4.61
Colorado .................. 225 11,796,938 3.42
Nevada .................... 144 10,783,127 3.13
Washington ................ 163 9,660,246 2.80
Texas ..................... 309 9,517,719 2.76
North Carolina ............ 231 8,961,169 2.60
Oregon .................... 152 8,859,474 2.57
New Jersey ................ 105 8,438,119 2.45
Georgia ................... 182 8,108,501 2.35
Massachusetts ............. 110 7,201,888 2.09
Michigan .................. 187 6,351,460 1.84
Connecticut ............... 72 4,878,609 1.42
Utah ...................... 61 4,718,418 1.37
Pennsylvania .............. 105 4,328,704 1.26
Minnesota ................. 73 3,800,232 1.10
Ohio ...................... 106 3,445,873 1.00
South Carolina ............ 93 3,330,808 0.97
Rhode Island .............. 42 2,733,980 0.79
Indiana ................... 74 2,579,561 0.75
Hawaii .................... 27 2,420,867 0.70
Idaho ..................... 49 1,953,533 0.57
Tennessee ................. 47 1,932,983 0.56
New Hampshire ............. 29 1,900,584 0.55
Delaware .................. 29 1,793,636 0.52
Louisiana ................. 33 1,364,302 0.40
District of Columbia ...... 16 1,208,527 0.35
New Mexico ................ 22 1,023,034 0.30
Wisconsin ................. 23 850,708 0.25
Missouri .................. 28 792,083 0.23
West Virginia ............. 11 747,944 0.22
Oklahoma .................. 25 706,778 0.21
Maine ..................... 12 598,653 0.17
Iowa ...................... 16 524,598 0.15
Mississippi ............... 13 513,052 0.15
Kentucky .................. 13 484,237 0.14
Montana ................... 12 475,300 0.14
Kansas .................... 14 443,391 0.13
Alabama ................... 11 388,484 0.11
Arkansas .................. 12 359,587 0.10
Vermont ................... 6 339,483 0.10
Wyoming ................... 7 324,945 0.09
Nebraska .................. 4 147,236 0.04
Alaska .................... 3 98,231 0.03
South Dakota .............. 2 54,046 0.02
---------- ------------ ------
Total: .................... 5,661 $344,592,203 100.00%
========== ============ ======
S-26
MORTGAGE RATES OF THE MORTGAGE LOANS AS OF THE CUT-OFF DATE
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
MORTGAGE RATE (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------- ------------ ----------------- -----------------
5.500 - 5.999 ......... 3 $ 187,393 0.05%
6.000 - 6.499 ......... 11 647,972 0.19
6.500 - 6.999 ......... 100 4,921,416 1.43
7.000 - 7.499 ......... 202 9,210,587 2.67
7.500 - 7.999 ......... 330 17,361,641 5.04
8.000 - 8.499 ......... 232 13,615,135 3.95
8.500 - 8.999 ......... 227 13,562,285 3.94
9.000 - 9.499 ......... 268 15,178,899 4.40
9.500 - 9.999 ......... 613 37,353,823 10.84
10.000 - 10.499 ......... 545 36,154,557 10.49
10.500 - 10.999 ......... 509 36,167,176 10.50
11.000 - 11.499 ......... 426 28,312,333 8.22
11.500 - 11.999 ......... 431 28,815,326 8.36
12.000 - 12.499 ......... 481 27,045,746 7.85
12.500 - 12.999 ......... 457 27,629,104 8.02
13.000 - 13.499 ......... 302 16,786,019 4.87
13.500 - 13.999 ......... 255 15,685,602 4.55
14.000 - 14.499 ......... 126 6,700,730 1.94
14.500 - 14.999 ......... 87 5,779,657 1.68
15.000 - 15.499 ......... 31 1,997,398 0.58
15.500 - 15.999 ......... 14 921,028 0.27
16.000 - 16.499 ......... 7 253,382 0.07
16.500 - 16.999 ......... 2 230,204 0.07
17.500 - 17.999 ......... 1 34,794 0.01
18.000 - 18.499 ......... 1 39,994 0.01
---------- ------------ ------
Total: .................... 5,661 $344,592,203 100.00%
========== ============ ======
ORIGINAL TERM OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL TERM (MONTHS) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------- ------------ ----------------- -----------------
120 ....................... 11 $ 579,856 0.17%
180 ....................... 4,543 280,823,203 81.49
240 ....................... 84 3,919,975 1.14
360 ....................... 1,023 59,269,170 17.20
---------- ------------ ------
Total: .................... 5,661 $344,592,203 100.00%
========== ============ ======
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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 STATED MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
MATURITY (MONTHS) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------- ------------ ----------------- -----------------
61 - 120 ................. 11 $ 579,856 0.17%
121 - 180 ................. 4,543 280,823,203 81.49
181 - 240 ................. 84 3,919,975 1.14
301 - 360 ................. 1,023 59,269,170 17.20
---------- ------------ ------
Total: .................... 5,661 $344,592,203 100.00%
========== ============ ======
PROPERTY TYPES OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------- ------------ ----------------- -----------------
Single Family Residence ... 3,249 $196,786,434 57.11%
PUD ....................... 1,319 85,104,287 24.70
2-4 Family ................ 494 31,487,388 9.14
Condominium ............... 590 30,637,737 8.89
Townhouse ................. 7 520,247 0.15
Rowhouse .................. 2 56,111 0.02
---------- ------------ ------
Total: .................... 5,661 $344,592,203 100.00%
========== ============ ======
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
ORIGINAL COMBINED LOAN-TO- MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
VALUE RATIO (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------- ------------ ----------------- -----------------
Less than or equal to 50.00 12 $ 781,983 0.23%
50.01 - 55.00 .......... 11 650,697 0.19
55.01 - 60.00 .......... 7 379,640 0.11
60.01 - 65.00 .......... 17 1,379,413 0.40
65.01 - 70.00 .......... 20 2,318,885 0.67
70.01 - 75.00 .......... 37 2,289,495 0.66
75.01 - 80.00 .......... 108 8,505,557 2.47
80.01 - 85.00 .......... 138 8,164,319 2.37
85.01 - 90.00 .......... 1,228 56,586,045 16.42
90.01 - 95.00 .......... 1,127 63,174,127 18.33
95.01 - 100.00 .......... 2,956 200,362,042 58.14
---------- ------------ ------
Total: .................... 5,661 $344,592,203 100.00%
========== ============ ======
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DOCUMENTATION TYPE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION TYPE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------- ------------ ----------------- -----------------
Stated Documentation ...... 3,420 $226,773,060 65.81%
Full Documentation ........ 1,833 91,642,273 26.59
No Documentation .......... 264 17,013,326 4.94
No Ratio .................. 124 7,526,717 2.18
Limited Documentation ..... 20 1,636,827 0.48
---------- ------------ ------
Total: .................... 5,661 $344,592,203 100.00%
========== ============ ======
FICO SCORE FOR THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
FICO SCORE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------- ------------ ----------------- -----------------
575 - 599 ................. 74 $ 3,391,103 0.98%
600 - 624 ................. 129 7,054,990 2.05
625 - 649 ................. 389 22,260,885 6.46
650 - 674 ................. 813 46,693,184 13.55
675 - 699 ................. 1,267 83,800,422 24.32
700 - 724 ................. 1,056 67,757,673 19.66
725 - 749 ................. 865 53,969,497 15.66
750 - 774 ................. 595 33,484,135 9.72
775 - 799 ................. 378 20,905,134 6.07
800 - 824 ................. 95 5,275,183 1.53
---------- ------------ ------
Total: .................... 5,661 $344,592,203 100.00%
========== ============ ======
LOAN PURPOSE OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
LOAN PURPOSE LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------- ------------ ----------------- -----------------
Purchase .................. 4,328 $257,917,857 74.85%
Refinance - Cashout ....... 1,197 81,157,881 23.55
Refinance - Rate Term ..... 136 5,516,466 1.60
---------- ------------ ------
Total: .................... 5,661 $344,592,203 100.00%
========== ============ ======
S-29
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 ................... 4,208 $280,559,363 81.42%
Investment ................ 1,149 45,993,337 13.35
Second Home ............... 296 17,690,571 5.13
Non-Owner Occupied ........ 8 348,933 0.10
---------- ------------ ------
Total: .................... 5,661 $344,592,203 100.00%
========== ============ ======
The occupancy status of a Mortgaged Property is as represented by the mortgagor
in its loan application.
PREPAYMENT PENALTY MONTHS OF THE MORTGAGE LOANS AT ORIGINATION
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
PREPAYMENT PENALTY MONTHS MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
AT ORIGINATION LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------- ------------ ----------------- -----------------
0 ........................ 4,951 $300,978,904 87.34%
12 ........................ 85 5,740,234 1.67
24 ........................ 482 30,008,412 8.71
30 ........................ 1 26,394 0.01
36 ........................ 142 7,838,259 2.27
---------- ------------ ------
Total: .................... 5,661 $344,592,203 100.00%
========== ============ ======
ORIGINATORS OF THE MORTGAGE LOANS
AGGREGATE % OF AGGREGATE
NUMBER OF PRINCIPAL BALANCE PRINCIPAL BALANCE
MORTGAGE OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINATORS LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- --------------------------- ------------ ----------------- -----------------
American Home Mortgage
Corp. ..................... 3,753 $244,348,912 70.91%
People's Choice Home Loan,
Inc. ...................... 588 37,404,967 10.85
Other ..................... 1,320 62,838,325 18.24
---------- ------------ ------
Total: .................... 5,661 $344,592,203 100.00%
========== ============ ======
UNDERWRITING STANDARDS
The information set forth in this section (other than the immediately
following paragraph) with regard to the underwriting standards of American Home
Mortgage Corp. has been provided to the Depositor by American Home Mortgage
Corp. because American Home Mortgage Corp. originated over 20% of the Mortgage
Loans.
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Approximately 70.91% of the Mortgage Loans, by aggregate principal
balance as of the Cut-off Date (the "American Home Mortgage Loans"), which will
be acquired on the Closing Date by the Depositor from the Sponsor, were acquired
by the Sponsor from American Home Mortgage Corp. prior to the Closing Date. All
of the American Home Mortgage Loans were originated or acquired by American Home
Mortgage Corp. in accordance with the underwriting criteria described in this
section.
GENERAL
American Home Mortgage Corp. ("American Home"), also referred to in
this section as the "Originator", is a New York corporation. The Originator
conducts lending through retail and wholesale loan production offices and its
correspondent channel as well as its direct-to-consumer channel supported by the
Originator's call center. The Originator operates more than 600 retail and
wholesale loan production offices located in 45 states and the District of
Columbia and makes loans throughout all 50 states and the District of Columbia.
The Originator has been originating mortgage loans since its incorporation in
1988, and has been originating second-lien mortgage loans since such date. The
principal executive offices of the Originator are located at 538 Broadhollow
Road, Melville, New York 11747.
The following table reflects the Originator's originations of
second-lien mortgage loans for the past three years and for the six months ended
June 30, 2006:
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
2003 2004 2005 2006
- ------------------------- ------------------- ------------------- ------------------- ---------------------
Number of Loans 5,170 13,150 41,309 25,106
- ---------------------------------------------------------------------------------------------------------------
Principal Balance $165,036,843 $589,714,629 $2,398,946,831 $1,636,133,692
- ---------------------------------------------------------------------------------------------------------------
The Originator is not aware of any material legal proceedings pending
against it or against any of its property, including any proceedings known to be
contemplated by governmental authorities material to the holders of the
Certificates.
UNDERWRITING CRITERIA
The following information generally describes the Originator's
underwriting guidelines with respect to second-lien mortgage loans originated
pursuant to its "conforming" or "prime" underwriting guidelines and its Alt-A
underwriting guidelines. The mortgage loans have been purchased or originated,
underwritten and documented in accordance with the guidelines of Fannie Mae and
Freddie Mac, the underwriting guidelines of specific private investors, and the
non-conforming or Alt-A underwriting guidelines established by the Originator.
The Originator's second-lien non-conforming underwriting guidelines are
similar to those of the government sponsored enterprises Fannie Mae and Freddie
Mac, but these loans are "non-conforming" in that they may not conform to the
maximum loan amounts and in some cases to the underwriting guidelines of Fannie
Mae and Freddie Mac. These non-conforming loans do not conform to and are not
insurable by the Federal Housing Administration nor can they be guaranteed by
the U.S. Department of Veterans Affairs.
The Originator's underwriting philosophy is to weigh all risk factors
inherent in the loan file, giving consideration to the individual transaction,
borrower profile, the level of documentation provided and the property used to
collateralize the debt. These standards are applied in
S-31
accordance with applicable federal and state laws and regulations. Exceptions to
the underwriting standards may be permitted where compensating factors are
present. In the case of investment properties and two- to four-unit dwellings,
income derived from the mortgage property may have been considered for
underwriting purposes, in addition to the income of the mortgagor from other
sources. With respect to second homes and vacation properties, no income derived
from the property will have been considered for underwriting purposes. Because
each loan is different, the Originator expects and encourages underwriters to
use professional judgment based on their experience in making a lending
decision.
The Originator underwrites a borrower's creditworthiness based solely
on information that the Originator believes is indicative of the applicant's
willingness and ability to pay the debt they would be incurring.
Non-conforming loans are generally documented to the requirements of
Fannie Mae and Freddie Mac, in that the borrower provides the same information
on the loan application along with documentation to verify the accuracy of the
information on the application such as income, assets, other liabilities, etc.
Certain non-conforming stated income or stated asset products allow for less
verification documentation than Fannie Mae or Freddie Mac require. Certain
non-conforming Alt-A products also allow for less verification documentation
than Fannie Mae or Freddie Mac require. For these Alt-A products, the borrower
may not be required to verify employment income, assets required to close or
both. For some other Alt-A products, the borrower is not required to provide any
information regarding employment income, assets required to close or both. Alt-A
products with less verification documentation generally have other compensating
factors such as higher credit score or lower combined loan-to-value
requirements.
The Originator obtains a credit report for each borrower that
summarizes each borrower's credit history. The credit report contains
information from the three major credit repositories, Equifax, Experian and
TransUnion. These companies have developed scoring models to identify the
comparative risk of delinquency among applicants based on characteristics within
the applicant's credit report. A borrower's credit score represents a
comprehensive view of the borrower's credit history risk factors and is
indicative of whether a borrower is likely to default on a loan. Some of the
factors used to calculate credit scores are a borrower's incidents of previous
delinquency, the number of credit accounts a borrower has, the amount of
available credit that a borrower has utilized, the source of a borrower's
existing credit, and recent attempts by a borrower to obtain additional credit.
Applicants who have higher credit scores will, as a group, have fewer defaults
than those who have lower credit scores. The minimum credit score allowed by the
Originator non-conforming loan guidelines for these loans is 620 and the average
is typically over 700. For the Originator Alt-A products, the minimum credit
score is generally 580. If the borrowers do not have a credit score they must
have an alternative credit history showing at least three trade lines with no
payments over 60 days past due in the last twelve months.
In addition to reviewing the borrower's credit history and credit
score, the Originator underwriters closely review the borrower's housing payment
history. In general, for non-conforming loans the borrower should not have made
any mortgage payments over 30 days after the due date for the most recent twelve
months. In general, for Alt-A loans, the borrower may have no more than one
payment that was made over 30 days after the due date for the most recent twelve
months.
In order to determine if a borrower qualifies for a second-lien
non-conforming loan, the loans have been either approved by Fannie Mae's Desktop
Underwriter, Freddie Mac's Loan Prospector automated underwriting systems, a
customized form of Fannie Mae's Desktop Underwriter called Custom Desktop
Underwriter, or they have been manually underwritten by the Originator's
underwriters. The Originator's Alt-A loan products generally have been approved
manually by the Originator's senior underwriters. For manually underwritten
loans, the
S-32
underwriter must ensure that the borrower's income will support the total
housing expense on an ongoing basis. Underwriters may give consideration to
borrowers who have demonstrated an ability to carry a similar or greater housing
expense for an extended period. In addition to the monthly housing expense, the
underwriter must evaluate the borrower's ability to manage all recurring
payments on all debts, including the monthly housing expense. When evaluating
the ratio of all monthly debt payments to the borrower's monthly income
(debt-to-income ratio), the underwriter should be aware of the degree and
frequency of credit usage and its impact on the borrower's ability to repay the
loan. For example, borrowers who lower their total obligations should receive
favorable consideration and borrowers with a history of heavy usage and a
pattern of slow or late payments should receive less flexibility.
Every mortgage loan is secured by a property that has been appraised by
a licensed appraiser in accordance with the Uniform Standards of Professional
Appraisal Practice of the Appraisal Foundation. The appraisers perform on-site
inspections of the property and report on the neighborhood and property
condition in factual and specific terms. Each appraisal contains an opinion of
value that represents the appraiser's professional conclusion based on market
data of sales of comparable properties and a logical analysis with adjustments
for differences between the comparable sales and the subject property and the
appraiser's judgment. In addition, each appraisal is reviewed for accuracy and
consistency by the Originator's vendor management company or an underwriter of
the Originator or a mortgage insurance company contract underwriter.
The appraiser's value conclusion is used to calculate the ratio
(combined loan-to-value) of the loan amount(s) to the value of the property. For
loans made to purchase a property, this ratio is based on the lower of the sales
price of the property and the appraised value. The Originator sets various
maximum combined loan-to-value ratios based on the loan amount, property type,
loan purpose and occupancy of the subject property securing the loan. In
general, the Originator requires lower combined loan-to-value ratios for those
loans that are perceived to have a higher risk, such as high loan amounts, loans
in which additional cash is being taken out on a refinance transaction, loans on
second homes or loans on investment properties. A lower combined loan-to-value
ratio requires a borrower to have more equity in the property, which is a
significant additional incentive to the borrower to avoid default on the loan.
The Originator realizes that there may be some acceptable quality loans
that fall outside published guidelines and encourages "common sense"
underwriting. Because a multitude of factors are involved in a loan transaction,
no set of guidelines can contemplate every potential situation. Therefore, each
case is weighed individually on its own merits and exceptions to the
Originator's underwriting guidelines are allowed if sufficient compensating
factors exist to offset any additional risk due to the exception.
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,
S-33
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 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 rate of principal prepayments thereon
(including for this purpose, payments resulting from refinancings, liquidations
of the Mortgage Loans due to defaults, casualties, condemnations and
repurchases, whether optional or required, by the Depositor or the Sponsor). The
Mortgage Loans may be prepaid by the mortgagors at any time; however, as
described under "The Mortgage Pool" in this prospectus supplement, with respect
to approximately 12.66% 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. There can be no certainty as to the
S-34
rate of prepayments on the Mortgage Loans during any period or over the life of
the certificates. See "Yield Considerations" in the prospectus.
Because principal distributions are paid to certain classes of Offered
Certificates before other classes, holders of classes of Offered Certificates
having a later priority of payment bear a greater risk of losses than holders of
classes having earlier priorities for distribution of principal. This is because
the certificates having a later priority of payment will represent an increasing
percentage interest in the trust fund during the period prior to the
commencement of distributions of principal on these certificates. As described
under "Description of the Certificates--Principal Distributions on the Offered
Certificates" in this prospectus supplement, prior to the Stepdown Date, all
principal payments on the Mortgage Loans will be allocated to the Class A
Certificates. Thereafter, as further described in this prospectus supplement,
during certain periods, subject to certain delinquency triggers described in
this prospectus supplement, all principal payments on the Mortgage Loans will be
allocated among the Class A Certificates and all classes of the Mezzanine
Certificates in the priorities described under "Description of the
Certificates--Principal Distributions on the Offered Certificates" 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 "Underwriting Standards" in this prospectus
supplement.
SPECIAL YIELD CONSIDERATIONS
The Mortgage Rates on the Mortgage Loans are fixed and will not vary
with any index. The Pass Through Rates on the Floating Rate Certificates adjust
monthly based upon One-Month LIBOR, subject to the applicable Net WAC
Pass-Through Rate, with the result that increases in the Pass-Through Rates on
the Floating Rate Certificates may be limited for extended periods in a rising
interest rate environment. 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 Floating Rate Certificates during the related
Interest Accrual Period; however, any shortfalls of this kind will be payable to
the holders of the Floating Rate Certificates, but only to the extent and in the
priority described under "Description of the Certificates--Overcollateralization
Provisions" in this prospectus supplement.
If the pass-through rates on the Offered Certificates are limited by
the applicable Net WAC Pass-Through Rate for any Distribution Date, the
resulting interest shortfalls and interest on such shortfalls, which are
referred to in this prospectus supplement as "Net WAC Rate Carryover Amounts",
may be recovered by the holders of such certificates on such Distribution Date
or on future Distribution Dates, to the extent that on such Distribution Date or
future Distribution Dates there are any available funds remaining after certain
other distributions on the Offered Certificates and the payment of certain fees
and expenses of the trust 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). The ratings
on the Offered Certificates will not address the likelihood of any such recovery
of such interest shortfalls by holders of those certificates from amounts
received on 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 Net
Monthly Excess Cashflow.
S-35
As described under "Description of the Certificates--Allocation of
Losses; Subordination," amounts otherwise distributable to holders of the
Mezzanine Certificates and the Class CE-1 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 Offered 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
September 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 assumes a constant prepayment rate ("CPR") for the mortgage loans. To
assume 35% CPR or any other CPR percentage is to assume that the stated
percentage of the outstanding principal balance of the pool is prepaid over the
course of a year. No representation is made that the Mortgage Loans will prepay
in accordance with the prepayment model or any other rate.
The tables entitled "Percent of Initial Certificate Principal Balance
Outstanding at the Specified Percentages of CPR" indicate the percentage of the
initial Certificate Principal Balance of the Offered Certificates that would be
outstanding after each of the dates shown at various percentages of CPR, and 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 47 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 September 2006; (iii) the Mortgage Loans prepay at the
percentages of CPR indicated; (iv) no defaults or delinquencies occur in the
payment by mortgagors of principal and interest on the Mortgage Loans and no
shortfalls due to the application of the Relief Act or similar state or local
laws are incurred; (v) none of the Depositor, the Master Servicer, the Servicer
or any other person purchases from the trust fund any Mortgage Loan under any
obligation or option under the Pooling and Servicing Agreement, except as
indicated in footnote two in the tables; (vi) scheduled monthly payments on the
Mortgage Loans are received on the first day of each month commencing in
September 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 August 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 August 29, 2006; (x) One-Month LIBOR remains constant at 5.3300% per annum;
(xi) the Class P Certificates have a Certificate Principal Balance equal to
zero; (xii) the rate at which the
S-36
Servicer's fee is calculated is assumed to be 0.5000% per annum, the rate at
which the Master Servicing fee is calculated is assumed to be equal to 0.0160%
per annum and the rate at which the Credit Risk Manager's fee is calculated is
assumed to be equal to 0.0150% per annum; and (xiii) the fixed swap payment is
calculated based on a per annum rate of 5.49%.
S-37
ASSUMED MORTGAGE LOAN CHARACTERISTICS
Remaining
Remaining Term Amortization
Principal Balance to Maturity Term Age Mortgage Rate Remaining Interest
($) (Months) (Months) (Months) (%) Only Term (months)
- -------------------------- ------------------ --------------------- ----------- -------------------- -----------------------
8,387,682.70 199 199 3 9.558 0
722,266.82 176 176 4 10.662 56
264,963,094.55 178 358 2 10.692 0
426,410.00 177 357 3 10.685 57
14,061,503.81 357 357 3 12.146 0
12,417,946.51 357 357 3 10.765 117
64,925.19 177 357 3 11.500 0
49,756.82 176 356 4 12.000 0
2,029,011.58 178 358 2 11.122 0
69,538.45 176 176 4 12.105 0
23,185.08 175 175 5 13.125 0
276,874.04 190 190 4 12.686 0
533,668.99 177 357 3 11.728 0
479,395.75 175 355 5 10.620 0
373,694.97 196 354 6 9.819 0
67,217.88 178 358 2 11.682 0
1,536,984.08 178 358 2 11.292 0
158,750.00 178 358 2 9.121 58
44,204.70 177 177 3 11.050 0
28,279.00 177 177 3 11.375 57
50,069.74 177 357 3 12.728 0
157,500.00 180 360 0 13.250 0
340,297.16 177 357 3 11.110 0
41,206.47 179 359 1 9.200 0
259,608.63 177 357 3 11.177 0
1,264,031.60 178 358 2 10.929 0
1,879,664.80 179 359 1 10.894 0
26,394.13 179 359 1 13.125 0
1,069,320.40 178 358 2 10.930 0
62,177.22 358 358 2 14.000 0
30,738.73 358 358 2 14.000 0
1,149,800.01 356 356 4 12.136 0
2,353,824.50 357 357 3 11.276 0
2,146,270.47 356 356 4 11.351 0
302,635.10 357 357 3 12.992 0
31,769.33 358 358 2 14.375 0
380,995.29 356 356 4 11.549 0
59,957.91 356 356 4 12.950 0
124,500.00 360 360 0 12.000 0
23,442,974.75 357 357 3 11.415 0
16,794.35 358 358 2 14.375 0
207,275.74 358 358 2 12.842 0
81,758.64 358 358 2 12.804 0
37,486.26 358 358 2 14.000 0
191,673.27 357 357 3 12.317 0
515,596.16 359 359 1 12.116 0
1,653,491.90 358 358 2 11.835 0
S-38
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 CPR". 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, the Offered Certificates may mature earlier or
later than indicated by the tables and since it is not likely that One-Month
LIBOR will remain constant as assumed. In addition, as described under
"Description of the Certificates-Principal Distributions on the Offered
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 CPR. 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
CPR.
S-39
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS A-1
---------
DISTRIBUTION DATE 0% CPR 20% CPR 35% CPR 45% CPR 55% CPR
- ----------------- ---------- ----------- ------------ ----------- ------------
Initial Percentage........................ 100% 100% 100% 100% 100%
August 25, 2007........................... 99 65 40 23 6
August 25, 2008........................... 98 38 1 0 0
August 25, 2009........................... 97 16 0 0 0
August 25, 2010........................... 96 6 0 0 0
August 25, 2011........................... 95 0 0 0 0
August 25, 2012........................... 93 0 0 0 0
August 25, 2013........................... 91 0 0 0 0
August 25, 2014........................... 90 0 0 0 0
August 25, 2015........................... 87 0 0 0 0
August 25, 2016........................... 85 0 0 0 0
August 25, 2017........................... 82 0 0 0 0
August 25, 2018........................... 80 0 0 0 0
August 25, 2019........................... 76 0 0 0 0
August 25, 2020........................... 73 0 0 0 0
August 25, 2021........................... 0 0 0 0 0
August 25, 2022........................... 0 0 0 0 0
August 25, 2023........................... 0 0 0 0 0
August 25, 2024........................... 0 0 0 0 0
August 25, 2025........................... 0 0 0 0 0
August 25, 2026........................... 0 0 0 0 0
August 25, 2027........................... 0 0 0 0 0
August 25, 2028........................... 0 0 0 0 0
August 25, 2029........................... 0 0 0 0 0
August 25, 2030........................... 0 0 0 0 0
August 25, 2031........................... 0 0 0 0 0
August 25, 2032........................... 0 0 0 0 0
August 25, 2033........................... 0 0 0 0 0
August 25, 2034........................... 0 0 0 0 0
August 25, 2035........................... 0 0 0 0 0
August 25, 2036........................... 0 0 0 0 0
Weighted Average Life in Years (1) 13.16 1.75 0.90 0.66 0.50
Weighted Average Life in Years (1)(2) 13.16 1.75 0.90 0.66 0.50
- ---------------------
*Indicates a number that is greater than zero but less than 0.5%, if applicable.
(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 or the Servicer exercises its option to
purchase the Mortgage Loans on the earliest possible Distribution Date on
which it is permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" in this prospectus supplement.
S-40
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS A-2
---------
DISTRIBUTION DATE 0% CPR 20% CPR 35% CPR 45% CPR 55% CPR
- ----------------- ---------- ----------- ------------ ----------- ------------
Initial Percentage........................ 100% 100% 100% 100% 100%
August 25, 2007........................... 100 100 100 100 100
August 25, 2008........................... 100 100 100 21 0
August 25, 2009........................... 100 100 0 0 0
August 25, 2010........................... 100 100 0 0 0
August 25, 2011........................... 100 94 0 0 0
August 25, 2012........................... 100 69 0 0 0
August 25, 2013........................... 100 50 0 0 0
August 25, 2014........................... 100 34 0 0 0
August 25, 2015........................... 100 22 0 0 0
August 25, 2016........................... 100 12 0 0 0
August 25, 2017........................... 100 4 0 0 0
August 25, 2018........................... 100 0 0 0 0
August 25, 2019........................... 100 0 0 0 0
August 25, 2020........................... 100 0 0 0 0
August 25, 2021........................... 32 0 0 0 0
August 25, 2022........................... 30 0 0 0 0
August 25, 2023........................... 27 0 0 0 0
August 25, 2024........................... 25 0 0 0 0
August 25, 2025........................... 23 0 0 0 0
August 25, 2026........................... 21 0 0 0 0
August 25, 2027........................... 18 0 0 0 0
August 25, 2028........................... 15 0 0 0 0
August 25, 2029........................... 12 0 0 0 0
August 25, 2030........................... 8 0 0 0 0
August 25, 2031........................... 4 0 0 0 0
August 25, 2032........................... 0 0 0 0 0
August 25, 2033........................... 0 0 0 0 0
August 25, 2034........................... 0 0 0 0 0
August 25, 2035........................... 0 0 0 0 0
August 25, 2036........................... 0 0 0 0 0
Weighted Average Life in Years (1) 16.89 7.38 2.51 1.83 1.38
Weighted Average Life in Years (1)(2) 16.68 7.27 2.51 1.83 1.38
- ---------------------
*Indicates a number that is greater than zero but less than 0.5%, if applicable.
(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 or the Servicer exercises its option to
purchase the Mortgage Loans on the earliest possible Distribution Date on
which it is permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" in this prospectus supplement.
S-41
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS A-3
---------
DISTRIBUTION DATE 0% CPR 20% CPR 35% CPR 45% CPR 55% CPR
- ----------------- ---------- ----------- ------------ ----------- ------------
Initial Percentage........................ 100% 100% 100% 100% 100%
August 25, 2007........................... 100 100 100 100 100
August 25, 2008........................... 100 100 100 100 0
August 25, 2009........................... 100 100 100 0 0
August 25, 2010........................... 100 100 100 0 0
August 25, 2011........................... 100 100 100 0 0
August 25, 2012........................... 100 100 100 0 0
August 25, 2013........................... 100 100 71 0 0
August 25, 2014........................... 100 100 45 0 0
August 25, 2015........................... 100 100 29 0 0
August 25, 2016........................... 100 100 19 0 0
August 25, 2017........................... 100 100 8 0 0
August 25, 2018........................... 100 92 * 0 0
August 25, 2019........................... 100 72 0 0 0
August 25, 2020........................... 100 56 0 0 0
August 25, 2021........................... 100 1 0 0 0
August 25, 2022........................... 100 0 0 0 0
August 25, 2023........................... 100 0 0 0 0
August 25, 2024........................... 100 0 0 0 0
August 25, 2025........................... 100 0 0 0 0
August 25, 2026........................... 100 0 0 0 0
August 25, 2027........................... 100 0 0 0 0
August 25, 2028........................... 100 0 0 0 0
August 25, 2029........................... 100 0 0 0 0
August 25, 2030........................... 100 0 0 0 0
August 25, 2031........................... 100 0 0 0 0
August 25, 2032........................... 96 0 0 0 0
August 25, 2033........................... 74 0 0 0 0
August 25, 2034........................... 50 0 0 0 0
August 25, 2035........................... 23 0 0 0 0
August 25, 2036........................... 0 0 0 0 0
Weighted Average Life in Years (1) 27.93 13.87 8.25 2.32 1.74
Weighted Average Life in Years (1)(2) 22.74 9.91 5.32 2.32 1.74
- ---------------------
*Indicates a number that is greater than zero but less than 0.5%, if applicable.
(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 or the Servicer exercises its option to
purchase the Mortgage Loans on the earliest possible Distribution Date on
which it is permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" in this prospectus supplement.
S-42
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS M-1
---------
DISTRIBUTION DATE 0% CPR 20% CPR 35% CPR 45% CPR 55% CPR
- ----------------- ---------- ----------- ------------ ----------- ------------
Initial Percentage........................ 100% 100% 100% 100% 100%
August 25, 2007........................... 100 100 100 100 100
August 25, 2008........................... 100 100 100 100 85
August 25, 2009........................... 100 100 100 94 85
August 25, 2010........................... 100 80 100 94 61
August 25, 2011........................... 100 63 84 74 27
August 25, 2012........................... 100 50 23 40 7
August 25, 2013........................... 100 40 9 22 0
August 25, 2014........................... 100 31 6 7 0
August 25, 2015........................... 100 25 4 0 0
August 25, 2016........................... 100 20 2 0 0
August 25, 2017........................... 100 15 0 0 0
August 25, 2018........................... 100 12 0 0 0
August 25, 2019........................... 100 9 0 0 0
August 25, 2020........................... 100 7 0 0 0
August 25, 2021........................... 31 0 0 0 0
August 25, 2022........................... 29 0 0 0 0
August 25, 2023........................... 28 0 0 0 0
August 25, 2024........................... 27 0 0 0 0
August 25, 2025........................... 26 0 0 0 0
August 25, 2026........................... 24 0 0 0 0
August 25, 2027........................... 23 0 0 0 0
August 25, 2028........................... 21 0 0 0 0
August 25, 2029........................... 19 0 0 0 0
August 25, 2030........................... 17 0 0 0 0
August 25, 2031........................... 15 0 0 0 0
August 25, 2032........................... 13 0 0 0 0
August 25, 2033........................... 10 0 0 0 0
August 25, 2034........................... 7 0 0 0 0
August 25, 2035........................... 3 0 0 0 0
August 25, 2036........................... 0 0 0 0 0
Weighted Average Life in Years (1) 17.65 7.07 5.81 5.87 4.26
Weighted Average Life in Years (1)(2) 16.86 6.49 5.23 3.74 2.74
- ---------------------
*Indicates a number that is greater than zero but less than 0.5%, if applicable.
(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 or the Servicer exercises its option to
purchase the Mortgage Loans on the earliest possible Distribution Date on
which it is permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" in this prospectus supplement.
S-43
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS M-2
---------
DISTRIBUTION DATE 0% CPR 20% CPR 35% CPR 45% CPR 55% CPR
- ----------------- ---------- ----------- ------------ ----------- ------------
Initial Percentage........................ 100% 100% 100% 100% 100%
August 25, 2007........................... 100 100 100 100 100
August 25, 2008........................... 100 100 100 100 100
August 25, 2009........................... 100 100 100 100 71
August 25, 2010........................... 100 80 100 61 8
August 25, 2011........................... 100 63 22 10 4
August 25, 2012........................... 100 50 14 5 0
August 25, 2013........................... 100 40 9 2 0
August 25, 2014........................... 100 31 6 0 0
August 25, 2015........................... 100 25 4 0 0
August 25, 2016........................... 100 20 0 0 0
August 25, 2017........................... 100 15 0 0 0
August 25, 2018........................... 100 12 0 0 0
August 25, 2019........................... 100 9 0 0 0
August 25, 2020........................... 100 7 0 0 0
August 25, 2021........................... 31 0 0 0 0
August 25, 2022........................... 29 0 0 0 0
August 25, 2023........................... 28 0 0 0 0
August 25, 2024........................... 27 0 0 0 0
August 25, 2025........................... 26 0 0 0 0
August 25, 2026........................... 24 0 0 0 0
August 25, 2027........................... 23 0 0 0 0
August 25, 2028........................... 21 0 0 0 0
August 25, 2029........................... 19 0 0 0 0
August 25, 2030........................... 17 0 0 0 0
August 25, 2031........................... 15 0 0 0 0
August 25, 2032........................... 13 0 0 0 0
August 25, 2033........................... 10 0 0 0 0
August 25, 2034........................... 7 0 0 0 0
August 25, 2035........................... 2 0 0 0 0
August 25, 2036........................... 0 0 0 0 0
Weighted Average Life in Years (1) 17.65 7.07 5.05 4.33 3.33
Weighted Average Life in Years (1)(2) 16.86 6.49 4.67 3.81 2.90
- ---------------------
*Indicates a number that is greater than zero but less than 0.5%, if applicable.
(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 or the Servicer exercises its option to
purchase the Mortgage Loans on the earliest possible Distribution Date on
which it is permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" in this prospectus supplement.
S-44
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS M-3
---------
DISTRIBUTION DATE 0% CPR 20% CPR 35% CPR 45% CPR 55% CPR
- ----------------- ---------- ----------- ------------ ----------- ------------
Initial Percentage........................ 100% 100% 100% 100% 100%
August 25, 2007........................... 100 100 100 100 100
August 25, 2008........................... 100 100 100 100 100
August 25, 2009........................... 100 100 100 100 18
August 25, 2010........................... 100 80 77 18 8
August 25, 2011........................... 100 63 22 10 4
August 25, 2012........................... 100 50 14 5 0
August 25, 2013........................... 100 40 9 0 0
August 25, 2014........................... 100 31 6 0 0
August 25, 2015........................... 100 25 4 0 0
August 25, 2016........................... 100 20 0 0 0
August 25, 2017........................... 100 15 0 0 0
August 25, 2018........................... 100 12 0 0 0
August 25, 2019........................... 100 9 0 0 0
August 25, 2020........................... 100 7 0 0 0
August 25, 2021........................... 31 0 0 0 0
August 25, 2022........................... 29 0 0 0 0
August 25, 2023........................... 28 0 0 0 0
August 25, 2024........................... 27 0 0 0 0
August 25, 2025........................... 26 0 0 0 0
August 25, 2026........................... 24 0 0 0 0
August 25, 2027........................... 23 0 0 0 0
August 25, 2028........................... 21 0 0 0 0
August 25, 2029........................... 19 0 0 0 0
August 25, 2030........................... 17 0 0 0 0
August 25, 2031........................... 15 0 0 0 0
August 25, 2032........................... 13 0 0 0 0
August 25, 2033........................... 10 0 0 0 0
August 25, 2034........................... 7 0 0 0 0
August 25, 2035........................... 0 0 0 0 0
August 25, 2036........................... 0 0 0 0 0
Weighted Average Life in Years (1) 17.64 7.07 4.76 3.90 2.97
Weighted Average Life in Years (1)(2) 16.86 6.49 4.39 3.62 2.77
- ---------------------
*Indicates a number that is greater than zero but less than 0.5%, if applicable.
(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 or the Servicer exercises its option to
purchase the Mortgage Loans on the earliest possible Distribution Date on
which it is permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" in this prospectus supplement.
S-45
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS M-4
---------
DISTRIBUTION DATE 0% CPR 20% CPR 35% CPR 45% CPR 55% CPR
- ----------------- ---------- ----------- ------------ ----------- ------------
Initial Percentage........................ 100% 100% 100% 100% 100%
August 25, 2007........................... 100 100 100 100 100
August 25, 2008........................... 100 100 100 100 100
August 25, 2009........................... 100 100 100 100 18
August 25, 2010........................... 100 80 35 18 8
August 25, 2011........................... 100 63 22 10 *
August 25, 2012........................... 100 50 14 5 0
August 25, 2013........................... 100 40 9 0 0
August 25, 2014........................... 100 31 6 0 0
August 25, 2015........................... 100 25 2 0 0
August 25, 2016........................... 100 20 0 0 0
August 25, 2017........................... 100 15 0 0 0
August 25, 2018........................... 100 12 0 0 0
August 25, 2019........................... 100 9 0 0 0
August 25, 2020........................... 100 7 0 0 0
August 25, 2021........................... 31 0 0 0 0
August 25, 2022........................... 29 0 0 0 0
August 25, 2023........................... 28 0 0 0 0
August 25, 2024........................... 27 0 0 0 0
August 25, 2025........................... 26 0 0 0 0
August 25, 2026........................... 24 0 0 0 0
August 25, 2027........................... 23 0 0 0 0
August 25, 2028........................... 21 0 0 0 0
August 25, 2029........................... 19 0 0 0 0
August 25, 2030........................... 17 0 0 0 0
August 25, 2031........................... 15 0 0 0 0
August 25, 2032........................... 13 0 0 0 0
August 25, 2033........................... 10 0 0 0 0
August 25, 2034........................... 7 0 0 0 0
August 25, 2035........................... 0 0 0 0 0
August 25, 2036........................... 0 0 0 0 0
Weighted Average Life in Years (1) 17.64 7.07 4.62 3.70 2.82
Weighted Average Life in Years (1)(2) 16.86 6.49 4.26 3.43 2.63
- ------------------
*Indicates a number that is greater than zero but less than 0.5%, if applicable.
(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 or the Servicer exercises its option to
purchase the Mortgage Loans on the earliest possible Distribution Date on
which it is permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" in this prospectus supplement.
S-46
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS M-5
---------
DISTRIBUTION DATE 0% CPR 20% CPR 35% CPR 45% CPR 55% CPR
- ----------------- ---------- ----------- ------------ ----------- ------------
Initial Percentage........................ 100% 100% 100% 100% 100%
August 25, 2007........................... 100 100 100 100 100
August 25, 2008........................... 100 100 100 100 100
August 25, 2009........................... 100 100 100 100 18
August 25, 2010........................... 100 80 35 18 8
August 25, 2011........................... 100 63 22 10 0
August 25, 2012........................... 100 50 14 5 0
August 25, 2013........................... 100 40 9 0 0
August 25, 2014........................... 100 31 6 0 0
August 25, 2015........................... 100 25 0 0 0
August 25, 2016........................... 100 20 0 0 0
August 25, 2017........................... 100 15 0 0 0
August 25, 2018........................... 100 12 0 0 0
August 25, 2019........................... 100 9 0 0 0
August 25, 2020........................... 100 7 0 0 0
August 25, 2021........................... 31 0 0 0 0
August 25, 2022........................... 29 0 0 0 0
August 25, 2023........................... 28 0 0 0 0
August 25, 2024........................... 27 0 0 0 0
August 25, 2025........................... 26 0 0 0 0
August 25, 2026........................... 24 0 0 0 0
August 25, 2027........................... 23 0 0 0 0
August 25, 2028........................... 21 0 0 0 0
August 25, 2029........................... 19 0 0 0 0
August 25, 2030........................... 17 0 0 0 0
August 25, 2031........................... 15 0 0 0 0
August 25, 2032........................... 13 0 0 0 0
August 25, 2033........................... 10 0 0 0 0
August 25, 2034........................... 7 0 0 0 0
August 25, 2035........................... 0 0 0 0 0
August 25, 2036........................... 0 0 0 0 0
Weighted Average Life in Years (1) 17.63 7.07 4.50 3.55 2.69
Weighted Average Life in Years (1)(2) 16.86 6.49 4.15 3.29 2.50
- ------------------
*Indicates a number that is greater than zero but less than 0.5%, if applicable.
(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 or the Servicer exercises its option to
purchase the Mortgage Loans on the earliest possible Distribution Date on
which it is permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" in this prospectus supplement.
S-47
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS M-6
---------
DISTRIBUTION DATE 0% CPR 20% CPR 35% CPR 45% CPR 55% CPR
- ----------------- ---------- ----------- ------------ ----------- ------------
Initial Percentage........................ 100% 100% 100% 100% 100%
August 25, 2007........................... 100 100 100 100 100
August 25, 2008........................... 100 100 100 100 100
August 25, 2009........................... 100 100 100 34 18
August 25, 2010........................... 100 80 35 18 8
August 25, 2011........................... 100 63 22 10 0
August 25, 2012........................... 100 50 14 3 0
August 25, 2013........................... 100 40 9 0 0
August 25, 2014........................... 100 31 6 0 0
August 25, 2015........................... 100 25 0 0 0
August 25, 2016........................... 100 20 0 0 0
August 25, 2017........................... 100 15 0 0 0
August 25, 2018........................... 100 12 0 0 0
August 25, 2019........................... 100 9 0 0 0
August 25, 2020........................... 100 7 0 0 0
August 25, 2021........................... 31 0 0 0 0
August 25, 2022........................... 29 0 0 0 0
August 25, 2023........................... 28 0 0 0 0
August 25, 2024........................... 27 0 0 0 0
August 25, 2025........................... 26 0 0 0 0
August 25, 2026........................... 24 0 0 0 0
August 25, 2027........................... 23 0 0 0 0
August 25, 2028........................... 21 0 0 0 0
August 25, 2029........................... 19 0 0 0 0
August 25, 2030........................... 17 0 0 0 0
August 25, 2031........................... 15 0 0 0 0
August 25, 2032........................... 13 0 0 0 0
August 25, 2033........................... 10 0 0 0 0
August 25, 2034........................... 7 0 0 0 0
August 25, 2035........................... 0 0 0 0 0
August 25, 2036........................... 0 0 0 0 0
Weighted Average Life in Years (1) 17.62 7.07 4.41 3.44 2.62
Weighted Average Life in Years (1)(2) 16.86 6.49 4.08 3.20 2.44
- ------------------
*Indicates a number that is greater than zero but less than 0.5%, if applicable.
(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 or the Servicer exercises its option to
purchase the Mortgage Loans on the earliest possible Distribution Date on
which it is permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" in this prospectus supplement.
S-48
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS M-7
---------
DISTRIBUTION DATE 0% CPR 20% CPR 35% CPR 45% CPR 55% CPR
- ----------------- ---------- ----------- ------------ ----------- ------------
Initial Percentage........................ 100% 100% 100% 100% 100%
August 25, 2007........................... 100 100 100 100 100
August 25, 2008........................... 100 100 100 100 100
August 25, 2009........................... 100 100 100 33 18
August 25, 2010........................... 100 80 35 18 8
August 25, 2011........................... 100 63 22 10 0
August 25, 2012........................... 100 50 14 0 0
August 25, 2013........................... 100 40 9 0 0
August 25, 2014........................... 100 31 3 0 0
August 25, 2015........................... 100 25 0 0 0
August 25, 2016........................... 100 20 0 0 0
August 25, 2017........................... 100 15 0 0 0
August 25, 2018........................... 100 12 0 0 0
August 25, 2019........................... 100 9 0 0 0
August 25, 2020........................... 100 7 0 0 0
August 25, 2021........................... 31 0 0 0 0
August 25, 2022........................... 29 0 0 0 0
August 25, 2023........................... 28 0 0 0 0
August 25, 2024........................... 27 0 0 0 0
August 25, 2025........................... 26 0 0 0 0
August 25, 2026........................... 24 0 0 0 0
August 25, 2027........................... 23 0 0 0 0
August 25, 2028........................... 21 0 0 0 0
August 25, 2029........................... 19 0 0 0 0
August 25, 2030........................... 17 0 0 0 0
August 25, 2031........................... 15 0 0 0 0
August 25, 2032........................... 13 0 0 0 0
August 25, 2033........................... 10 0 0 0 0
August 25, 2034........................... 7 0 0 0 0
August 25, 2035........................... 0 0 0 0 0
August 25, 2036........................... 0 0 0 0 0
Weighted Average Life in Years (1) 17.61 7.07 4.34 3.37 2.56
Weighted Average Life in Years (1)(2) 16.86 6.49 4.03 3.14 2.39
- ---------------------
*Indicates a number that is greater than zero but less than 0.5%, if applicable.
(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 or the Servicer exercises its option to
purchase the Mortgage Loans on the earliest possible Distribution Date on
which it is permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" in this prospectus supplement.
S-49
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS M-8
---------
DISTRIBUTION DATE 0% CPR 20% CPR 35% CPR 45% CPR 55% CPR
- ----------------- ---------- ----------- ------------ ----------- ------------
Initial Percentage........................ 100% 100% 100% 100% 100%
August 25, 2007........................... 100 100 100 100 100
August 25, 2008........................... 100 100 100 100 100
August 25, 2009........................... 100 100 100 33 18
August 25, 2010........................... 100 80 35 18 8
August 25, 2011........................... 100 63 22 10 0
August 25, 2012........................... 100 50 14 0 0
August 25, 2013........................... 100 40 9 0 0
August 25, 2014........................... 100 31 0 0 0
August 25, 2015........................... 100 25 0 0 0
August 25, 2016........................... 100 20 0 0 0
August 25, 2017........................... 100 15 0 0 0
August 25, 2018........................... 100 12 0 0 0
August 25, 2019........................... 100 9 0 0 0
August 25, 2020........................... 100 7 0 0 0
August 25, 2021........................... 31 0 0 0 0
August 25, 2022........................... 29 0 0 0 0
August 25, 2023........................... 28 0 0 0 0
August 25, 2024........................... 27 0 0 0 0
August 25, 2025........................... 26 0 0 0 0
August 25, 2026........................... 24 0 0 0 0
August 25, 2027........................... 23 0 0 0 0
August 25, 2028........................... 21 0 0 0 0
August 25, 2029........................... 19 0 0 0 0
August 25, 2030........................... 17 0 0 0 0
August 25, 2031........................... 15 0 0 0 0
August 25, 2032........................... 13 0 0 0 0
August 25, 2033........................... 10 0 0 0 0
August 25, 2034........................... 2 0 0 0 0
August 25, 2035........................... 0 0 0 0 0
August 25, 2036........................... 0 0 0 0 0
Weighted Average Life in Years (1) 17.60 7.04 4.30 3.32 2.52
Weighted Average Life in Years (1)(2) 16.86 6.49 4.00 3.10 2.36
- ---------------------
*Indicates a number that is greater than zero but less than 0.5%, if applicable.
(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 or the Servicer exercises its option to
purchase the Mortgage Loans on the earliest possible Distribution Date on
which it is permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" in this prospectus supplement.
S-50
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS M-9
---------
DISTRIBUTION DATE 0% CPR 20% CPR 35% CPR 45% CPR 55% CPR
- ----------------- ---------- ----------- ------------ ----------- ------------
Initial Percentage........................ 100% 100% 100% 100% 100%
August 25, 2007........................... 100 100 100 100 100
August 25, 2008........................... 100 100 100 100 100
August 25, 2009........................... 100 100 100 33 18
August 25, 2010........................... 100 80 35 18 4
August 25, 2011........................... 100 63 22 10 0
August 25, 2012........................... 100 50 14 0 0
August 25, 2013........................... 100 40 9 0 0
August 25, 2014........................... 100 31 0 0 0
August 25, 2015........................... 100 25 0 0 0
August 25, 2016........................... 100 20 0 0 0
August 25, 2017........................... 100 15 0 0 0
August 25, 2018........................... 100 12 0 0 0
August 25, 2019........................... 100 9 0 0 0
August 25, 2020........................... 100 1 0 0 0
August 25, 2021........................... 31 0 0 0 0
August 25, 2022........................... 29 0 0 0 0
August 25, 2023........................... 28 0 0 0 0
August 25, 2024........................... 27 0 0 0 0
August 25, 2025........................... 26 0 0 0 0
August 25, 2026........................... 24 0 0 0 0
August 25, 2027........................... 23 0 0 0 0
August 25, 2028........................... 21 0 0 0 0
August 25, 2029........................... 19 0 0 0 0
August 25, 2030........................... 17 0 0 0 0
August 25, 2031........................... 15 0 0 0 0
August 25, 2032........................... 13 0 0 0 0
August 25, 2033........................... 10 0 0 0 0
August 25, 2034........................... 0 0 0 0 0
August 25, 2035........................... 0 0 0 0 0
August 25, 2036........................... 0 0 0 0 0
Weighted Average Life in Years (1) 17.56 6.99 4.22 3.25 2.47
Weighted Average Life in Years (1)(2) 16.86 6.49 3.96 3.05 2.32
- ---------------------
*Indicates a number that is greater than zero but less than 0.5%, if applicable.
(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 or the Servicer exercises its option to
purchase the Mortgage Loans on the earliest possible Distribution Date on
which it is permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" in this prospectus supplement.
S-51
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR
CLASS M-10
----------
DISTRIBUTION DATE 0% CPR 20% CPR 35% CPR 45% CPR 55% CPR
- ----------------- ---------- ----------- ------------ ----------- ------------
Initial Percentage........................ 100% 100% 100% 100% 100%
August 25, 2007........................... 100 100 100 100 100
August 25, 2008........................... 100 100 100 100 61
August 25, 2009........................... 100 100 100 33 18
August 25, 2010........................... 100 80 35 18 0
August 25, 2011........................... 100 63 22 1 0
August 25, 2012........................... 100 50 14 0 0
August 25, 2013........................... 100 40 0 0 0
August 25, 2014........................... 100 31 0 0 0
August 25, 2015........................... 100 25 0 0 0
August 25, 2016........................... 100 20 0 0 0
August 25, 2017........................... 100 15 0 0 0
August 25, 2018........................... 100 9 0 0 0
August 25, 2019........................... 100 * 0 0 0
August 25, 2020........................... 100 0 0 0 0
August 25, 2021........................... 31 0 0 0 0
August 25, 2022........................... 29 0 0 0 0
August 25, 2023........................... 28 0 0 0 0
August 25, 2024........................... 27 0 0 0 0
August 25, 2025........................... 26 0 0 0 0
August 25, 2026........................... 24 0 0 0 0
August 25, 2027........................... 23 0 0 0 0
August 25, 2028........................... 21 0 0 0 0
August 25, 2029........................... 19 0 0 0 0
August 25, 2030........................... 17 0 0 0 0
August 25, 2031........................... 15 0 0 0 0
August 25, 2032........................... 11 0 0 0 0
August 25, 2033........................... 1 0 0 0 0
August 25, 2034........................... 0 0 0 0 0
August 25, 2035........................... 0 0 0 0 0
August 25, 2036........................... 0 0 0 0 0
Weighted Average Life in Years (1) 17.47 6.87 4.11 3.15 2.38
Weighted Average Life in Years (1)(2) 16.86 6.49 3.91 3.00 2.28
- ---------------------
*Indicates a number that is greater than zero but less than 0.5%, if applicable.
(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 or the Servicer exercises its option to
purchase the Mortgage Loans on the earliest possible Distribution Date on
which it is permitted to exercise this option. SEE "POOLING AND SERVICING
AGREEMENT--TERMINATION" in this prospectus supplement.
S-52
There is no assurance that prepayments of the Mortgage Loans included
in the Mortgage Pool will conform to any of the levels of CPR 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-1, 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-1, 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-1, 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 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-1, 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-1, 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
S-53
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-1,
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-1, 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-1, 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-1 Certificates 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-1 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. 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 and Class CE-1 Certificates are approximately
4.00%, approximately 3.90%, approximately 1.40%, approximately 2.30%,
approximately 1.60%, approximately 1.40%, approximately 1.10%, approximately
0.70%, approximately 1.75%, approximately 1.55% and approximately 3.80%,
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 Interest Rate Swap
Agreement and the Swap Provider" 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 Offered
Certificates. As a result of the longer weighted average lives of the Mezzanine
Certificates, the holders of such certificates have a greater risk of suffering
a loss on their investments. For additional considerations relating to the yield
on the Mezzanine Certificates, see "Yield Considerations" in the prospectus.
S-54
DESCRIPTION OF THE CERTIFICATES
GENERAL
The ACE Securities Corp. Home Equity Loan Trust, Series 2006-SL4, Asset
Backed Pass-Through Certificates will consist of seventeen classes of
certificates, designated as (i) the Class A-1, Class A-2 and Class A-3
Certificates (collectively, the "Class A Certificates"); (ii) 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 Certificates (collectively, the "Mezzanine Certificates");
(iii) the Class CE-1 Certificates (together, with the Mezzanine Certificates,
the "Subordinate Certificates"); (v) the Class CE-2 Certificates; (vi) the Class
P Certificates; and (vii) the Class R Certificates (also referred to in this
prospectus supplement as the "Residual Certificates"). Only the Class A
Certificates and the Mezzanine Certificates (together, the "Offered
Certificates") are offered by this prospectus supplement. The Class A-1, Class
A-2, Class M-4, Class M-5, Class M-7, Class M-8, Class M-9 and Class M-10
Certificates are also collectively referred to in this prospectus supplement as
the "Floating Rate Certificates". The Class A-3, Class M-1, Class M-2, Class M-3
and Class M-6 Certificates are also collectively referred to in this prospectus
supplement as the "Fixed Rate Certificates".
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 September 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 Floating Rate 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 such Distribution Date occurs if
such certificates are held in physical form. The "Record Date" for the Fixed
Rate Certificates and any Distribution Date, is the last business day of the
month immediately preceding the month in which such Distribution Date occurs.
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, second lien fixed-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 $344,592,203, subject to a permitted variance of plus or minus 5%.
The Class A Certificates and the Mezzanine Certificates will have the
initial Certificate Principal Balance set forth in the table appearing on the
cover of this prospectus supplement. The Pass-Through Rates on the Offered
Certificates will be calculated for each Distribution Date as described under
"--Pass-Through Rates" below. The Class A-1, Class A-2 and Class A-3
Certificates evidence an initial undivided interest of approximately 58.82%,
approximately 14.19% and approximately 3.49%, respectively, 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 and Class M-10 Certificates evidence initial undivided
interests of approximately 4.00%, approximately 3.90%, approximately 1.40%,
approximately 2.30%, approximately 1.60%, approximately 1.40%, approximately
1.10%, approximately 0.70%, approximately 1.75% and approximately 1.55%,
respectively, in the trust fund and the Class CE-1 Certificates evidence initial
undivided interests of approximately 3.80% in the trust fund.
BOOK-ENTRY CERTIFICATES
The Offered Certificates will be book-entry certificates (for so long
as they are registered in the name of the applicable depository or its nominee,
the "Book-Entry Certificates"). Persons acquiring beneficial ownership interests
in the Book-Entry Certificates ("Certificate Owners") will hold such
certificates through The Depository Trust Company ("DTC") in the United States,
or
S-55
Clearstream Banking Luxembourg, formerly known as Cedelbank SA ("Clearstream"),
or the Euroclear System ("Euroclear") in Europe, if they are participants of
such systems ("Clearstream Participants" or "Euroclear Participants",
respectively), or indirectly through organizations which are Clearstream or
Euroclear Participants. The Book-Entry Certificates will be issued in one or
more certificates which equal the aggregate Certificate Principal Balance of
such Certificates and will initially be registered in the name of Cede & Co.,
the nominee of DTC. Clearstream and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Clearstreams' and Euroclear's names on the books of their respective
depositories which in turn will hold such positions in customers' securities
accounts in the depositories, names on the books of DTC. Citibank, N.A. will act
as 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 Offered Certificates will be Cede & Co., as nominee
of DTC. Certificate Owners will not be Certificateholders as that term is used
in the Pooling and Servicing Agreement. Certificate Owners are only permitted to
exercise their rights indirectly through DTC and participants of DTC ("DTC
Participants").
The Certificate Owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC Participant and on
the records of Clearstream or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of and
interest on the Book-Entry Certificates from the Securities Administrator
through DTC and DTC Participants. While the Book-Entry Certificates are
outstanding (except under the circumstances described below), under the rules,
regulations and procedures creating and affecting DTC and its operations (the
"Rules"), DTC is required to make book-entry transfers among DTC Participants on
whose behalf it acts with respect to the Book-Entry Certificates and is required
to receive and transmit distributions of principal of, and interest on, the
Book-Entry Certificates. DTC Participants and indirect participants with whom
Certificate Owners have accounts with respect to Book-Entry Certificates are
similarly required to make book-entry transfers and receive and transmit such
distributions on behalf of their respective Certificate Owners. Accordingly,
although Certificate Owners will not possess certificates representing their
respective interests in the Book-Entry Certificates, the Rules provide a
mechanism by which Certificate Owners will receive distributions and will be
able to transfer their interest.
Certificate Owners will not receive or be entitled to receive
certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Certificate Owners who are not DTC
Participants may transfer ownership of Book-Entry Certificates only through DTC
Participants and indirect participants by instructing such DTC Participants and
indirect participants to transfer Book-Entry Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Book-Entry
Certificates, which account is maintained with their respective DTC
Participants. Under the Rules and in accordance with DTC's normal procedures,
transfers of ownership of Book-Entry Certificates will be executed through DTC
and the accounts of the respective DTC Participants at DTC will be debited and
credited. Similarly, the DTC Participants and indirect
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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.
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
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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
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
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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. 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.
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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 0.120% in the case of each Distribution Date through and including the
Distribution Date on which the aggregate principal balance of the Mortgage Loans
and properties acquired in respect thereof remaining in the trust fund is
reduced to less than 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 0.240%, in the case of any Distribution Date thereafter and
(ii) the applicable Net WAC Pass-Through Rate for such Distribution Date.
The Pass-Through Rate on the Class A-2 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 0.200% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 0.400%, 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 A-3 Certificates will be a rate per
annum equal to the lesser of (i) 6.140% in the case of each Distribution Date
through and including the Optional Termination Date, or 6.640% in the case of
any Distribution Date thereafter and (ii) the applicable Net WAC Pass-Through
Rate for such Distribution Date.
The Pass-Through Rate on the Class M-1 Certificates will be a rate per
annum equal to the lesser of (i) 6.190% in the case of each Distribution Date
through and including the Optional Termination Date, or 6.690% in the case of
any Distribution Date thereafter and (ii) the applicable Net WAC Pass-Through
Rate for such Distribution Date.
The Pass-Through Rate on the Class M-2 Certificates will be a rate per
annum equal to the lesser of (i) 6.230% in the case of each Distribution Date
through and including the Optional Termination Date, or 6.730%, 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) 6.270% in the case of each Distribution Date
through and including the Optional Termination Date, or 6.770%, 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 0.520% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 0.780%, 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 0.570% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 0.855%, 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-6 Certificates will be a rate per
annum equal to the lesser of (i) 6.500% in the case of each Distribution Date
through and including the Optional Termination Date, or 7.000%, 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 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-8 Certificates will be a rate per
annum equal to the lesser of (i) One-Month LIBOR plus 1.250% in the case of each
Distribution Date through and including the Optional Termination Date, or
One-Month LIBOR plus 1.750%, 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 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.
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.
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, (ii)
the rate at which the fee payable to the Master Servicer is calculated and (iii)
the rate at which the fee payable to the Credit Risk Manager is calculated.
"ALLOCATED REALIZED LOSS AMOUNT": The Allocated Realized Loss Amount
with respect to any class of Mezzanine Certificates 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 Custodians, 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.
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"CERTIFICATE PRINCIPAL BALANCE": The Certificate Principal Balance of
an Offered Certificate outstanding at any time represents the then maximum
amount that the holder of such certificate is entitled to receive as
distributions allocable to principal from the cash flow on the Mortgage Loans
and the other assets in the trust fund. The Certificate Principal Balance of an
Offered Certificate 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 CE-1 Certificates as of any date of determination is equal
to the excess, if any, of (i) the then aggregate principal balance of the
Mortgage Loans over (ii) the then aggregate Certificate Principal Balance of the
Offered Certificates and the Class P Certificates. The initial Certificate
Principal Balance of the Class P Certificates is equal to $100.
"CHARGED OFF MORTGAGE LOAN": A Charged Off Mortgage Loan is a defaulted
Mortgage Loan that the Servicer is required to charge off once such Mortgage
Loan becomes 180 days delinquent, provided that such Mortgage Loan is not a
Liquidated Mortgage Loan and provided further, that the Servicer for such
Mortgage Loan has determined, based on a broker's price opinion and other
relevant considerations, that no significant Subsequent Recovery is possible
through foreclosure proceedings or other liquidation of the related Mortgaged
Property or that the potential Subsequent Recovery is anticipated to be an
amount that is insufficient to warrant proceeding through foreclosure or other
liquidation of the related Mortgaged Property.
"CLASS A PRINCIPAL DISTRIBUTION AMOUNT": The Class A Principal
Distribution Amount is an amount equal to the excess of (x) the sum of the
Certificate Principal Balances of the Class A Certificates immediately prior to
the Distribution Date over (y) the lesser of (A) the product of (i)
approximately 53.00% 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 excess, if any, of (x) 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
(y) the product of (i) 0.50% and (ii) the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date.
"CLASS M-1 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-1 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
aggregate Certificate Principal Balances of the Class A Certificates after
taking into account the payment of the Class A Principal Distribution Amount on
the Distribution Date and (ii) the Certificate Principal Balance of the Class
M-1 Certificates immediately prior to the Distribution Date over (y) the lesser
of (A) the product of (i) approximately 61.00% 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 excess, if
any, of (x) 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 (y) the product of (i) 0.50% and (ii) the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date.
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"CLASS M-2 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-2 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
aggregate Certificate Principal Balances of the Class A Certificates after
taking into account the payment of the Class A Principal Distribution Amount on
the Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date and (iii) the Certificate Principal
Balance of the Class M-2 Certificates immediately prior to the Distribution Date
over (y) the lesser of (A) the product of (i) approximately 68.80% 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 excess, if any, of (x) 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 (y) the product of (i)
0.50% and (ii) the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date.
"CLASS M-3 PRINCIPAL DISTRIBUTION AMOUNT": The Class M-3 Principal
Distribution Amount is an amount equal to the excess of (x) the sum of (i) the
aggregate Certificate Principal Balances of the Class A Certificates after
taking into account the payment of the Class A Principal Distribution Amount on
the Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date, (iii) the Certificate Principal
Balance of the Class M-2 Certificates after taking into account the payment of
the Class M-2 Principal Distribution Amount on the Distribution Date and (iv)
the Certificate Principal Balance of the Class M-3 Certificates immediately
prior to the Distribution Date over (y) the lesser of (A) the product of (i)
approximately 71.60% 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 excess, if any, of (x) 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
(y) 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 Balances of the Class A Certificates after
taking into account the payment of the Class A Principal Distribution Amount on
the Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date, (iii) the Certificate Principal
Balance of the Class M-2 Certificates after taking into account the payment of
the Class M-2 Principal Distribution Amount on the Distribution Date, (iv) the
Certificate Principal Balance of the Class M-3 Certificates after taking into
account the payment of the Class M-3 Principal Distribution Amount on the
Distribution Date and (v) the Certificate Principal Balance of the Class M-4
Certificates immediately prior to the Distribution Date over (y) the lesser of
(A) the product of (i) approximately 76.20% 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 excess, if
any, of (x) 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
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principal received during the related Prepayment Period) minus (y) 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 Balances of the Class A Certificates after
taking into account the payment of the Class A Principal Distribution Amount on
the Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date, (iii) the Certificate Principal
Balances of the Class M-2 Certificates after taking into account the payment of
the Class M-2 Principal Distribution Amount on the Distribution Date, (iv) the
Certificate Principal Balance of the Class M-3 Certificates after taking into
account the payment of the Class M-3 Principal Distribution Amount on the
Distribution Date, (v) the Certificate Principal Balance of the Class M-4
Certificates after taking into account the payment of the Class M-4 Principal
Distribution Amount on the Distribution Date and (vi) the Certificate Principal
Balance of the Class M-5 Certificates immediately prior to the Distribution Date
over (y) the lesser of (A) the product of (i) approximately 79.40% 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 excess, if any, of (x) 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 (y) 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 Balances of the Class A Certificates after
taking into account the payment of the Class A Principal Distribution Amount on
the Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date, (iii) the Certificate Principal
Balance of the Class M-2 Certificates after taking into account the payment of
the Class M-2 Principal Distribution Amount on the Distribution Date, (iv) the
Certificate Principal Balance of the Class M-3 Certificates after taking into
account the payment of the Class M-3 Principal Distribution Amount on the
Distribution Date, (v) the Certificate Principal Balance of the Class M-4
Certificates after taking into account the payment of the Class M-4 Principal
Distribution Amount on the Distribution Date, (vi) the Certificate Principal
Balance of the Class M-5 Certificates after taking into account the payment of
the Class M-5 Principal Distribution Amount on the Distribution Date and (vii)
the Certificate Principal Balance of the Class M-6 Certificates immediately
prior to the Distribution Date over (y) the lesser of (A) the product of (i)
approximately 82.20% 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 excess, if any, of (x) 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
(y) 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 Balances of the Class A Certificates after
taking into account the payment of the Class A Principal Distribution Amount on
the Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount
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on the Distribution Date, (iii) the Certificate Principal Balance of the Class
M-2 Certificates after taking into account the payment of the Class M-2
Principal Distribution Amount on the Distribution Date, (iv) the Certificate
Principal Balance of the Class M-3 Certificates after taking into account the
payment of the Class M-3 Principal Distribution Amount on the Distribution Date,
(v) the Certificate Principal Balance of the Class M-4 Certificates after taking
into account the payment of the Class M-4 Principal Distribution Amount on the
Distribution Date, (vi) the Certificate Principal Balance of the Class M-5
Certificates after taking into account the payment of the Class M-5 Principal
Distribution Amount on the Distribution Date, (vii) the Certificate Principal
Balance of the Class M-6 Certificates after taking into account the payment of
the Class M-6 Principal Distribution Amount on the Distribution Date and (viii)
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 84.40% 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 excess, if any, of (x) 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
(y) 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 Balances of the Class A Certificates after
taking into account the payment of the Class A Principal Distribution Amount on
the Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date, (iii) the Certificate Principal
Balance of the Class M-2 Certificates after taking into account the payment of
the Class M-2 Principal Distribution Amount on the Distribution Date, (iv) the
Certificate Principal Balance of the Class M-3 Certificates after taking into
account the payment of the Class M-3 Principal Distribution Amount on the
Distribution Date, (v) the Certificate Principal Balance of the Class M-4
Certificates after taking into account the payment of the Class M-4 Principal
Distribution Amount on the Distribution Date, (vi) the Certificate Principal
Balance of the Class M-5 Certificates after taking into account the payment of
the Class M-5 Principal Distribution Amount on the Distribution Date, (vii) the
Certificate Principal Balance of the Class M-6 Certificates after taking into
account the payment of the Class M-6 Principal Distribution Amount on the
Distribution Date, (viii) the Certificate Principal Balance of the Class M-7
Certificates after taking into account the payment of the Class M-7 Principal
Distribution Amount on the Distribution Date and (ix) 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 85.80% 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 excess, if any, of (x) 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 (y) 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 Balances of the Class A Certificates after
taking into account the payment of the Class A Principal Distribution Amount on
the Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount
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on the Distribution Date, (iii) the Certificate Principal Balance of the Class
M-2 Certificates after taking into account the payment of the Class M-2
Principal Distribution Amount on the Distribution Date, (iv) the Certificate
Principal Balance of the Class M-3 Certificates after taking into account the
payment of the Class M-3 Principal Distribution Amount on the Distribution Date,
(v) the Certificate Principal Balance of the Class M-4 Certificates after taking
into account the payment of the Class M-4 Principal Distribution Amount on the
Distribution Date, (vi) the Certificate Principal Balance of the Class M-5
Certificates after taking into account the payment of the Class M-5 Principal
Distribution Amount on the Distribution Date, (vii) the Certificate Principal
Balance of the Class M-6 Certificates after taking into account the payment of
the Class M-6 Principal Distribution Amount on the Distribution Date, (viii) the
Certificate Principal Balance of the Class M-7 Certificates after taking into
account the payment of the Class M-7 Principal Distribution Amount on the
Distribution Date, (ix) 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 (x) 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 89.30% and (ii) the
aggregate principal balance of the Mortgage Loans as of the last day of the
related Due Period (after giving effect to scheduled payments of principal due
during the related Due Period, to the extent received or advanced, and
unscheduled collections of principal received during the related Prepayment
Period) and (B) the excess, if any, of (x) 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 (y) 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 Balances of the Class A Certificates after
taking into account the payment of the Class A Principal Distribution Amount on
the Distribution Date, (ii) the Certificate Principal Balance of the Class M-1
Certificates after taking into account the payment of the Class M-1 Principal
Distribution Amount on the Distribution Date, (iii) the Certificate Principal
Balance of the Class M-2 Certificates after taking into account the payment of
the Class M-2 Principal Distribution Amount on the Distribution Date, (iv) the
Certificate Principal Balance of the Class M-3 Certificates after taking into
account the payment of the Class M-3 Principal Distribution Amount on the
Distribution Date, (v) the Certificate Principal Balance of the Class M-4
Certificates after taking into account the payment of the Class M-4 Principal
Distribution Amount on the Distribution Date, (vi) the Certificate Principal
Balance of the Class M-5 Certificates after taking into account the payment of
the Class M-5 Principal Distribution Amount on the Distribution Date, (vii) the
Certificate Principal Balance of the Class M-6 Certificates after taking into
account the payment of the Class M-6 Principal Distribution Amount on the
Distribution Date, (viii) the Certificate Principal Balance of the Class M-7
Certificates after taking into account the payment of the Class M-7 Principal
Distribution Amount on the Distribution Date, (ix) 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, (x) 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 (xi) 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 92.40% 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 excess, if
any, of (x) 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 (y) the product of (i) 0.50% and (ii) the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date.
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"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": For 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.
"INTEREST ACCRUAL PERIOD": The Interest Accrual Period for the Floating
Rate Certificates and any Distribution Date is the period commencing on the
Distribution Date of the month immediately preceding the month in which such
Distribution Date occurs (or, in the case of the first period, commencing on the
Closing Date), and ending on the day preceding such Distribution Date. All
distributions of interest on the Floating Rate Certificates will be based on a
360-day year and the actual number of days in the applicable Interest Accrual
Period. The Interest Accrual Period for the Fixed Rate Certificates and any
Distribution Date is the period commencing on the first day of the month prior
to the month in which the Distribution Date occurs and ending on the last day of
the month immediately preceding the month in which such Distribution Date
occurs. All distributions of interest on the Fixed Rate Certificates will be
based on a 360-day year consisting of twelve 30-day months.
"INTEREST CARRY FORWARD AMOUNT": The Interest Carry Forward Amount with
respect to any class of Offered Certificates and any Distribution Date is equal
to the amount, if any, by which the Interest Distribution Amount for that class
of certificates for the immediately preceding Distribution Date exceeded the
actual amount distributed on the certificates in respect of interest on the
immediately preceding Distribution Date, together with any Interest Carry
Forward Amount with respect to such class of certificates remaining unpaid from
the previous Distribution Date, plus interest accrued thereon at the related
Pass-Through Rate on the certificates for the most recently ended Interest
Accrual Period.
"INTEREST DISTRIBUTION AMOUNT": The Interest Distribution Amount for
any class of Offered Certificates 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 that portion of the Available Distribution Amount for such
Distribution Date that represents interest received or advanced on the Mortgage
Loans minus any amounts payable or reimbursable therefrom to the Servicer, the
Trustee, the Custodians, the Master Servicer, the Credit Risk Manager or the
Securities Administrator.
"LIQUIDATED MORTGAGE LOAN": A Liquidated Mortgage Loan is a Mortgage
Loan that was liquidated and for which the Servicer has determined that it has
received all amounts it expects to
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receive in connection with such liquidation, including payments under any
related private mortgage insurance policy, hazard insurance policy or any
condemnation proceeds and amounts received in connection with the final
disposition of the related REO property.
"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 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 the Offered Certificates, is a rate per annum (adjusted,
with respect to the Floating Rate Certificates, for the actual number of days
elapsed in the related Interest Accrual Period) equal to the product of (i) 12
and (ii) a fraction, expressed as a percentage, the numerator of which is the
amount of interest which accrued on the Mortgage Loans in the prior calendar
month minus the fees payable to the Servicer, the Master Servicer and the Credit
Risk Manager with respect to the Mortgage Loans for such Distribution Date and
the 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 Mortgage Loans as
of the Due Date in the month preceding the month in which that Distribution Date
occurs, (or as of the Cut-off Date with respect to the first Distribution Date),
after giving effect to principal prepayments received during the related
Prepayment Period.
"NET WAC RATE CARRYOVER AMOUNT": With respect to any class of the
Offered 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 certificates on such Distribution
Date over (y) the amount of interest paid on such Distribution Date at the
applicable Net WAC Pass-Through Rate plus (ii) the related Net WAC Rate
Carryover Amount for the previous Distribution Date not previously distributed
together with interest thereon at a rate equal to the Pass-Through Rate for such
class of certificates for the most recently ended Interest Accrual Period
determined without taking into account the applicable Net WAC Pass-Through Rate.
"OVERCOLLATERALIZATION AMOUNT": The Overcollateralization Amount as of
any Distribution Date is equal to the amount by which 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
Offered Certificates and the Class P Certificates after taking into account
payment of the Principal Remittance Amount on the related Distribution Date.
"OVERCOLLATERALIZATION INCREASE AMOUNT": An Overcollateralization
Increase Amount and any Distribution Date is any amount of Net Monthly Excess
Cashflow actually applied as an accelerated payment of principal to the classes
of Offered 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
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Amount. The Overcollateralization Reduction Amount is equal to zero when a
Trigger Event is in effect.
"PREPAYMENT PERIOD": With respect to the first Distribution Date, the
period beginning on the Cut-off Date and ending on the (15th) day of the month
of such Distribution Date, and with respect to any Distribution Date thereafter,
the period beginning on the sixteenth (16th) day of the month preceding the
related Distribution Date and ending on the fifteenth (15th) day of the month in
which such Distribution Date occurs.
"PRINCIPAL DISTRIBUTION AMOUNT": The Principal Distribution Amount for
any Distribution Date will be the sum of (i) the principal portion of all
scheduled monthly payments on the 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 Mortgage Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) as required by the Pooling and Servicing
Agreement during the immediately preceding calendar month; (iii) the principal
portion of all other unscheduled collections, including insurance proceeds,
liquidation proceeds and Subsequent Recoveries received during the related
Prepayment Period and all full and partial principal prepayments received during
the related Prepayment Period, to the extent applied as recoveries of principal
on the Mortgage Loans; (iv) the amount of any Overcollateralization Increase
Amount for such Distribution Date; minus (v) the amount of any
Overcollateralization Reduction Amount for such Distribution Date, minus any
amounts payable or reimbursable therefrom to the Servicer, the Trustee, the
Custodians, the Master Servicer, the Credit Risk Manager or the Securities
Administrator. In no event will the Principal Distribution Amount with respect
to any Distribution Date be (x) less than zero or (y) greater than the then
outstanding aggregate Certificate Principal Balance of the Offered Certificates.
"PRINCIPAL REMITTANCE AMOUNT": The Principal Remittance Amount for any
Distribution Date will be the sum of the amounts described in clauses (i)
through (iii) of the definition of Principal Distribution Amount net of any
amounts payable or reimbursable therefrom to the Servicer, the Trustee, the
Custodians, the Master Servicer, the Credit Risk Manager or the Securities
Administrator.
"REALIZED LOSS": A Realized Loss is equal to (i) with respect to a
Liquidated Mortgage Loan, the unpaid principal balance of such Liquidated
Mortgage Loan, plus interest thereon from the date on which interest was last
paid by the related mortgagor through the last day of the month in which the
related Mortgage Loan was finally liquidated, less any liquidation proceeds
received on such Liquidated Mortgage Loan (net of amounts reimbursable to the
Servicer or the Master Servicer for P&I Advances, servicing advances and other
related expenses, including attorneys' fees) and (ii) with respect to a Charged
Off Mortgage Loan, the unpaid principal balance of such Charged Off Mortgage
Loan, plus interest thereon from the date on which interest was last paid by the
related mortgagor through the last day of the month in which the related
Mortgage Loan was charged off, plus amounts reimbursable to the Servicer or the
Master Servicer for P&I Advances, servicing advances and other related expenses,
including attorneys' fees.
"REQUIRED OVERCOLLATERALIZATION AMOUNT": Initially shall mean an amount
equal to the product of (i) approximately 3.80% 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
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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 sum of the Interest
Distribution Amounts for such Distribution Date for the Class A Certificates and
the sum of the Interest Carry Forward Amounts, if any, for such Distribution
Date for the Class A Certificates.
"SERVICER REMITTANCE DATE": With respect to any Distribution Date, by
12:00 p.m. New York time on the 18th day of the month in which such Distribution
Date occurs; provided that if such 18th day of a given month is not a Business
Day, the Servicer Remittance Date for such month 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 September 2009 and (y)
the first Distribution Date on which the Credit Enhancement Percentage
(calculated for this purpose only after taking into account collections 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 47.00% and (ii) the first Distribution Date following the
Distribution Date on which the aggregate Certificate Principal Balance of the
Class A Certificates is 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 (i) with respect to a Charged
Off Loan, after such Mortgage Loan has been charged off by the Servicer or (ii)
with respect to a Liquidated Mortgage Loan, after the liquidation or disposition
of such defaulted Mortgage Loan.
"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 17.03% of the Credit Enhancement Percentage of the Class A
Certificates 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:
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DISTRIBUTION DATE PERCENTAGE
- ----------------- ----------
September 2008 to August 2009...... 1.95%, plus 1/12 of approximately 2.40% for each month
thereafter
September 2009 to August 2010...... 4.35%, plus 1/12 of approximately 1.65% for each month
thereafter
September 2010 to August 2011...... 6.00%, plus 1/12 of approximately 1.25% for each month
thereafter
September 2011 to August 2012...... 7.25%, plus 1/12 of approximately 0.75% for each month
thereafter
September 2012 and thereafter...... 8.00%
THE INTEREST RATE SWAP AGREEMENT AND THE SWAP PROVIDER
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 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.
It is intended that the significance percentage of the Interest Rate
Swap Agreement, as calculated in accordance with Item 1115 of Regulation AB, be
less than 10%. The Interest Rate Swap Agreement will provide that the Swap
Provider may be replaced in certain circumstances, including if the significance
percentage of the Interest Rate Swap Agreement is equal to or greater than 10%.
Pursuant to the Interest Rate Swap Agreement, on each Distribution Date
commencing on the Distribution Date occurring in September 2006 and terminating
immediately following the Distribution Date in December 2011 (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 5.49% per annum, (y) the Swap
Notional Amount (as defined below) for that Distribution Date, and (z) a
fraction, the numerator of which is 30 (or, for the first Distribution Date, the
number of days elapsed from and including the effective date (as defined in the
Interest Rate Swap Agreement) to but excluding the first Distribution Date,
determined on a 30/360 basis) and the denominator of which is 360, and (ii) the
Swap Provider will be obligated to pay to the Supplemental Interest Trust a
floating amount for that Distribution Date equal to the product of (x) One-Month
LIBOR, as determined pursuant to the Interest Rate Swap Agreement, for the
related calculation period (as defined in the Interest Rate Swap Agreement), (y)
the Swap Notional Amount 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. 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 (on behalf of the
Supplemental Interest Trust) 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 (for the benefit of the Offered Certificates), 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.
Payments
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received by the Supplemental Interest Trust pursuant to the Interest Rate Swap
Agreement will be available for the benefit of the Offered Certificates in
respect of distributions of Interest Carry Forward Amounts, Net WAC Rate Carry
Forward Amounts, amounts necessary to maintain or restore the Required
Overcollateralization Amount and Allocated Realized Loss Amounts.
The Swap Notional Amount for each Distribution Date, commencing with
the Distribution Date in September 2006, will be equal to the lesser of (x) the
aggregate Certificate Principal Balances of the Floating Rate Certificates on
the day immediately preceding such Distribution Date and (y) the amount set
forth below in the table below, which will be substantially the same as the
schedule set forth in the Interest Rate Swap Agreement for such Distribution
Date (the "Swap Notional Amount").
SWAP NOTIONAL AMOUNT
DISTRIBUTION DATE ($)
----------------------------------- --------------------------
September 2006 275,692,695
October 2006 265,863,567
November 2006 256,383,905
December 2006 247,241,311
January 2007 238,423,824
February 2007 229,919,908
March 2007 221,718,434
April 2007 213,808,669
May 2007 206,180,260
June 2007 198,823,221
July 2007 191,727,919
August 2007 184,885,063
September 2007 178,285,691
October 2007 171,921,160
November 2007 165,783,130
December 2007 159,863,561
January 2008 154,154,694
February 2008 148,649,047
March 2008 143,339,404
April 2008 138,218,803
May 2008 133,280,529
June 2008 128,518,107
July 2008 123,925,290
August 2008 119,496,052
September 2008 115,224,582
October 2008 111,105,274
November 2008 107,132,723
December 2008 103,301,711
January 2009 99,607,211
February 2009 96,044,370
March 2009 92,608,509
April 2009 89,295,114
May 2009 86,099,832
June 2009 83,018,463
July 2009 80,046,959
August 2009 77,181,412
September 2009 74,418,056
October 2009 71,753,255
November 2009 69,183,506
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December 2009 66,705,426
January 2010 64,315,757
February 2010 62,011,352
March 2010 59,789,179
April 2010 57,646,312
May 2010 55,579,929
June 2010 53,587,308
July 2010 51,665,825
August 2010 49,812,948
September 2010 48,026,235
October 2010 46,303,331
November 2010 44,641,964
December 2010 43,039,943
January 2011 41,495,155
February 2011 40,005,564
March 2011 38,569,201
April 2011 37,184,173
May 2011 35,848,651
June 2011 34,560,520
July 2011 33,318,410
August 2011 32,120,712
September 2011 30,965,856
October 2011 29,852,314
November 2011 28,778,615
December 2011 27,743,338
The Interest Rate Swap Agreement will terminate immediately following
the Distribution Date in December 2011, 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 (other than Swap Termination Payments (as defined below)) will be
subject to the following conditions precedent: (1) no Swap Event of Default or
event that with the giving of notice or lapse of time or both would become a
Swap Event of Default will 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 Supplemental Interest Trust 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
Supplemental Interest Trust is required to make a Swap Termination Payment to
the Swap Provider (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
Supplemental Interest Trust 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 generally will be subordinated to distributions to the
certificateholders 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 at the direction
of the Depositor, 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.
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
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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.
On each Distribution Date, to the extent required following the
distribution of the Interest Remittance Amount, the Principal Distribution
Amount, 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 the Class A-1, Class A-2 and Class A-3
Certificates, on a pro rata basis based on the entitlement of each such class,
the Senior Interest Distribution Amount for each such class remaining
undistributed;
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 and Class M-10
Certificates, in that order, the related Interest Distribution Amount and
Interest Carry Forward Amount, to the extent remaining undistributed;
FIFTH, to the holders of the Offered Certificates then
entitled to receive distributions in respect of principal, in an amount
necessary to restore or maintain the Required Overcollateralization Amount after
taking into account distributions made pursuant to clause FIRST under
"--Overcollateralization Provisions;"
SIXTH, 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 and Class M-10
Certificates, in that order, in each case up to the Allocated Realized Loss
Amount related to each such class for such Distribution Date remaining
undistributed;
SEVENTH, concurrently to the Class A-1, Class A-2 and Class
A-3 Certificates, on a pro rata basis based on the entitlement of each such
class, the related Net WAC Rate Carryover Amount, to the extent remaining
undistributed;
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 and Class M-10
Certificates, in that order, the related Net WAC Rate Carryover Amount, to the
extent remaining undistributed;
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-1 Certificates, any remaining amounts.
Deutsche Bank AG New York Branch, a branch of Deutsche Bank
Aktiengesellschaft ("Deutsche Bank" or the "Bank") is the swap provider (in such
capacity, the "Swap Provider").
Deutsche Bank originated from the reunification of Norddeutsche Bank
Aktiengesellschaft, Hamburg, Rheinisch-Westfalische Bank Aktiengesellschaft,
Dusseldorf and Suddeutsche Bank
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Aktiengesellschaft, Munich; pursuant to the Law on the Regional Scope of Credit
Institutions, these had been disincorporated in 1952 from Deutsche Bank, which
was founded in 1870. The merger and the name were entered in the Commercial
Register of the District Court Frankfurt am Main on 2 May 1957. Deutsche Bank is
a banking company with limited liability incorporated under the laws of Germany
under registration number HRB 30000. The Bank has its registered office in
Frankfurt am Main, Germany. It maintains its head office at Taunusanlage 12,
60325 Frankfurt am Main and branch offices in Germany and abroad including in
London, New York, Sydney, Tokyo and an Asia-Pacific Head Office in Singapore
which serve as hubs for its operations in the respective regions.
The Bank is the parent company of a group consisting of banks, capital
market companies, fund management companies, a property finance company,
installment financing companies, research and consultancy companies and other
domestic and foreign companies.
The objects of Deutsche Bank, as laid down in its Articles of
Association, include the transaction of all kinds of banking business, the
provision of financial and other services and the promotion of international
economic relations. The Bank may realize these objectives itself or through
subsidiaries and affiliated companies. To the extent permitted by law, the Bank
is entitled to transact all business and to take all steps which appear likely
to promote the objectives of the Bank, in particular: to acquire and dispose of
real estate, to establish branches at home and abroad, to acquire, administer
and dispose of participations in other enterprises, and to conclude
company-transfer agreements.
Deutsche Bank AG New York Branch (the "Branch") was established in 1978
and is licensed by the New York Superintendent of Banks. Its office is currently
located at 60 Wall Street, New York, New York 10005-2858. The Branch is examined
by the New York State Banking Department and is subject to the banking laws and
regulations applicable to a foreign bank that operates a New York branch. The
Branch is also examined by the Federal Reserve Bank of New York.
The long-term senior debt of Deutsche Bank has been assigned a rating
of AA- (outlook stable) by S&P, Aa3 (outlook stable) by Moody's and AA- (outlook
stable) by Fitch. Deutsche Bank and the Branch are affiliates of Deutsche Bank
Securities Inc., the Underwriter and of Deutsche Bank National Trust Company, a
Custodian.
Except for the information provided in the preceding five paragraphs,
neither Deutsche Bank nor the Branch have been involved in the preparation of,
and do not accept responsibility for, this prospectus supplement or the
prospectus.
The significance percentage of the Interest Rate Swap Agreement as
calculated in accordance with Item 1115 of Regulation AB, is less than 10%. The
Interest Rate Swap Agreement will provide that the Swap Provider may be replaced
in certain circumstances, including if the significance percentage of the
Interest Rate Swap Agreement is equal to or greater than 10%.
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 OFFERED CERTIFICATES
Holders of the Offered Certificates will be entitled to receive on each
Distribution Date, interest distributions in an aggregate amount equal to
interest accrued during the related Interest Accrual Period on the Certificate
Principal Balances thereof at the then-applicable Pass-Through Rates thereon, in
the priorities set forth below.
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On each Distribution Date, the Interest Remittance Amount will be
distributed in the following order of priority:
FIRST, to the Supplemental Interest Trust, an amount equal to
the sum of any Net Swap Payment owed to the Swap Provider and 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-1, Class
A-2 and Class A-3 Certificates, the Senior Interest Distribution Amount
allocable to the Class A-1, Class A-2 and Class A-3 Certificates on a pro rata
basis based on the entitlement of 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
and Class M-10 Certificates, in that order, the Interest Distribution Amount
distributable to each such class; and
FOURTH, any such Interest Remittance Amount remaining after
application pursuant to clauses first, second and third above, will be applied
as part of Net Monthly Excess Cashflow for such Distribution Date, as described
under "Description of the Certificates--Overcollateralization Provisions".
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" and "--The Interest Rate Swap
Agreement and the Swap Provider" in this prospectus supplement, SECOND, to the
Class M-10 Certificates, THIRD, to the Class M-9 Certificates, FOURTH, to the
Class M-8 Certificates, FIFTH, to the Class M-7 Certificates, SIXTH, to the
Class M-6 Certificates, SEVENTH, to the Class M-5 Certificates, EIGHTH, to the
Class M-4 Certificates, NINTH, to the Class M-3 Certificates, TENTH, to the
Class M-2 Certificates, ELEVENTH, to the Class M-1 Certificates and TWELFTH, to
the Class A-1, Class A-2 and Class A-3 Certificates, on a pro rata basis based
on their respective Senior Interest Distribution Amounts before such reduction.
The holders of the Offered Certificates will be entitled to reimbursement for
any of these interest shortfalls, subject to available funds, in the priorities
described under "--Overcollateralization Provisions" in this prospectus
supplement.
With respect to any Distribution Date, to the extent that the aggregate
Interest Distribution Amount exceeds the Interest Remittance Amount, a shortfall
in interest distributions on one or more classes of Offered Certificates will
result and payments of Interest Carry Forward Amounts to such classes of Offered
Certificates will be made. The Interest Carry Forward Amount with respect to the
Class A Certificates, if any, is distributed as part of the Senior Interest
Distribution Amount on each Distribution Date. The Interest Carry Forward Amount
with respect to the Mezzanine Certificates, if any, may be carried forward to
succeeding Distribution Dates and, subject to available funds, will be
distributed in the manner set forth in "--Overcollateralization Provisions" and
"--The Interest Rate Swap Agreement and the Swap Provider" 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.
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CALCULATION OF ONE-MONTH LIBOR
With respect to each Interest Accrual Period (other than the initial
Interest Accrual Period) and the Floating Rate 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 in this prospectus
supplement) 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 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 in
this prospectus supplement).
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 Floating Rate Certificates
for the related Interest Accrual Period shall (in the absence of manifest error)
be final and binding.
PRINCIPAL DISTRIBUTIONS ON THE OFFERED CERTIFICATES
On each Distribution Date, the Principal Distribution Amount will be
distributed to the holders of the Offered Certificates then entitled to
principal distributions. In no event will the Principal Distribution Amount with
respect to any Distribution Date be (i) less than zero or (ii) greater than the
then outstanding aggregate Certificate Principal Balance of the Offered
Certificates.
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(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 Principal Distribution Amount will be made in the
following amounts and order of priority:
FIRST, to the Supplemental Interest Trust, an amount equal to
the sum of any Net Swap Payment owed to the Swap Provider and 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-1, Class
A-2 and Class A-3 Certificates, in that order, until the Certificate Principal
Balance of each such class has been reduced to zero; and
THIRD, sequentially, to the holders of the Class 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
and Class M-10 Certificates, in that order, until the Certificate Principal
Balance of each such class has been reduced to zero.
(B) 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 will be made in the
following amounts and order of priority:
FIRST, to the Supplemental Interest Trust, an amount equal to
the sum of any Net Swap Payment owed to the Swap Provider and 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-1, Class
A-2 and Class A-3 Certificates, in that order, the lesser of (x) the excess of
(i) the Principal Distribution Amount over (ii) the amount distributed to the
Supplemental Interest Trust under clause FIRST above, and (y) the Class A
Principal Distribution Amount, until the Certificate Principal Balance of each
such class has been reduced to zero;
THIRD, to the holders of the Class M-1 Certificates, the
lesser of (x) the excess of (i) the Principal Distribution Amount over (ii) the
amount distributed to the Supplemental Interest Trust under clause FIRST above
and to the holders of the Class A Certificates under clause SECOND above, and
(y) the Class M-1 Principal Distribution Amount, until the Certificate Principal
Balance of the Class M-1 Certificates has been reduced to zero;
FOURTH, to the holders of the Class M-2 Certificates, the
lesser of (x) the excess of (i) the Principal Distribution Amount over (ii) the
sum of the amounts distributed to the Supplemental Interest Trust under clause
FIRST above, to the holders of the Class A Certificates under clause SECOND
above and to the holders of the Class M-1 Certificates under clause THIRD above,
and (y) the Class M-2 Principal Distribution Amount, until the Certificate
Principal Balance of the Class M-2 Certificates has been reduced to zero;
FIFTH, to the holders of the Class M-3 Certificates, the
lesser of (x) the excess of (i) the Principal Distribution Amount over (ii) the
sum of the amounts distributed to the Supplemental Interest Trust under clause
FIRST above, to the holders of the Class A Certificates under clause SECOND
above, to the holders of the Class M-1 Certificates under clause THIRD above and
to the holders of the Class M-2 Certificates under clause FOURTH above, and (y)
the Class M-3 Principal Distribution Amount, until the Certificate Principal
Balance of the Class M-3 Certificates has been reduced to zero;
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SIXTH, 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 under clause
FIRST above, to the holders of the Class A Certificates under clause SECOND
above, to the holders of the Class M-1 Certificates under clause THIRD above, to
the holders of the Class M-2 Certificates under clause FOURTH above and to the
holders of the Class M-3 Certificates under clause FIFTH 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;
SEVENTH, 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 under clause
FIRST above, to the holders of the Class A Certificates under clause SECOND
above, to the holders of the Class M-1 Certificates under clause THIRD above, to
the holders of the Class M-2 Certificates under clause FOURTH above, to the
holders of the Class M-3 Certificates under clause FIFTH above and to the
holders of the Class M-4 Certificates under clause SIXTH 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;
EIGHTH, 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 under clause
FIRST above, to the holders of the Class A Certificates under clause SECOND
above, to the holders of the Class M-1 Certificates under clause THIRD above, to
the holders of the Class M-2 Certificates under clause FOURTH above, to the
holders of the Class M-3 Certificates under clause FIFTH above, to the holders
of the Class M-4 Certificates under clause SIXTH above and to the holders of the
Class M-5 Certificates under clause SEVENTH 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;
NINTH, 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 under clause FIRST
above, to the holders of the Class A Certificates under clause SECOND above, to
the holders of the Class M-1 Certificates under clause THIRD above, to the
holders of the Class M-2 Certificates under clause FOURTH above, to the holders
of the Class M-3 Certificates under clause FIFTH above, to the holders of the
Class M-4 Certificates under clause SIXTH above, to the holders of the Class M-5
Certificates under clause SEVENTH above and to the holders of the Class M-6
Certificates under clause EIGHTH 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;
TENTH, 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 under clause
FIRST above, to the holders of the Class A Certificates under clause SECOND
above, to the holders of the Class M-1 Certificates under clause THIRD above, to
the holders of the Class M-2 Certificates under clause FOURTH above, to the
holders of the Class M-3 Certificates under clause FIFTH above, to the holders
of the Class M-4 Certificates under clause SIXTH above, to the holders of the
Class M-5 Certificates under clause SEVENTH above, to the holders of the Class
M-6 Certificates under clause EIGHTH above and to the holders of the Class M-7
Certificates under clause NINTH 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;
ELEVENTH, 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 under clause
FIRST above, to the holders of the Class A Certificates under clause SECOND
above, to the holders of the Class M-1 Certificates under clause THIRD above, to
the holders of the Class M-2 Certificates under clause FOURTH above, to the
holders of the Class
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M-3 Certificates under clause FIFTH above, to the holders of the Class M-4
Certificates under clause SIXTH above, to the holders of the Class M-5
Certificates under clause SEVENTH above, to the holders of the Class M-6
Certificates under clause EIGHTH above, to the holders of the Class M-7
Certificates under clause NINTH above and to the holders of the Class M-8
Certificates under clause TENTH above, and (y) the Class M-9 Principal
Distribution Amount, until the Certificate Principal Balance the Class M-9
Certificates has been reduced to zero;
TWELFTH, 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 under clause
FIRST above, to the holders of the Class A Certificates under clause SECOND
above, to the holders of the Class M-1 Certificates under clause THIRD above, to
the holders of the Class M-2 Certificates under clause FOURTH above, to the
holders of the Class M-3 Certificates under clause FIFTH above, to the holders
of the Class M-4 Certificates under clause SIXTH above, to the holders of the
Class M-5 Certificates under clause SEVENTH above, to the holders of the Class
M-6 Certificates under clause EIGHTH above, to the holders of the Class M-7
Certificates under clause NINTH above, to the holders of the Class M-8
Certificates under clause TENTH above and to the holders of the Class M-9
Certificates under clause ELEVENTH 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
THIRTEENTH, any such Principal Distribution Amount remaining
after application pursuant to clauses FIRST through TWELFTH above, will be
applied as part of Net Monthly Excess Cashflow for such Distribution Date, as
described under "Description of the Certificates--Overcollateralization
Provisions".
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-1, Class A-2 and Class A-3 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-1, Class A-2 and Class A-3 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
Offered 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.
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Item Fee or Expense Paid To Paid From Frequency
- ------------------------ ---------------------- --------------- ------------------------------ -----------------
Servicing Fee(1) 0.5000% per annum of Servicer Mortgage Loan interest Monthly
the Scheduled collections
Principal Balance of
each Mortgage Loan
Master Servicing Fee(2) 0.0160% per annum of Master Servicer Mortgage Loan interest Monthly
the Scheduled collections
Principal Balance of
each Mortgage Loan
Credit Risk Manager 0.0150% per annum of Credit Risk Mortgage Loan interest Monthly
Fee(3) the Scheduled Manager collections
Principal Balance of
each Mortgage Loan
P&I Advances and To the extent of funds Servicer or With respect to each Mortgage Time to Time
Servicing Advances available, the amount Master Loan, late recoveries of the
of any advances and Servicer, as payments of the costs and
servicing advances applicable expenses, liquidation
proceeds, Subsequent
Recoveries, purchase proceeds
or repurchase proceeds for
that Mortgage Loan
Nonrecoverable Advances The amount of any Servicer or All collections on the Time to Time
and Servicing Advances advances and servicing Master Mortgage Loans
advances deemed Servicer, as
nonrecoverable applicable
Reimbursement for The amount of the Servicer, All collections on the Time to Time
certain expenses, costs expenses, costs and Master Mortgage Loans
and liabilities incurred liabilities incurred Servicer,
by the Servicer, the Securities
Master Servicer, the Administrator,
Securities Sponsor or
Administrator, the Depositor, as
Sponsor or the Depositor applicable
in connection with any
legal action relating to
the pooling and
servicing agreement or
the certificates (4)
Indemnification expenses Amounts for which the Servicer, All collections on the Time to Time
Sponsor, the Master Mortgage Loans (or, in the
Servicer, the Master Servicer, case of the Servicer, the
Servicer, the Securities related Mortgage Loans)
Securities Administrator
Administrator and the Sponsor or
Depositor are entitled Depositor, as
to indemnification (5) applicable
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Item Fee or Expense Paid To Paid From Frequency
- ------------------------ ---------------------- --------------- ------------------------------ -----------------
Indemnification expenses Amounts for which the Trustee or All collections on the Time to Time
Trustee or the Custodians, as mortgage loans
Custodians are applicable
entitled to
indemnification (6)
Reimbursement for any The amounts paid by Trustee or All collections on the Time to Time
amounts payable by the the Trustee or Master Master Servicer Mortgage Loans
Trustee or Master Servicer
Servicer for recording
of assignments of
mortgages to the extent
not paid by the Sponsor
Reimbursement for costs The amount of costs Trustee or All collections on the Time to Time
associated with the incurred by the Master Master Mortgage Loans
transfer of servicing or Servicer or the Servicer, as
master servicing in the Trustee in connection applicable
event of termination of with the transfer of
the Master Servicer or servicing to the
the 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
Reimbursement for any The amount incurred by Trustee and All collections on the Time to Time
expenses incurred by the the Trustee or Securities Mortgage Loans
Trustee or Securities Securities Administrator
Administrator in Administrator in
connection with a tax connection with a tax
audit of the trust audit of the 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. For so long as GMAC Mortgage Corporation is servicing
the Mortgage Loans, with respect to each such Mortgage Loan, 0.18% of the
servicing fee will be paid to GMAC Mortgage Corporation and 0.32% of the
servicing fee will be paid to the holder of the Class CE-2 Certificate.
(2) The master servicing fee is paid on a first priority basis from collections
allocable to interest on the Mortgage Loans, prior to distributions to the
Certificateholders.
(3) The credit risk manager fee is paid on a first priority basis from
collection allocable to interest on the Mortgage Loans, prior to
distributions to Certificateholders.
(4) The Master Servicer pays trustee fees and ongoing custodial and safekeeping
fees out of its compensation.
(5) See "The Securities Administrator, the Master Servicer and the Custodians"
in this prospectus supplement.
(6) See "The Trustee" and "The Securities Administrator, the Master Servicer
and the Custodians" in this prospectus supplement.
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CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the holders of the
Class A Certificates consists of subordination, as described in this section,
and overcollateralization, as described under "--Overcollateralization
Provisions" in this prospectus supplement.
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 and Class CE-1 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 and
Class CE-1 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 and Class CE-1
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 and Class CE-1 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 and Class
CE-1 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 and Class CE-1 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 and Class CE-1 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 and Class CE-1 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 Certificates and Class CE-1 Certificates and
(x) the rights of the holders of the Class M-10 Certificates will be senior to
the rights of the holders of the Class CE-1 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
Offered Certificates, thus generating excess interest collections which, in the
absence of Realized Losses, will not be necessary to fund interest distributions
on the
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Offered Certificates. Additional excess interest will be generated by the
portion of the Mortgage Pool represented by the Overcollateralization Amount.
The Pooling and Servicing Agreement requires that, on each Distribution Date,
the Net Monthly Excess Cashflow, if any, be applied on the related Distribution
Date as an accelerated payment of principal on the class or classes of Offered
Certificates then entitled to receive distributions in respect of principal, but
only to the limited extent described in this section.
With respect to any Distribution Date, any Net Monthly Excess Cashflow
(or, in the case of clause FIRST below, the Net Monthly Excess Cashflow
exclusive of any Overcollateralization Reduction Amount) shall be paid as
follows:
FIRST, to the holders of the class or classes of certificates
then entitled to receive distributions in respect of principal, in an amount
equal to any Overcollateralization Increase Amount, payable to such holders in
accordance with the priorities set forth under "--Principal Distributions on the
Offered Certificates" above;
SECOND, concurrently, to the holders of the Class A-1, Class
A-2 and Class A-3 Certificates, on a pro rata basis based on the entitlement of
each such class, in an amount equal to the Senior Interest Distribution Amount
remaining undistributed;
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
and Class M-10 Certificates, in that order, in an amount equal to the Interest
Distribution Amount and Interest Carry Forward Amount allocable to each such
class;
FOURTH, 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
and Class M-10 Certificates, in that order, in an amount equal to the Allocated
Realized Loss Amount allocable to each such class;
FIFTH, 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 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, 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
and Class M-10 Certificates, in 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;
SEVENTH, to the reserve fund (the "Reserve Fund") established
in accordance with the terms of the Pooling and Servicing Agreement, the amount
by which the sum of the Net WAC Rate Carryover Amounts, if any, with respect to
the Offered Certificates exceeds any amounts in the Reserve Fund that were not
distributed on prior Distribution Dates;
EIGHTH, 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;
NINTH, to the holders of the Class P Certificates and Class
CE-1 Certificates as provided in the Pooling and Servicing Agreement; and
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TENTH, to the holders of the Residual Certificates, any
remaining amounts.
On each Distribution Date, any amounts deposited in the Reserve Fund
from the Net Monthly Excess Cashflow will be distributed:
FIRST, to the holders of the Class A-1, Class A-2 and Class
A-3 Certificates, the related Net WAC Rate Carryover Amount for such
Distribution Date, 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
and Class M-10 Certificates, in that order, the related Net WAC Rate Carryover
Amount for each such class for such Distribution Date.
As of the Closing Date, the aggregate principal balance of the Mortgage
Loans as of the Cut-off Date will exceed the sum of the aggregate Certificate
Principal Balances of the Offered Certificates and the Class P Certificates by
an amount equal to approximately $13,092,103, which is equal to the initial
Certificate Principal Balance of the Class CE-1 Certificates. This amount
represents approximately 3.80% of the aggregate principal balance of the
Mortgage Loans as of the Cut-off Date. Under the Pooling and Servicing
Agreement, the Overcollateralization Amount is required to be maintained at the
"Required Overcollateralization Amount." In the event that Realized Losses are
incurred on the Mortgage Loans, such Realized Losses may result in an
overcollateralization deficiency since the Realized Losses will reduce the
principal balance of the Mortgage Loans without a corresponding reduction to the
aggregate Certificate Principal Balances of the Offered Certificates. 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, subject to available funds, of an
amount equal to the overcollateralization deficiency, which shall constitute a
principal distribution on the Offered Certificates in reduction of the
Certificate Principal Balances of the Offered Certificates. This has the effect
of accelerating the amortization of the Offered Certificates relative to the
amortization of the Mortgage Loans, and of increasing the Overcollateralization
Amount.
On and after the Stepdown Date and provided that a Trigger Event is not
in effect, the Required Overcollateralization Amount may be permitted to
decrease ("step down"), to a level equal to approximately 7.60% of the then
current aggregate outstanding principal balance of the Mortgage Loans (after
giving effect to principal payments to be distributed on the related
Distribution Date), subject to a floor equal to the product (i) 0.50% and (ii)
the aggregate principal balance of the Mortgage Loans as of the Cut-off Date. In
the event that the Required Overcollateralization Amount is permitted to step
down on any Distribution Date, the Pooling and Servicing Agreement provides that
a portion of the principal which would otherwise be distributed to the holders
of the Offered Certificates on the related Distribution Date shall be
distributed to the holders of the Class CE-1 Certificates pursuant to the
priorities set forth above.
With respect to each Distribution Date, the Overcollateralization
Reduction Amount, after taking into account all other distributions to be made
on the related Distribution Date, shall be distributed as Net Monthly Excess
Cashflow pursuant to the priorities set forth above. This has the effect of
decelerating the amortization of the Offered Certificates relative to the
amortization of the Mortgage Loans, and of reducing the Overcollateralization
Amount. However, if on any Distribution Date a Trigger Event is in effect, the
Required Overcollateralization Amount will not be permitted to step down on the
related Distribution Date.
THE CLASS P CERTIFICATES
On each Distribution Date, all amounts representing Prepayment Charges
in respect of the Mortgage Loans received during the related Prepayment Period
will be withdrawn from the
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Distribution Account and distributed to the Class P Certificates and shall not
be available for distribution to the holders of any other class of certificates.
The payment of such Prepayment Charges shall not reduce the Certificate
Principal Balance of the Class P Certificates.
On the Distribution Date occurring after the expiration of the latest
Prepayment Charge term on the Mortgage Loans, the Securities Administrator shall
make a payment of principal to the Class P Certificates in reduction of the
Certificate Principal Balance thereof from Net Monthly Excess Cashflow pursuant
to clause EIGHTH under "Description of the Certificates--Overcollateralization
Provisions" above.
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,
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. With respect to any defaulted Mortgage Loan that is
charged off, the amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, plus interest thereon from the date on which
interest was last paid through the last day of the month in which the related
Mortgage Loan was charged off, plus amounts reimbursable to the Servicer or the
Master Servicer for P&I Advances, servicing advances and other related expenses,
including attorneys' fees. 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
related 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
and available for that purpose, second, to the Class CE-1 Certificates, THIRD,
to the Class M-10 Certificates until the Certificate Principal Balance of the
Class M-10 Certificates has been reduced to zero, FOURTH, to the Class M-9
Certificates until the Certificate Principal Balance of the Class M-9
Certificates has been reduced to zero; FIFTH, to the Class M-8 Certificates
until the Certificate Principal Balance of the Class M-8 Certificates has been
reduced to zero; SIXTH, to the Class M-7 Certificates until the Certificate
Principal Balance of the Class M-7 Certificates has been reduced to zero,
SEVENTH, to the Class M-6 Certificates until the Certificate Principal Balance
of the Class M-6 Certificates has been reduced to zero, EIGHTH, to the Class M-5
Certificates until the Certificate Principal Balance of the Class M-5
Certificates has been reduced to zero, NINTH, to the Class M-4 Certificates
until the Certificate Principal Balance of the Class M-4 Certificates has been
reduced to zero, TENTH, to the Class M-3 Certificates until the Certificate
Principal Balance of the Class M-3 Certificates has been reduced to zero,
ELEVENTH, to the Class M-2 Certificates until the Certificate Principal Balance
of the Class M-2 Certificates has been reduced to zero and TWELFTH, to the Class
M-1 Certificates until the Certificate Principal Balance of the Class M-1
Certificates has been reduced to zero.
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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 Net Swap Payments paid by
the Swap Provider, according to the priorities set forth under
"--Overcollateralization Provisions" and "--The Interest Rate Swap Agreement and
the Swap Provider" above.
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 Subordinate Certificates that has been reduced by the
allocation of a Realized Loss to such certificate will be increased, in order of
seniority, by the amount of such Subsequent Recoveries but only to the extent
that such certificate has not been reimbursed for the amount of such Realized
Loss (or any portion thereof) allocated to such certificate from Net Monthly
Excess Cashflow as described under "Description of the
Certificates--Overcollateralization Provisions" and from amounts on deposit in
the Supplemental Interest Trust as described under "--The Interest Rate Swap
Agreement and the Swap Provider" 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. the total cash flows received and the general sources thereof;
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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. the amount of the related distribution to holders of the
Offered 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;
5. the amount of such distribution to holders of the Offered
Certificates (by class) allocable to interest and the portion thereof, if any,
provided by the Interest Rate Swap Agreement in the aggregate;
6. the Interest Carry Forward Amounts and any Net WAC Rate
Carryover Amounts for the Offered Certificates (if any);
7. the Certificate Principal Balance of the Offered Certificates
before and after giving effect to the distribution of principal and allocation
of Allocated Realized Loss Amounts on such distribution date;
8. 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 Offered Certificates
for such Distribution Date;
10. the aggregate amount of advances included in the distributions
on the Distribution Date (including the general purpose of such advances);
11. the number and aggregate principal balance of any Mortgage
Loans (not including any Liquidated Mortgage Loans as of the end of the related
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; the number and aggregate principal balance of any
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 been commenced, and loss
information for the period;
12. the amount of, if any, of excess cashflow or excess spread and
the application of such excess cashflow;
13. with respect to 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. whether the Stepdown Date has occurred and whether a Trigger
Event is in effect;
15. the total number and principal balance of any real estate
owned, or REO, properties as of the end of the related Prepayment Period;
16. the cumulative Realized Losses through the end of the
preceding month;
17. 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 that are
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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,
18. the amount of the Prepayment Charges remitted by the Servicer;
and
19. the amount of any Net Swap Payment payable to the trust, any
Net Swap Payment payable to the Swap Provider, any Swap Termination Payment
payable to the trust and any 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,
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 ORIGINATORS
The primary originators of the Mortgage Loans are American Home
Mortgage Corp., with respect to approximately 70.91% of the Mortgage Loans by
aggregate principal balance as of the Cut-off Date, and People's Choice Home
Loan, Inc., with respect to approximately 10.85% of the Mortgage Loans by
aggregate principal balance as of the Cut-off Date.
For a description of the underwriting guidelines applicable to the
Mortgage Loans originated by American Home Mortgage Corp. and certain other
information with respect to American Home Mortgage Corp. 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 supplement 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.
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ISSUING ENTITY
ACE Securities Corp. Home Equity Loan Trust, Series 2006-SL4 is a
common law trust formed under the laws of the State of New York pursuant to the
pooling and servicing agreement between the Depositor, the Servicer, the Master
Servicer, the Securities Administrator and the Trustee, dated as of August 1,
2006 (the "Pooling and Servicing Agreement"). The Pooling and Servicing
Agreement constitutes the "governing instrument" under the laws of the State of
New York. After its formation, ACE Securities Corp. Home Equity Loan Trust,
Series 2006-SL4 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 ACE Securities Corp. Home Equity Loan Trust, Series
2006-SL4 will consist of the Mortgage Loans and certain related assets.
ACE Securities Corp. Home Equity Loan Trust, Series 2006-SL4'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
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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 $26 billion
in residential mortgage loans. This includes the purchase of newly originated
non-agency loans, as well as seasoned, program exception, sub-performing and
non-performing loans.
The Sponsor has been securitizing residential mortgage loans since
2004. The following table describes size, composition and growth of the
Sponsor's total portfolio of assets it has securitized as of the dates
indicated.
DECEMBER 31, 2004 DECEMBER 31, 2005
------------------------------ --------------------------------
TOTAL PORTFOLIO TOTAL PORTFOLIO
OF LOANS OF LOANS
LOAN TYPE NUMBER ($) NUMBER ($)
- --------------------------- -------- ----------------- ----------- -------------------
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 GMAC
Mortgage Corporation ("GMACM"). GMACM will service the Mortgage Loans in
accordance with the Pooling and Servicing Agreement. The Master Servicer will be
required to monitor GMACM's performance under the Pooling and Servicing
Agreement. In the event of a default by GMACM under the Pooling and Servicing
Agreement, the Master Servicer shall enforce any remedies against GMACM.
The information set forth in the following paragraphs of this section
has been provided by GMACM.
GENERAL. GMACM is a Pennsylvania corporation and a wholly-owned
subsidiary of GMAC Residential Holding Corporation, which is a wholly owned
subsidiary of Residential Capital Corporation ("RESCAP"). ResCap is a
wholly-owned subsidiary of GMAC Mortgage Group, Inc., which is a wholly-owned
subsidiary of General Motors Acceptance Corporation ("GMAC"). GMAC is a
wholly-owned subsidiary of General Motors Corporation.
GMACM began acquiring, originating and servicing residential mortgage
loans in 1985 through its acquisition of Colonial Mortgage Service Company,
which was formed in 1926, and the loan administration, servicing operations and
portfolio of Norwest Mortgage, which entered the residential mortgage loan
business in 1906. These businesses formed the original basis of what is now GMAC
Mortgage Corporation.
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GMACM maintains its executive and principal offices at 100 Witmer Road,
Horsham, Pennsylvania 19044. Its telephone number is (215) 682-1000.
The diagram below illustrates the ownership structure among the parties
affiliated with GMACM.
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General Motors Corporation
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General Motors Acceptance
Corporation
(GMAC)
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Residential Capital Corporation
(ResCap)
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|
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(GMAC Mortgage Corporation
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SERVICING ACTIVITIES. GMACM generally retains the servicing rights with
respect to loans it sells or securitizes, and also occasionally purchases
mortgage servicing rights from other servicers or acts as a subservicer of
mortgage loans (and does not hold the corresponding mortgage servicing right
asset).
As of December 31, 2005, GMACM acted as primary servicer and owned the
corresponding servicing rights on approximately 2,036,298 of residential
mortgage loans having an aggregate unpaid principal balance of approximately
$250 billion, and GMACM acted as subservicer (and did not own the corresponding
servicing rights) on approximately 271,915 loans having an aggregate unpaid
principal balance of over $38.9 billion.
GMAC MORTGAGE CORPORATION SERVICING EXPERIENCE. The following tables
set forth the mortgage loans serviced by GMACM for the periods indicated, and
the annual average number of such loans for the same period. GMACM was the
servicer of a residential mortgage loan portfolio of approximately $150.4
billion, $12.5 billion, $21.2 billion and $6.67 billion during the year ended
December 31, 2002 backed by prime conforming mortgage loans, prime
non-conforming mortgage loans, government mortgage loans and second-lien
mortgage loans, respectively. GMACM was the servicer of a residential mortgage
loan portfolio of approximately $186.4 billion, $32.4 billion, $18.1 billion and
$13.0 billion during the year ended December 31, 2005 backed by prime conforming
mortgage loans, prime non-conforming mortgage loans, government mortgage loans
and second-lien mortgage loans, respectively. The percentages shown under
"Percentage Change from Prior Year" represent the ratio of (a) the difference
between the current and prior year volume over (b) the prior year volume.
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GMAC MORTGAGE CORPORATION
PRIMARY SERVICING PORTFOLIO ($IN MILLIONS)
- --------------------------------------------------------------------------------
For the Year Ended December 31,
-----------------------------------------------------------------------------
2005 2004 2003 2002
--------------- ----------------- ----------------- ----------------
Prime Conforming Mortgage Loans
- -----------------------------------
No. of Loans 1,392,870 1,323,249 1,308,284 1,418,843
Dollar Amount of Loans $186,364 $165,521 $153,601 $150,421
Percentage Change from Prior Year 12.59% 7.76% 2.11% N/A
Prime Non-Conforming Mortgage
Loans
- -----------------------------------
No. of Loans 69,488 53,119 34,041 36,225
Dollar Amount of Loans $32,385 $23,604 $13,937 $12,543
Percentage Change from Prior Year 37.20% 69.36% 11.12% N/A
Government Mortgage Loans
- -----------------------------------
No. of Loans 181,679 191,844 191,023 230,085
Dollar Amount of Loans $18,098 $18,328 $17,594 $21,174
Percentage Change from Prior Year -1.25% 4.17% -16.91% N/A
Second Lien Mortgage Loans
- -----------------------------------
No. of Loans 392,261 350,334 282,128 261,416
Dollar Amount of Loans $13,034 $10,374 $7,023 $6,666
Percentage Change from Prior Year 25.64% 47.71% 5.36% N/A
Total Mortgage Loans Serviced
- -----------------------------------
No. of Loans 2,036,298 1,918,546 1,815,476 1,946,569
Dollar Amount of Loans $249,881 $217,827 $192,155 $190,804
Percentage Change from Prior Year 14.72% 13.36% 0.71% N/A
BILLING AND PAYMENT PROCEDURES. As servicer, GMACM collects and remits
mortgage loan payments, responds to borrower inquiries, accounts for principal
and interest, holds custodial and escrow funds for payment of property taxes and
insurance premiums, counsels or otherwise works with delinquent borrowers,
supervises foreclosures and property dispositions and generally administers the
loans. GMACM sends monthly invoices or annual coupon books to borrowers to
prompt the collection of the outstanding payments. Borrowers may elect for
monthly payments to be deducted automatically from bank accounts on the same day
every month or may take advantage of on demand ACH payments made over the
internet or via phone.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Servicer will provide customary servicing functions with respect to
the Mortgage Loans. Among other things, the Servicer is obligated under some
circumstances to make P&I Advances with respect to the Mortgage Loans. In
managing the liquidation of defaulted Mortgage Loans, the Servicer will have
sole discretion to take such action in maximizing recoveries to the
certificateholders including, without limitation, selling defaulted Mortgage
Loans and REO properties as described in the Pooling and Servicing Agreement.
As to any Mortgage Loan that becomes 120 days delinquent, the Servicer
will be required to obtain a broker's price opinion, the cost of which will be
reimbursable as a servicing advance.
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After obtaining the broker's price opinion, the Servicer will determine whether
a significant Subsequent Recovery is possible through foreclosure proceedings or
other liquidation of the related Mortgaged Property. If the Servicer determines
that no such recovery is possible, it must charge off the related Mortgage Loan
at the time such Mortgage Loan becomes 180 days delinquent. Once a Mortgage Loan
has been charged off, the Servicer will discontinue making P&I Advances, the
Servicer will not be entitled to servicing fees (except as otherwise provided in
the Pooling and Servicing Agreement) and the Mortgage Loan will be treated as a
Charged Off Mortgage Loan giving rise to a Realized Loss. If the Servicer
determines that such Subsequent Recovery is possible through foreclosure
proceedings or other liquidation of the related Mortgaged Property on a Mortgage
Loan that becomes 180 days delinquent, the Servicer may continue making P&I
Advances and will be required to notify the Credit Risk Manager of such
decision.
The Sponsor has the right to transfer the servicing of the Mortgage
Loans serviced by the Servicer to a successor servicer which is qualified to
service mortgage loans for Fannie Mae or Freddie Mac. The appointment of any
successor servicer requires the consent of the Master Servicer, which consent
may not be unreasonably withheld, and the receipt of confirmation from the
Rating Agencies that the transfer of servicing will not result in a
qualification, withdrawal or downgrade of the then-current ratings of any of the
Offered Certificates, although there can be no guaranty that such transfer will
not have an adverse impact on rates of delinquencies, defaults and losses. See
"Risk Factors--The transfer of servicing may result in higher delinquencies and
defaults which may adversely affect the yield on your certificates" in this
prospectus supplement.
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"), as set forth under "Description of the Certificates--Table of
Fees and Expenses", calculated using a per annum rate multiplied by the
Scheduled Principal Balance of each Mortgage Loan, in this prospectus
supplement. Amounts collected or advanced in respect of interest on the Mortgage
Loans each month will be remitted by the Servicer to the Master Servicer net of
the Servicing Fee payable to the Servicer for such month. As a result of the
Sponsor's continued ownership of the servicing rights, each Servicer's net
compensation for performing the servicing activities will resemble that of a
subservicer. Since the Servicing Fee payable to the Servicer is less than 1/12
of 0.50% multiplied by the Scheduled Principal Balance of each Mortgage Loan,
the amount of such excess Servicing Fee will be distributed to the Class CE-2
Certificateholder on each Distribution Date. If servicing is transferred from
the Servicer to a qualified successor pursuant to the Pooling and Servicing
Agreement, the Servicing Fee payable to any successor to the Servicer shall be
calculated using a per annum rate equal to 0.50%. Notwithstanding that the fee
payable to the Servicer is based on a per annum rate that is less than 0.50%,
the Servicer has agreed to service and administer the Mortgage Loans in
accordance with the terms of the Pooling and Servicing Agreement.
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 the Pooling and Servicing Agreement) with respect
to the Mortgage Loans.
The Servicer is obligated to pay insurance premiums and other ongoing
expenses associated with the Mortgage Loans in connection with their
responsibilities under the Pooling and Servicing Agreement, and are entitled to
reimbursement for these expenses as provided in the Pooling and Servicing
Agreement. See "Description of the Agreement-Material Terms of the
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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 Pooling and 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 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;
(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;
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(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 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 during the portion of the related
Prepayment Period occurring between the 16th day of the month prior to the month
of the 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 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 fee payable to the Master Servicer for the applicable
Distribution Date. Accordingly, the effect of interest shortfalls resulting from
(i) principal prepayments in part and principal prepayments in full on the
Mortgage Loans received during the related Prepayment Period (a "Prepayment
Interest Shortfall") to the extent that they exceed any payments by the Master
Servicer or the Servicer ("Compensating Interest") or (ii) any shortfalls
resulting from the application of the Relief Act or similar state or local laws,
will be to reduce the aggregate amount
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of interest collected that is available for distribution to certificateholders.
Any such shortfalls will be allocated among the certificates as provided under
"Description of the Certificates-Interest Distributions on the Offered
Certificates" and "-Overcollateralization Provisions" in this prospectus
supplement. See "Certain Legal Aspects of the Mortgage Loans-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 Fees, that
were due during the related Due Period on the Mortgage Loans and that were
delinquent on the related Determination Date, plus amounts representing assumed
payments not covered by any current net income on the Mortgaged Properties
acquired by foreclosure or deed in lieu of foreclosure (net of the Servicing
Fees). These advances are referred to in this prospectus supplement as "P&I
Advances". In the event that the Servicer fails in its obligation to make any
required P&I Advance, a successor servicer, which may be the Master Servicer,
will be obligated to make the P&I Advance on the Distribution Date for which the
Servicer was required to make such P&I Advance, to the extent required in the
Pooling and Servicing Agreement.
P&I Advances are required to be made only to the extent they are deemed
by the Servicer or successor servicer, as applicable, to be recoverable from
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. Neither the Servicer nor the successor servicer will 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 or once a Mortgage Loan has
been charged off. All P&I Advances will be reimbursable to the Servicer or
successor 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 successor servicer to be nonrecoverable
from late collections, insurance proceeds or liquidation proceeds may be
reimbursed to the Servicer or the successor servicer out of any funds in the
collection account prior to the distributions on the certificates.
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.
The Pooling and Servicing Agreement also provides that the Servicer may
enter into a facility with any person which provides that such person may fund
P&I Advances or servicing advances, although no such facility shall reduce or
otherwise affect the obligations of the Servicer to fund such P&I Advances or
servicing advances. Any P&I Advances or servicing advances funded by an
advancing person will be reimbursed to the advancing person in the same manner
as reimbursements would be made to the Servicer.
Upon an Event of Default by the Servicer under the Pooling and
Servicing Agreement, the Master Servicer may terminate the Servicer and the
Master Servicer will, or under certain circumstances, the Servicer or its
designee may, appoint a successor servicer. Such successor servicer must meet
the requirements for successor servicers under the Pooling and Servicing
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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
in accordance with the terms and conditions of the Pooling and Servicing
Agreement).
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 those set forth in
this paragraph. 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. Pursuant
to the terms of the Pooling and Servicing Agreement, unless a Mortgage Loan is
in default or such default is reasonably foreseeable, no servicing modification
with respect to a Mortgage Loan will have the effect of (i) reducing the
mortgage rate, (ii) reducing or increasing the principal balance (except for
reductions resulting from actual payments of principal) or (iii) changing the
final maturity date on such Mortgage Loan (subject to certain exceptions) or
that would both (A) effect an exchange or reissuance of such Mortgage Loan under
Section 1001 of the Code (or final, temporary or proposed Treasury regulations
promulgated thereunder) and (B) cause any Trust REMIC created under the Pooling
and Servicing Agreement to fail to qualify as a REMIC under the Code or the
imposition of any tax on "prohibited transactions" or "contributions after the
startup date" under the REMIC Provisions.
Any advances made on any Mortgage Loan will be reduced to reflect any
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 Offered Certificates will
not be affected by the servicing modification.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement will provide that each year on or
before the date set forth in the Pooling and Servicing Agreement, 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 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 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 Pooling and 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 Pooling and 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
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officer, the Servicer has fulfilled in all material respects its obligations
under the Pooling and 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.
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 Custodians" 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 CUSTODIANS
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 a Custodian under the Pooling and
Servicing Agreement and the applicable 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.
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, current 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 issuing trust. Wells Fargo Bank has been engaged in the business of
securities administration since June 30, 1995. As of June 30, 2006, Wells Fargo
Bank was acting as securities administrator with respect to more than
$894,773,136,436 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
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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 June 30, 2006, Wells Fargo Bank was
acting as master servicer for approximately 1,253 series of residential
mortgage-backed securities with an aggregate outstanding principal balance of
approximately $651,189,990,090.
CUSTODIAN. Wells Fargo Bank is acting as a custodian of certain 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 June 30, 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.
Approximately 29.09% of the mortgage loan files with respect to the
Mortgage Loans, by aggregate principal balance as of the Cut-off Date, 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.
DEUTSCHE BANK NATIONAL TRUST COMPANY
GENERAL
The information set forth in the following paragraph has been provided
by Deutsche Bank National Trust Company ("DBNTC").
DBNTC has performed a custodial role in numerous mortgage-backed
transactions since 1991. DBNTC will maintain the mortgage files in secure,
fire-resistant facilities. DBNTC will not physically segregate the mortgage
files from other mortgage files in DBNTC's custody but will be kept in shared
facilities. However, DBNTC's proprietary document tracking system will show the
location within DBNTC's facilities of each mortgage file and will show that the
mortgage loan documents are held by the Trustee on behalf of the trust. DBNTC
has no pending legal proceedings that would materially affect its ability to
perform its duties as a custodian on behalf of the Holders. DBNTC may perform
certain of its obligations through one or more third party vendors. However,
DBNTC shall remain liable for the duties and obligations required of it under
its custodial agreement.
DBNTC is providing the information in the foregoing paragraph at the
Depositor's request in order to assist the Depositor with the preparation of its
disclosure documents to be filed with the SEC pursuant to Regulation AB.
Otherwise, DBNTC has not participated in the preparation of such disclosure
documents and assumes no responsibility or liability for their contents.
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Approximately 70.91% of the mortgage loan files with respect to the
Mortgage Loans by aggregate principal balance as of the Cut-off Date, will be
held by DBNTC pursuant to a custodial agreement to be entered into among HSBC
Bank USA, National Association, as Trustee, DBNTC, 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 a master
servicing fee equal to one-twelfth of the product of 0.0160% multiplied by the
Scheduled Principal Balance of the Mortgage Loans as of the Due Date in the
preceding calendar month. In addition, the Master Servicer will be entitled to
any interest or other income earned on funds held in the Distribution Account.
In the event that a 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 "-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.
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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.
The Custodians and any director, officer, employee or agent of the
Custodians will be indemnified and held harmless by the trust against any loss,
liability or expense as set forth in the Custodial Agreements.
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-SL4 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 included in the Mortgage Pool.
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:
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, if applicable)
shall examine them to determine whether they are in the required form;
provided, however, that the Trustee (or the Custodian, if applicable,
to the extent it is required to review any such documents under the
custodial agreement) 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 (or the Custodian, if applicable) 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
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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 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
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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 Agreements, other than any loss, liability or expense (i) resulting
from a breach of the obligations and duties of the Servicer under the Pooling
and Servicing Agreement (for which the Trustee receives indemnity from the
Servicer) or (ii) incurred by reason of willful misfeasance, bad faith or
negligence in the performance of the Trustee's duties under the Pooling and
Servicing Agreement, the certificates or the Custodial Agreements 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 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 such
Mortgage Loans, pursuant to a Credit Risk Management Agreement to be entered
into by the Credit Risk Manager and the Servicer and/or Master Servicer on or
prior to the Closing Date. The Credit Risk Manager will rely upon mortgage loan
data that is provided to it by the Servicer and/or Master Servicer in performing
its advisory and monitoring functions. The Credit Risk Manager will be entitled
to receive a "Credit Risk Manager's Fee" until the termination of the trust or
until its removal by a vote of at least 66 2/3% of the Certificateholders. Such
fee will be paid by the trust and will be equal to one-twelfth of the product of
0.0150% 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 (the "Pooling and Servicing Agreement"), dated as of August 1, 2006
among the Depositor, the Servicer, the Master Servicer, the Securities
Administrator and the Trustee, a form of which is filed as an exhibit to the
registration statement. A Current Report on Form 8-K relating to the
certificates containing a copy of the Pooling and Servicing Agreement as
executed will be filed by the Depositor with the Securities and Exchange
Commission ("SEC") 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
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Properties acquired on behalf of certificateholders by foreclosure or by deed in
lieu of foreclosure, and any revenues received on these mortgaged properties;
(iv) the rights of the Trustee under all insurance policies required to be
maintained under the Pooling and Servicing Agreement; (v) the rights of the
Depositor under the Mortgage Loan Purchase Agreement; (vi) the Reserve Fund and
any amounts on deposit in the Reserve Fund from time to time and any proceeds
thereof; and (vii) the right to any Net Swap Payments and any Swap Termination
Payment made by the Swap Provider. 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.
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 applicable 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 a Custodian on its
behalf will review the Mortgage Loans and the Related Documents pursuant to the
related 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
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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 in this prospectus supplement) 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 in this prospectus supplement) 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.
A "Qualified Substitute Mortgage Loan" is a mortgage loan substituted
for a Deleted Mortgage Loan which must, on the date of such substitution, (i)
have an outstanding principal balance (or in the case of a substitution of more
than one Mortgage Loan for a Deleted Mortgage Loan, an aggregate principal
balance), not in excess of the principal balance of the Deleted Mortgage Loan;
(ii) have a Mortgage Rate not less than the Mortgage Rate of the Deleted
Mortgage Loan and not more than 1% in excess of the Mortgage Rate of such
Deleted Mortgage Loan; (iii) have a remaining term to maturity not more than one
year earlier and not later than the remaining term to maturity of the Deleted
Mortgage Loan; (iv) 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); (v) be of the same or better credit
quality as the Mortgage Loan being replaced; (vi) have the same lien priority on
the related mortgaged property as the Mortgage Loan being replaced and (vii)
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. 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
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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."
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-1 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 Class CE-2 Certificates will not be allocated any voting
rights.
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 or, if the Master Servicer fails to exercise such option, GMAC
Mortgage Corporation (either of the Master Servicer or GMAC Mortgage
Corporation, the "Terminator") will have the right to purchase all remaining
Mortgage Loans and any properties acquired in respect thereof and thereby effect
early retirement of the certificates on any Distribution Date following the Due
Period during which the aggregate principal balance of the Mortgage Loans and
properties acquired in respect thereof remaining in the trust fund at the time
of purchase is reduced to less than or equal to 10% of the aggregate principal
balance of the Mortgage Loans as of the Cut-off Date. In the event the
Terminator exercises the option, the purchase price payable in connection with
the option will be equal to par with respect to the Mortgage Loans and the fair
market value of all properties acquired by the trust in respect of any Mortgage
Loans, plus accrued interest for each Mortgage Loan at the related Mortgage Rate
to but not including the first day of the month in which the repurchase price is
distributed, together with (to the extent not covered by the foregoing) all
amounts due and owing to the Trustee, the Servicer, the Master Servicer and the
Securities Administrator as of the termination date and any Swap Termination
Payment payable to the Swap Provider not due to a Swap Provider Trigger Event
pursuant to the Interest Rate Swap Agreement. In the event the Terminator
exercises this option, the portion of the purchase price allocable to the
Offered Certificates will be, to the extent of available funds, (i) 100% of the
then outstanding Certificate Principal Balance of the Offered Certificates, plus
(ii) one month's interest on the then outstanding Certificate Principal Balance
of the Offered Certificates at the then applicable Pass-Through Rate for each
such class, plus (iii) any
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previously accrued but unpaid interest thereon to which the holders of the
Offered Certificates are entitled, together with the amount of any Net WAC Rate
Carryover Amounts. The holders of the Residual Certificates shall pledge any
amount received in a termination in excess of par to the holders of the Class
CE-1 Certificates. In no event will the trust created by the Pooling and
Servicing Agreement continue beyond the expiration of 21 years from the death of
the survivor of the persons named in the Pooling and Servicing Agreement. See
"Description of the Securities-Termination" in the prospectus.
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 and any properties acquired in respect thereof 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 Custodians 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, Master 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
Custodians, the Servicer and the Swap Provider from amounts on deposit in the
Distribution Account pursuant to the terms of the Pooling and 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
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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
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 Offered Certificates and the Class CE-1 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), the Class P Certificates and the Class CE-2
Certificates will represent the "regular interests" in, and will be treated as
debt instruments of, a REMIC. See "Material Federal Income Tax
Considerations-REMICs" in the prospectus.
For federal income tax purposes, the Class M-10 Certificates will be,
and the other 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
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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 Mortgage Loans will prepay at a rate equal to 35% CPR
(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 Issuing Entity. 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
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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 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
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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 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 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
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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 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 an 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 99.68%
of the aggregate initial Certificate Principal Balance of the Offered
Certificates before deducting expenses. 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 in this prospectus supplement 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, 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-2 AAA Aaa
Class A-3 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 A- Baa1
Class M-8 BBB+ Baa2
Class M-9 BBB Baa3
Class M-10 BBB- Ba1
The ratings assigned to mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions to which
the certificateholders are entitled. The rating process addresses structural and
legal aspects associated with the certificates, including the nature of the
underlying mortgage loans. The ratings assigned to mortgage pass-through
certificates do not represent any assessment of the likelihood that principal
prepayments will be made by the mortgagors or the degree to which such
prepayments will differ from that originally anticipated. The ratings do not
address the possibility that certificateholders might suffer a lower than
anticipated yield due to non-credit events. In addition, the ratings on the
Offered Certificates do not address the likelihood of receipt by the holders of
such certificates of any amounts in respect of Net WAC Rate Carryover Amounts.
A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each security rating should be evaluated
independently of any other security rating. In the event that the ratings
initially assigned to the Offered Certificates are subsequently lowered for any
reason, no person or entity is obligated to provide any additional credit
support or credit enhancement with respect to the Offered Certificates.
The Depositor has not requested that any rating agency rate the Offered
Certificates other than as stated above. However, there can be no assurance as
to whether any other rating agency will rate the Offered Certificates, or, if it
does, what rating would be assigned by any other rating agency. A rating on the
Offered Certificates by another rating agency, if assigned at all, may be lower
than the ratings assigned to the Offered Certificates as stated in this section.
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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, the Issuing Entity, the Master Servicer, the
Servicer, the Originators, the Securities Administrator or the Custodians, 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, the
Issuing Entity, the Swap Provider or Deutsche Bank National Trust Company, as a
custodian and (b) any of the Master Servicer, the Securities Administrator,
Wells Fargo Bank, National Association, as a custodian, the Servicer, the
Originators and the Trustee. There are no affiliations among the Depositor or
the Issuing Entity and Deutsche Bank National Trust Company. There are no
affiliations among the Master Servicer, the Securities Administrator or Wells
Fargo Bank, National Association as a custodian and any of the Servicer, the
Originators and the Trustee. There are no affiliations among any of the
Servicer, the Originators and the Trustee. Deutsche Bank National Trust Company,
the Swap Provider and the Sponsor are affiliates. There are currently no
business relationships, agreements, arrangements, transactions or understandings
between (a) the Sponsor, the Depositor, the Issuing Entity, the Swap Provider or
Deutsche Bank National Trust Company, as a custodian and (b) any of the Master
Servicer, the Securities Administrator, Wells Fargo Bank, National Association,
as a custodian, the Servicer, the Originator 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
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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 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
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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 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 in this prospectus supplement 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
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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 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. As noted in the Prospectus, one requirement of
eligibility under the Exemption is that all of the mortgage loans must have a
loan-to-value ratio of not more than 100%, based on the outstanding principal
balance of the loan and the fair market value of the mortgage property as of the
closing date. It is possible that, if the fair market value of any of the
mortgage loans has declined substantially since origination, this requirement
may not be satisfied. This possibility is greater for the seasoned loans than it
is for the other mortgage loans. 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
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Standard & Poor's, Fitch Ratings 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 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.
The recently enacted Pension Protection Act of 2006 modified the ERISA
rules relating to prohibited transactions. Plan fiduciaries are encouraged to
consult their legal counsel concerning the availability of, and scope of relief
provided by, the Exemption, the enumerated class exemptions and other
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
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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 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 Depositaries, which in turn will hold such positions in accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC will
follow the settlement practices applicable to conventional eurobonds, except
that there will be no temporary global security and no "lock-up" or restricted
period. Investor securities custody accounts will be credited with their
holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream
or Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trade where both the purchaser's and sellers
accounts are located to ensure that settlement can be made on the desired value
date.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior mortgage
loan asset-backed certificates issues in same-day funds.
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TRADING BETWEEN CLEARSTREAM AND/OR EUROCLEAR PARTICIPANTS. Secondary
market trading between Clearstream Participants or Euroclear Participants will
be settled using the procedures applicable to conventional eurobonds in same-day
funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM OR EUROCLEAR PURCHASER. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective 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
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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...............................................................23
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 originators are
UNDERWRITTEN TO STANDARDS intended to assess the ability and willingness of
WHICH DO NOT CONFORM TO the mortgagor to repay the debt and to evaluate the
THE STANDARDS OF FANNIE adequacy of the property as collateral for the
MAE OR FREDDIE MAC. 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 The Offered Securities will not represent an
WILL BE LIMITED interest in or obligation of the depositor, the
OBLIGATIONS SOLELY OF servicer, the master servicer, the securities
THE ISSUING ENTITY AND administrator, the originators, the trustee or any
NOT OF ANY OTHER PARTY. 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 regulate interest
PROTECTION LAWS MAY RESULT rates and other charges, require certain disclosure,
IN LOSSES ON THE MORTGAGE and require licensing of the originators. In
LOANS, THE CONTRACTS AND addition, other state laws, public policy and
YOUR SECURITIES. 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 The underwriter has no obligation to make a
SECURITIES MAY BE LIMITED. 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 The Relief Act and similar state or local laws
SECURITIES COULD BE provide relief to mortgagors who enter active
REDUCED BY SHORTFALLS military service and to mortgagors in reserve status
DUE TO THE APPLICATION who are called to active military service after the
OF THE RELIEF ACT. 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 Securities may
WITHDRAWAL OF RATINGS ON change or withdraw its initial ratings at any time
THE OFFERED SECURITIES. 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
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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;
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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
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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.
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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.
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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
10
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.
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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
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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;
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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
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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,
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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
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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
24
interest may accrue on each Asset during a period (each, an "Accrual Period"),
the distribution of that interest will be made on a day that may be several
days, weeks or months following the period of accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Notes or Certificates, as applicable,
entitled to distributions of interest (or addition to the Security Balance of a
class of Accrual Securities) will be made by or on behalf of the trustee each
month on the date specified in the related prospectus supplement (each date, a
"Distribution Date"), and will include interest accrued during the Accrual
Period for that Distribution Date. As indicated above under "--Interest Rate,"
if the Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of those Notes or
Certificates, as applicable, may be lower than the yield that would result if
the Accrual Period ended on the day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Notes or Certificates, as applicable, will
be affected by the rate of principal payments on the Assets (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities), including principal prepayments
resulting from both voluntary prepayments by the borrowers and involuntary
liquidations. The rate at which principal prepayments occur will be affected by
a variety of factors, including the terms of the Assets (or, in the case of
Mortgage Securities and Agency Securities, the underlying assets related to the
Mortgage Securities and Agency Securities), the level of prevailing interest
rates, the availability of mortgage credit and economic, demographic,
geographic, tax, legal and other factors.
In general, however, if prevailing interest rates fall significantly
below the interest rates on the Assets in a particular 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.
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Conversely, local economic conditions and some of the other factors mentioned
above may play a larger role in the prepayment behavior of manufactured housing
contracts than they do in the prepayment behavior of loans secured by mortgages
on site-built homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets (or, in
the case of Mortgage Securities and Agency Securities, the underlying assets
related to the Mortgage Securities and Agency Securities), the actual yield to
maturity will be lower than that so calculated. Conversely, if the purchaser of
a Security offered at a premium calculates its anticipated yield to maturity
based on an assumed rate of distributions of principal that is slower than that
actually experienced on the Assets (or, in the case of Mortgage Securities and
Agency Securities, the underlying assets related to the Mortgage Securities and
Agency Securities), the actual yield to maturity will be lower than that so
calculated. In either case, if so provided in the prospectus supplement for a
series of Notes or Certificates, as applicable, the effect on yield on one or
more classes of the Notes or Certificates, as applicable, of that series of
prepayments of the Assets in the related 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
26
Distribution Date, which is the date on or before which the Security Balance of
the class of Notes or Certificates, as applicable, is scheduled to be reduced to
zero, calculated on the basis of the assumptions applicable to that series.
Weighted average life refers to the average amount of time that will elapse from
the date of issue of a security until each dollar of principal of that security
will be repaid to the investor. The weighted average life of a class of Notes or
Certificates, as applicable, of a series will be influenced by the rate at which
principal on the Assets is paid to that class, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes prepayments, in whole or in part, and liquidations due to default).
In addition, the weighted average life of the Notes or Certificates, as
applicable, may be affected by the varying maturities of the Assets in 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
28
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
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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.
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TARGET AMORTIZATION A class of securities with a principal
balance that is reduced based on a
scheduled of principal balances, 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
38
the prospectus supplement, the servicer's (or another entity's) advance
obligation may be limited only to the portion of those delinquencies necessary
to make the required distributions on one or more classes of Senior Notes or
Senior Certificates, as applicable, and/or may be subject to a good faith
determination that advances will be reimbursable not only from Related Proceeds
but also from collections on other Assets otherwise distributable on one or more
classes of those Subordinate Notes or Subordinate Certificates, as applicable.
See "Description of Credit Support."
Advances are intended to maintain a regular flow of scheduled interest
and principal payments to holders of the class or classes of Notes or
Certificates, as applicable, entitled to the payments, rather than to guarantee
or insure against losses. Advances of the servicer's (or another entity's) funds
will be reimbursable only out of related recoveries on the Assets (including
amounts received under any form of credit support) respecting which those
advances were made (as to any Assets, "Related Proceeds") and from any other
amounts specified in the prospectus supplement, including out of any amounts
otherwise distributable on one or more classes of Subordinate Notes or
Subordinate Certificates, as applicable, of that series; provided, however, that
any advance will be reimbursable from any amounts in the related Collection
Account before any distributions being made on the Notes 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.
48
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
49
"Agreement"). The prospectus supplement for a series of Notes or Certificates,
as applicable, will describe any provision of the Agreement relating to that
series that materially differs from the description of those provisions
contained in this prospectus. The summaries do not purport to be complete and
are subject to, and are qualified by reference to, all of the provisions of the
Agreement for each 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
50
referred to) particular loan documents, which will generally include the
original mortgage note endorsed, without recourse, in blank or to the order of
the trustee, the original Mortgage (or a certified copy of the original
Mortgage) with evidence of recording indicated on the original Mortgage and an
assignment of the Mortgage to the trustee in recordable form. However, 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
51
and the security interest in the manufactured home securing each contract. To
give notice of the right, title and interest of the trustee in the contracts,
the depositor will cause UCC-1 financing statements to be executed by the
related asset seller identifying the depositor as secured party and by the
depositor identifying the trustee as the secured party and, in each case,
identifying all contracts as collateral. The contracts will be stamped or
otherwise marked to reflect their assignment from the depositor to the 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;
52
o in the case of a mortgage loan, the existence of customary
provisions in the related mortgage note and Mortgage to permit
realization against the Mortgaged Property of the benefit of the
security of the Mortgage; and
o the existence of hazard and extended perils insurance coverage on
the Mortgaged Property or manufactured home.
Any Warranting Party shall be an Asset Seller or an affiliate of the
Asset Seller or any other person acceptable to the depositor and will be
identified in the prospectus supplement.
Representations and warranties made in respect of an Asset may have been
made as of a date before the applicable Cut-off Date. A substantial period of
time may have elapsed between that date and the date of initial issuance of the
related series of Notes or Certificates, as applicable, evidencing an interest
in that Asset. In the event of a breach of any of these representations or
warranties, the 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
53
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."
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;
54
(3) Liquidation Proceeds and Insurance Proceeds, together
with the net proceeds on a monthly basis with respect to any Assets
acquired for the benefit of securityholders;
(4) any amounts paid under any instrument or drawn from any
fund that constitutes credit support for the related series of Notes or
Certificates, as applicable, as described under "Description of Credit
Support;"
(5) any advances made as described under "Description of the
Securities--Advances in Respect of Delinquencies;"
(6) any amounts paid under any Cash Flow Agreement, as
described under "Description of the 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;
55
(3) to reimburse a servicer for unpaid servicing fees earned
and unreimbursed servicing expenses incurred with respect to Assets and
properties acquired in respect of the Assets, which reimbursement is to
be made out of amounts that represent Liquidation Proceeds and Insurance
Proceeds collected on the particular Assets and properties, and net
income collected on the particular properties, which fees were earned or
expenses were incurred or out of amounts drawn under any form of credit
support for those Assets and properties;
(4) to reimburse a servicer for any advances described in
clause (2) above and any servicing expenses described in clause (3)
above which, in the servicer's good faith judgment, will not be
recoverable from the amounts described in those clauses, which
reimbursement is to be made from amounts collected on other Assets or,
if and to the extent so provided by the related Agreement and described
in the prospectus supplement, just from that portion of amounts
collected on other Assets that is otherwise distributable on one or more
classes of Subordinate Notes or Subordinate Certificates, as applicable,
if any, remain outstanding, and otherwise any outstanding class of Notes
or Certificates, as applicable, of the related series;
(5) if and to the extent described in the prospectus
supplement, to pay a servicer interest accrued on the advances described
in clause (2) above and the servicing expenses described in clause (3)
above while those advances and servicing expenses remain outstanding and
unreimbursed;
(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;
56
(13) to pay for the cost of an independent appraiser or other
expert in real estate matters retained to determine a fair sale price
for a defaulted mortgage loan or a property acquired in respect of a
mortgage loan in connection with the liquidation of that mortgage loan
or property;
(14) to pay for the cost of various opinions of counsel
obtained pursuant to the related Agreement for the benefit of
securityholders;
(15) to pay for the costs of recording the related Agreement
if that recordation materially and beneficially affects the interests of
securityholders, provided that the payment shall not constitute a waiver
with respect to the obligation of the Warranting Party to remedy any
breach of representation or warranty under the Agreement;
(16) to pay the person so entitled any amounts deposited in
the Collection Account in error, including amounts received on any Asset
after its removal from the 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
57
(3) the general servicing standard specified in the
prospectus supplement or, if no standard is so specified, its normal
servicing practices (in either case, the "Servicing Standard").
In connection, the servicer will be permitted in its discretion to waive any
late payment charge or penalty interest in respect of a late payment on an
Asset.
Each servicer will also be required to perform other customary functions
of a servicer of comparable assets, including maintaining hazard insurance
policies as described in this prospectus and in any prospectus supplement, and
filing and settling claims under these policies; maintaining, to the extent
required by the Agreement, escrow or impoundment accounts of borrowers for
payment of taxes, insurance and other items required to be paid by any borrower
pursuant to the terms of the Assets; processing assumptions or substitutions in
those cases where the servicer has determined not to enforce any applicable
due-on-sale clause; attempting to cure delinquencies; supervising foreclosures
or repossessions; inspecting and managing Mortgaged Properties or manufactured
homes under some circumstances; and maintaining accounting records relating to
the Assets. The servicer or any other entity specified in the prospectus
supplement will be responsible for filing and settling claims in respect of
particular Assets under any applicable instrument of credit support. See
"Description of Credit Support."
The servicer may agree to modify, waive or amend any term of any Asset
in a manner consistent with the Servicing Standard so long as the modification,
waiver or amendment will not (1) affect the amount or timing of any scheduled
payments of principal or interest on the Asset or (2) in its judgment,
materially impair the security for the Asset or reduce the likelihood of timely
payment of amounts due on the Asset. The servicer also may agree to any
modification, waiver or amendment that would so affect or impair the payments
on, or the security for, an Asset if (1) in its judgment, a material default on
the Asset has occurred or a payment default is reasonably foreseeable and (2) in
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.
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REALIZATION UPON DEFAULTED ASSETS
Generally, the servicer is required to monitor any Asset that is in
default, initiate corrective action in cooperation with the borrower if cure is
likely, inspect the Asset and take any other actions as are consistent with the
Servicing Standard. A significant period of time may elapse before the servicer
is able to assess the success of that corrective action or the need for
additional initiatives.
Any Agreement relating to 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
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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 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
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Collection Account out of those proceeds, before distribution of the Collection
Account to securityholders, amounts representing its normal servicing
compensation on that Asset, unreimbursed servicing expenses incurred for the
Asset and any unreimbursed advances of delinquent payments made with respect to
the Asset. See "Hazard Insurance Policies" and "Description of Credit Support."
HAZARD INSURANCE POLICIES
MORTGAGE LOANS. Generally, each Agreement for 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
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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 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.
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The servicer may maintain, in lieu of causing individual hazard
insurance policies to be maintained for each manufactured home, and must
maintain, to the extent that the related contract does not require the borrower
to maintain a hazard insurance policy for the related manufactured home, one or
more blanket insurance policies covering losses on the borrower's interest in
the contracts resulting from the absence or insufficiency of individual hazard
insurance policies. The servicer must pay the premium for that blanket policy on
the basis described therein and must pay any deductible amount for claims under
that policy relating to the contracts.
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
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accrued and unpaid before that date but in general only to the extent it was
allowed pursuant to a forbearance plan approved by HUD. When entitlement to
insurance benefits results from assignment of the FHA loan to HUD, the insurance
payment includes full compensation for interest accrued and unpaid to the
assignment date. The insurance payment itself, upon foreclosure of an FHA loan,
bears interest from a date 30 days after the borrower's first uncorrected
failure to perform any obligation to make any payment due under the mortgage
and, upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
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:
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o adversely affect or jeopardize coverage under any applicable
insurance policy or
o materially increase the risk of default or delinquency on, or
materially impair the security for, that mortgage loan.
Any fee collected by or on behalf of the servicer for entering into an
assumption agreement will be retained by or on behalf of the servicer as
additional servicing compensation. See "Certain Legal Aspects of Mortgage
Loans--Due-on-Sale Clauses."
The contracts may also contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related mortgaged property, or
due-on-sale clauses. The servicer will generally permit that transfer so long as
the transferee satisfies the servicer's then applicable underwriting standards.
The purpose of those transfers is often to avoid a default by the transferring
borrower.
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The prospectus supplement for a series of Notes or Certificates, as
applicable, will specify whether there will be any Retained Interest in the
Assets, and, if so, the initial owner of this Retained Interest. If so, the
Retained Interest will be established on a loan-by-loan basis and will be
specified on an exhibit to the related Agreement. A "Retained Interest" in an
Asset represents a specified portion of the interest payable on the Asset. The
Retained Interest will be deducted from borrower payments as received and will
not be part of the related 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
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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
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
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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 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
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the prospectus supplement, and the servicer will be liable for the performance
of a Special servicer only if, and to the extent, set forth in the prospectus
supplement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Events of default under the related Agreement will generally include:
o any failure by the servicer to distribute or cause to be distributed
to securityholders, or to remit to the trustee for distribution to
securityholders, any required payment that continues after a grace
period, if any;
o any failure by the servicer duly to observe or perform in any
material respect any of its other covenants or obligations under the
Agreement that continues unremedied for 30 days after written notice
of that failure has been given to the servicer by the trustee or the
depositor, or to the servicer, the depositor and the trustee by
securityholders evidencing not less than 25% of the voting rights
for that series;
o any breach of a representation or warranty made by the servicer
under the Agreement that materially and adversely affects the
interests of securityholders and which continues unremedied for 30
days after written notice of that breach has been given to the
servicer by the trustee or the depositor, or to the servicer, the
depositor and the trustee by the holders of Notes or Certificates,
as applicable, evidencing not less than 25% of the voting rights for
that series; and
o some events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings and actions by or on
behalf of the servicer indicating its insolvency or inability to pay
its obligations.
Material variations to the foregoing events of default (other than to
shorten cure periods or eliminate notice requirements) will be specified in the
prospectus supplement. The trustee will, not later than the later of 60 days or
any other period specified in the prospectus supplement after the occurrence of
any event that constitutes or, with notice or lapse of time or both, would
constitute an event of default and five days after specific officers of the
trustee become aware of the occurrence of that event, transmit by mail to the
depositor and all securityholders of the applicable series notice of that
occurrence, unless that default has been cured or waived.
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
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under the Agreement. Pending that appointment, the trustee is obligated to act
in that capacity. The trustee and any successor servicer may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation payable to the servicer under the Agreement.
The holders of Notes or Certificates, as applicable, representing at
least 66 2/3% (or any other percentage specified in the Agreement) of the voting
rights allocated to the respective classes of Notes or Certificates, as
applicable, affected by any event of default will be entitled to waive that
event of default; provided, however, that an Event of Default involving a
failure to distribute a required payment to securityholders described in clause
(1) under "Events of Default under the Agreements" may be waived only by all of
the securityholders. Upon any waiver of an event of default, that event of
default will cease to exist and will be deemed to have been remedied for every
purpose under the Agreement.
No securityholders will have the right under any Agreement to institute
any proceeding with respect to the Agreement unless that holder previously has
given to the trustee written notice of default and unless the holders of Notes
or Certificates, as applicable, evidencing not less than 25% (or any other
percentage specified in the Agreement) of the voting rights have made written
request upon the trustee to institute that proceeding in its own name as trustee
under the Agreement and have offered to the trustee reasonable indemnity, and
the trustee for 60 days (or any other number of days specified in the Agreement)
has neglected or refused to institute any proceeding. The trustee, however, is
under no obligation to exercise any of the trusts or powers vested in it by any
Agreement or to make any investigation of matters arising under the Agreement or
to institute, conduct or defend any litigation under the Agreement or in
relation to the Agreement at the request, order or direction of any of the
securityholders covered by that Agreement, unless those securityholders have
offered to the trustee reasonable security or indemnity against the costs,
expenses and liabilities that may be incurred.
The manner of determining the voting rights of a Security or class or
classes of Notes or Certificates, as applicable, will be specified in the
Agreement.
AMENDMENT
In general, each Agreement may be amended by the parties to it, without
the consent of any securityholders covered by the Agreement, to 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
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less than 51% (or any other percentage specified in the Agreement) of the voting
rights, for any purpose; provided, however, no amendment may (1) reduce in any
manner the amount of, or delay the timing of, payments received or advanced on
Assets that are required to be distributed on any Security without the consent
of the securityholder or (2) reduce the consent percentages described in this
paragraph without the consent of all the securityholders covered by the
Agreement then outstanding. However, for any series of Notes or Certificates, as
applicable, as to which a REMIC election is to be made, the trustee will not
consent to any amendment of the Agreement unless it has first have received an
opinion of 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
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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 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,
72
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
73
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
77
of timely distributions of principal of and interest on the Notes or
Certificates, as applicable. If specified in the prospectus supplement, reserve
funds may be established to provide limited protection against only some types
of losses and shortfalls. Following each Distribution Date amounts in a reserve
fund in excess of any amount required to be maintained in the reserve fund may
be released from the reserve fund under the conditions and to the extent
specified in the prospectus supplement and will not be available for further
application to the Notes or Certificates, as applicable.
Money deposited in any reserve funds will be invested in Permitted
Investments, to the extent specified in the prospectus supplement. To the extent
specified in the prospectus supplement, any reinvestment income or other gain
from those investments will be credited to the related reserve fund for that
series, and any loss resulting from those investments will be charged to the
reserve fund. However, that income may be payable to any related servicer or
another service provider or other entity. To the extent specified in the
prospectus supplement, the reserve fund, if any, for a series will not be a part
of the 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.
85
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
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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
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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
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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
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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
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disposition of the Notes or Certificates, as applicable, offered under this
prospectus. These 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
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promulgated thereunder (the "OID Regulations"), and in part upon the REMIC
Provisions and the 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
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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.
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(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
110
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
111
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
112
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
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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
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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.
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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
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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
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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,
150
accordingly, makes no representation as to the accuracy or completeness of the
information in those documents.
Copies of the most recent Offering Circular for Freddie Mac certificates
as well as Freddie Mac's most recent Information Statement and Information
Statement supplement and any quarterly report made available by Freddie Mac may
be obtained by writing or calling the Investor Inquiry Department of Freddie Mac
at 8200 Jones Branch Drive, McLean, Virginia 22102 (outside Washington, D.C.
metropolitan area, telephone 800-336-3672; within Washington, D.C. metropolitan
area, telephone 703-759-8160). The Depositor did not participate in the
preparation of Freddie Mac's Offering Circular, Information Statement or any
supplement to the Information Statement or any quarterly report of the
Information Statement and, accordingly, makes no representation as to the
accuracy or completeness of the information in those documents.
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.....................114 Definitive Certificates..............34
1986 Act............................107 Definitive Notes.....................34
1997 Act............................131 Definitive Securities................34
1998 Policy Statement...............150 Determination Date...................35
AB Servicing Criteria................66 Disqualified Organization...........118
Acceptable Investments..............147 disqualified persons................142
Accrual Period.......................25 Distribution Account.................72
ADA..................................97 Distribution Date....................25
Agency Securities.....................4 DOL.................................142
Agreement............................50 DOL Pre-Funding Period..............146
Allowable Interest Rate.............145 DTC..................................43
Allowable Notional Amount...........145 EDGAR...............................152
ARM Loans.............................8 Eligible Accounts....................22
Asset Conservation Act...............91 Eligible Corporation................120
Asset Group..........................34 Environmental Policies...............65
Asset Seller..........................4 ERISA...............................141
Assets................................4 Euroclear............................43
Bankruptcy Code......................88 Euroclear Operator...................45
Beneficial Owner.....................44 European Depositaries................46
Book-Entry Certificates..............34 Exchange Act.........................44
Book-Entry Notes.....................34 Exemption...........................143
Book-Entry Securities................34 EYS Agreement.......................146
Buydown Mortgage Loans...............29 Fannie Mae............................4
Buydown Period.......................29 FDIC.................................54
Capitalized Interest Account.........22 Federal Tax Counsel.................103
Cash Flow Agreement..................23 FFIEC...............................150
CERCLA...........................14, 90 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.................92
Clearstream, Luxembourg Participants.45 Ginnie Mae............................4
Code............................42, 101 Grantor Trust Fund..................101
Collection Account...................54 Grantor Trust Fund Stripped Bond....130
Commercial Mortgage Loans............11 Grantor Trust Fund Stripped Coupon..130
Commercial Property...................6 Grantor Trust Securities............101
Commission............................8 Grantor Trust Securityholders.......126
contract borrower....................82 HELOCs................................9
contract lender......................82 Home Equity Loans.....................6
Cooperative..........................81 Housing Act..........................16
Cooperative Corporation..............45 HUD..................................63
Cooperative Loans....................81 Increasing Payment Asset..............5
Cooperatives..........................6 Indirect Participants................44
Covered Trust........................76 Insurance Proceeds...................35
CPR..................................27 Interest Rate........................36
Crime Control Act....................95 land sale contract...................82
Cut-off Date..........................8 Land Sale Contracts...................6
DBC..................................44 lease................................96
DBS.................................151 lessee...............................96
Debt Securities.....................102 Leveraged...........................145
153
Liquidation Proceeds.................36 Purchase Price.......................52
Loan-to-Value Ratio...................7 QPAM................................145
Lock-out Date.........................9 Rating Agency.......................144
Lock-out Period.......................9 RCRA.................................91
Mixed Use Mortgage Loans.............11 Record Date..........................35
Mixed-Use Property....................6 Refinance Loans.......................7
Mortgage Securities...................4 Registration Statement..............152
Mortgaged Properties..................6 Regular Securities..................103
Mortgages.............................7 Regular Securityholder..............106
Multifamily Mortgage Loans...........11 Relevant Depositary..................46
Multifamily Properties...............28 Relief Act...........................95
Multifamily Property..................6 REMIC...........................49, 101
NCUA................................150 REMIC Provisions....................101
New CI...............................44 REMIC qualified floating rate.......106
noneconomic residual interest.......119 REMIC Regulations...................102
Nonrecoverable Advance...............39 REMIC Securities................49, 101
Notes................................32 REO Property.........................41
OCC.................................149 Residual Holders....................114
Offered Certificates.................34 Residual Securities.................103
Offered Notes........................34 RICO.................................95
Offered Securities...................34 Rules................................47
Offering Documents..................147 Securities...........................32
OID Regulations.....................102 Servicemen's Readjustment Act........21
OTS.............................93, 150 Shortfall Amount....................130
Parity Act...........................92 Similar Law.........................149
Participants.........................44 Single Family Property................6
parties in interest.................141 SMMEA...............................149
Partnership Certificate Owners......135 SPA..................................27
Partnership Certificates............102 Special Servicer.....................68
Pass-Through Entity.................119 Stripped Agency Securities...........20
PCBs.................................90 Subsequent Assets....................22
Permitted Investments................55 Superliens...........................90
Plan................................141 Swap................................145
Plan Asset Regulations..............142 Swap Agreement......................145
Pre-Funded Amount....................22 Taxable Mortgage Pools..............102
Pre-Funding Account..................21 Terms and Conditions.................46
Pre-Funding Limit...................146 Tiered REMICs.......................105
Pre-Funding Period...................22 Title V..............................93
Prepayment Assumption...............108 Title VIII...........................94
Prepayment Premium....................9 U.S. Person.........................121
PTCE 83-1...........................142 UCC..................................44
PTCE 84-14..........................145 UST..................................91
PTCE 95-60..........................144 VA....................................7
PTCE 96-23..........................145 VA Guaranty Policy...................64
PTE 2000-58.........................143 Value.................................7
PTE 2002-41.........................143 Warranting Party.....................53
PTE 97-34...........................143
154
$331,500,000 (APPROXIMATE)
ACE SECURITIES CORP.
DEPOSITOR
ACE SECURITIES CORP. HOME EQUITY LOAN TRUST,
SERIES 2006-SL4
ISSUING ENTITY
ACE SECURITIES CORP. HOME EQUITY LOAN
TRUST, SERIES 2006-SL4
ASSET BACKED PASS-THROUGH CERTIFICATES
PROSPECTUS SUPPLEMENT
DATED AUGUST 23, 2006
GMAC MORTGAGE CORPORATION
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.
AUGUST 23, 2006