<Page>
PROSPECTUS SUPPLEMENT
(to Prospectus dated October 30, 2003)
$302,628,000
(APPROXIMATE)
[FIRST HORIZON LOGO]
FIRST HORIZON ABS TRUST 2004-HE1,
AS ISSUER
FIRST HORIZON ABS NOTES, SERIES 2004-HE1
PAYMENTS PAYABLE MONTHLY COMMENCING IN APRIL 2004
<Table>
FIRST TENNESSEE BANK NATIONAL ASSOCIATION, FIRST HORIZON ASSET SECURITIES, INC.,
AS SELLER AND SERVICER AS DEPOSITOR
</Table>
<Table>
<Caption>
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PRINCIPAL NOTE PRICE TO UNDERWRITING PROCEEDS TO THE
BALANCE RATE(1) PUBLIC DISCOUNT DEPOSITOR(2)
------------ -------------- ------------ -------- ------------
Per Note............................ LIBOR + 0.21% 100.00% 0.30% 99.70%
Total............................... $302,628,000 $302,628,000 $907,884 $301,720,116
---------------
(1) Variable, as described in this prospectus supplement.
(2) Before deducting expenses, payable by the depositor, estimated to be $450,000.
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</Table>
The notes are being offered pursuant to this prospectus supplement and the
accompanying prospectus.
The assets of the trust will include primarily a pool of adjustable rate home
equity line of credit loans. The notes will be secured by the assets of the
trust. The notes currently have no trading market. The notes are obligations of
the trust only and are not obligations of any other person. Credit enhancement
will be provided in the form of excess interest, overcollateralization and a
surety bond issued by Financial Guaranty Insurance Company. The remaining terms
to maturity of the loans will range from 235 to 238 months.
[Financial Guaranty Insurance Company LOGO]
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You should carefully consider the risk factors beginning on page S-11 of this
prospectus supplement and on page 6 of the accompanying prospectus.
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THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS MAY BE USED BY
FTN FINANCIAL SECURITIES CORP. IN CONNECTION WITH OFFERS AND SALES OF THE NOTES
IN MARKET-MAKING TRANSACTIONS.
THE SEC AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED OF
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The notes will be offered by FTN Financial Capital Markets, a division of
First Tennessee Bank National Association, from time to time to the public at
the offering price listed in the table above and FTN Financial Capital Markets
will receive the underwriting discount listed above. See 'Underwriting' in this
prospectus supplement. Delivery of the notes, in book-entry form, will be made
through The Depository Trust Company against payment in immediately available
funds on or about March 25, 2004.
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FTN FINANCIAL
Prospectus Supplement dated March 22, 2004
<Page>
Important notice about information presented in this
prospectus supplement and the accompanying prospectus:
We provide information to you about the notes offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your notes; and (2) this prospectus supplement,
which describes the specific terms of your notes.
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 notes in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
After the initial distribution of the notes offered hereby, this
prospectus and prospectus supplement may be used by FTN Financial Securities
Corp., an affiliate of the depositor, the seller and the servicer, in connection
with market making transactions in such notes. FTN Financial Securities Corp.
may act as principal or agent in these transactions. Certain information in this
prospectus supplement may be updated from time to time in connection with
transactions in which FTN Financial Securities Corp. acts as a market maker.
S-2
<Page>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
SUMMARY.....................................................................................S-6
The Trust................................................................................S-6
The Seller and Servicer..................................................................S-6
The Depositor............................................................................S-6
The Indenture Trustee and Administrator..................................................S-6
The Owner Trustee........................................................................S-6
The Note Insurer.........................................................................S-6
Cut-Off Date.............................................................................S-6
Trust Property...........................................................................S-6
The Mortgage Loans.......................................................................S-6
Payments to Noteholders..................................................................S-7
Interest Periods.........................................................................S-7
Application of Collections...............................................................S-7
Interest..............................................................................S-7
Principal.............................................................................S-7
Maturity Date............................................................................S-8
Termination of Trust.....................................................................S-8
Credit Enhancement.......................................................................S-8
Overcollateralization and Excess Interest............................................ S-8
The Policy........................................................................... S-8
Optional Termination.....................................................................S-9
Registration of Notes....................................................................S-9
Federal Income Tax Consequences..........................................................S-9
ERISA Considerations.....................................................................S-9
Legal Investment Considerations..........................................................S-9
Note Rating..............................................................................S-9
RISK FACTORS...............................................................................S-11
Notes May Not Be Appropriate Investments For Some Investors.............................S-11
Geographic Concentration Increases Risk That the Yield on the Notes May Be Impaired.....S-11
Cash Flow Limited in Early Years of Mortgage Loans......................................S-12
The Failure to Deliver the Loan Documents and the Failure to Record the Assignments
May Cause a Sale to the Depositor to be Ineffective..................................S-12
The Servicer Has Limited Ability to Change the Terms of the Mortgage Loans..............S-13
Interest Payable on the Notes and Interest Payable on the Mortgage Loans Differ.........S-13
Ratings on Notes Based Primarily on Claims-Paying Ability of the Note Insurer...........S-14
Limited Information Regarding Prepayment History........................................S-14
Yield to Maturity of Notes May be Affected by Repurchases...............................S-14
Consequences of Owning Book-Entry Notes.................................................S-14
Impact of Terrorist Attacks.............................................................S-15
An Insolvency of the Seller May Delay, Accelerate or Reduce Payments on the Notes.......S-15
Mortgage Loans May Convert to Fixed Rates Which May Reduce the Yield on the Notes.......S-16
FORWARD-LOOKING STATEMENTS.................................................................S-17
THE TRUST..................................................................................S-17
General.................................................................................S-17
THE NOTE INSURER...........................................................................S-18
Capitalization..........................................................................S-18
The Note Insurer's Credit Ratings.......................................................S-19
THE SELLER AND SERVICER....................................................................S-20
First Tennessee Bank National Association...............................................S-20
Credit and Underwriting Guidelines......................................................S-20
Servicing of the Mortgage Loans.........................................................S-22
S-3
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Foreclosure, Delinquency and Loss Experience............................................S-23
Management's Discussion and Analysis of Delinquency and Foreclosure Trends..............S-24
MATURITY AND PREPAYMENT CONSIDERATIONS.....................................................S-25
DESCRIPTION OF THE HELOCS..................................................................S-26
General.................................................................................S-26
HELOC Pool Statistics...................................................................S-27
HELOC Terms.............................................................................S-35
Servicing Compensation and Payment of Expenses..........................................S-35
Assignment of HELOCs....................................................................S-36
Conservatorship or Receivership.........................................................S-38
Optional Transfer of HELOCs to the Seller...............................................S-39
DESCRIPTION OF THE NOTES...................................................................S-39
General.................................................................................S-39
Book-Entry Notes........................................................................S-39
Payments................................................................................S-43
Certain Definitions.....................................................................S-43
Interest................................................................................S-45
The Policy..............................................................................S-46
Rapid Amortization Events...............................................................S-48
Termination of Trust....................................................................S-48
Optional Termination....................................................................S-48
Reports to Securityholders..............................................................S-49
THE SERVICING AGREEMENT....................................................................S-50
Modifications to HELOCs.................................................................S-51
Consent to Senior Liens.................................................................S-51
Hazard Insurance........................................................................S-51
Realization Upon Defaulted Mortgage Loans...............................................S-52
Evidence as to Compliance...............................................................S-52
Events of Servicing Termination.........................................................S-52
Rights Upon an Event of Servicing Termination...........................................S-52
Amendment...............................................................................S-53
Matters Regarding the Servicer..........................................................S-53
THE INDENTURE..............................................................................S-53
Events of Default; Rights Upon Event of Default.........................................S-53
Covenants...............................................................................S-54
Annual Compliance Statement.............................................................S-55
Indenture Trustee's Annual Report.......................................................S-55
Satisfaction and Discharge of Indenture.................................................S-55
Modification of Indenture...............................................................S-55
Voting Rights...........................................................................S-56
Matters Regarding the Indenture Trustee, the Depositor and the Seller...................S-57
THE TRUST AGREEMENT........................................................................S-57
Amendment...............................................................................S-57
Matters Regarding the Owner Trustee, the Depositor and the Seller.......................S-57
ADMINISTRATION AGREEMENT...................................................................S-57
THE INDENTURE TRUSTEE......................................................................S-58
THE OWNER TRUSTEE..........................................................................S-58
USE OF PROCEEDS............................................................................S-58
FEDERAL INCOME TAX CONSEQUENCES............................................................S-58
STATE TAX CONSEQUENCES.....................................................................S-58
ERISA CONSIDERATIONS.......................................................................S-59
S-4
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LEGAL INVESTMENT CONSIDERATIONS............................................................S-59
UNDERWRITING...............................................................................S-60
EXPERTS....................................................................................S-60
LEGAL MATTERS..............................................................................S-61
RATING.....................................................................................S-61
INDEX OF DEFINED TERMS.....................................................................S-62
ANNEX I.....................................................................................I-1
S-5
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Summary
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of the offering of the
securities, read carefully this entire document and the accompanying prospectus.
The Trust
First Horizon ABS Trust 2004-HE1 will be created pursuant to a trust agreement,
as amended and restated, between the depositor and the owner trustee. The trust
will own a pool of home equity line of credit loans including the outstanding
balances as of the cut-off date and any additional outstanding balances
generated under those loans. The trust will issue securities, referred to as the
notes, on March 25, 2004.
The Seller and Servicer
First Tennessee Bank National Association
We refer you to "The Seller and Servicer" in this prospectus supplement for more
detail.
The Depositor
First Horizon Asset Securities, Inc.
We refer you to "The Depositor" in the prospectus.
The Indenture Trustee and Administrator
The Bank of New York
The Owner Trustee
Wilmington Trust Company
The Note Insurer
Financial Guaranty Insurance Company
We refer you to "The Note Insurer" and "Description of the Notes--The Policy" in
this prospectus supplement for more detail.
Cut-Off Date
March 1, 2004.
Trust Property
The property of the trust will include:
o a pool of adjustable rate home equity line of credit loans made or to be
made in the future under home equity line of credit loan agreements, and
secured primarily by first and second lien deeds of trust or mortgages on
residential properties that are primarily one- to four-family properties.
We sometimes refer to these home equity line of credit loan agreements as
mortgage loans or home equity lines of credit.
o payments on the mortgage loans received after the cut-off date.
o any additions to the loan balances of the mortgage loans during the life of
the trust.
o property that secured a mortgage loan which has been acquired by
foreclosure or deed in lieu of foreclosure.
o the benefit of the note insurance policy.
o rights of the depositor under the purchase agreement by which the seller
sells the mortgage loans to the depositor.
o benefits under any hazard insurance policies covering the mortgaged
properties.
o amounts on deposit in certain accounts.
o all proceeds from the items above.
The Mortgage Loans
On or before March 25, 2004, the trust will acquire a pool of mortgage loans.
The information below is based on the pool of mortgage loans as it existed on
March 1, 2004.
o number of mortgage loans: 6,228
o aggregate principal balance: $302,628,574.41
o average principal balance: $48,591.61
o range of credit limits: $5,000.00 to $250,000.00
o average credit limit: $50,874.96
o range of remaining terms to stated maturity: 235 months to 238 months
o weighted average remaining term to stated maturity: 237 months
o current loan rate per annum range: 4.000% to 9.550%
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S-6
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o weighted average current loan rate per annum: 5.701%
o range of margins: 0.000% to 5.550%
o weighted average margin: 1.701%
o credit limit utilization rate range: 0.036% to 100.000%
o weighted average credit limit utilization rate: 95.512%
o weighted average original combined loan-to value ratio: 87.325%
We refer you to "The Seller and Servicer" and "Description of the HELOCs" in
this prospectus supplement for more detail.
Each mortgage loan contains a feature that permits the related borrower to lock
the loan rate at a fixed rate with respect to all or a portion of the principal
balance thereof at certain times during the term of the mortgage loan.
Payments to Noteholders
You will be entitled to receive payments of interest each month starting in
April 2004. The amount of principal you will be entitled to receive will vary
depending on a number of factors, including the payments and new draws on the
mortgage loans. Each month the indenture trustee will calculate the amounts to
be paid to the noteholders. If you hold a note on the day preceding a payment
date, or if the notes are no longer book-entry securities, the last day of the
month preceding a payment date, you will be entitled to receive payments on the
next payment date. The payment date will be the 25th day of each month or, if
that day is not a business day, the next succeeding business day.
Interest Periods
Interest for the first payment date will accrue on the unpaid principal balance
of the notes at the applicable rate from the closing date through the day before
the first payment date. After the first payment date, interest will accrue from
and including the preceding payment date to but excluding the current payment
date. Interest will be calculated on the basis of the actual number of days in
each interest period divided by 360.
Application of Collections
Interest
On each payment date, after payment of the servicing fee, the portion of
interest collections on the mortgage loans received during the preceding
calendar month, that is allocated to noteholders will be applied in the
following order of priority:
1. to the indenture trustee, the indenture trustee fee;
2. to the note insurer, the premium due for the note insurance policy;
3. to the noteholders, accrued interest and any overdue accrued interest
on the notes, to the extent described under "Description of the
Notes--Payments";
4. to the noteholders, as a payment of principal, the noteholders'
portion of charge-offs incurred during the preceding calendar month,
and the noteholders' portion of charge-offs incurred during previous
periods that were not subsequently funded by the noteholders' portion
of interest collections, overcollateralization or draws under the note
insurance policy;
5. to the note insurer, as reimbursement for prior draws made under the
note insurance policy;
6. to the noteholders, as a payment of principal, the amount necessary to
build the overcollateralization to the required level;
7. to the note insurer, any other amounts owed to the note insurer
pursuant to the insurance agreement;
8. to the noteholders, any carryover interest amounts from prior periods
when the amount of interest paid on the notes was limited to the
weighted average of the loan rates minus certain fees; and
9. to the owner of the transferor interest.
Principal
During the period from the first payment date through the payment date in March
2009, the amount of principal collections to be paid to noteholders as a payment
of principal will equal the excess, if any, of all principal collections on the
mortgage loans
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S-7
<Page>
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received during the preceding calendar month over the amount of all additional
balances drawn under the mortgage loans during the preceding calendar month. On
every payment date after the payment date in March 2009, all principal
collections on the mortgage loans received during the preceding calendar month
will be paid to noteholders as a payment of principal. However, the amount of
principal collections on the mortgage loans paid on the notes on any payment
date will be reduced if the amount of overcollateralization exceeds the
required level of overcollateralization.
Notwithstanding the above, noteholders may be entitled to all principal
collections prior to the 61st month if any of the events included in the
definition of "Rapid Amortization Event" occur.
We refer you to "Description of the Notes--Payments" in this prospectus
supplement for more detail.
Maturity Date
January 25, 2024
We expect that the actual final payment date for the notes will be significantly
earlier than the maturity date.
Termination of Trust
The trust will terminate on the payment date following the earliest of (i) the
payment date occurring in January 2024, (ii) the final payment or other
liquidation of the last mortgage loan in the trust and (iii) the servicer's
exercise of its right to repurchase the mortgage loans as described under
"Optional Termination".
Credit Enhancement
Overcollateralization and Excess Interest
The application of the payments on the mortgage loans to the holders of the
notes has been structured to create overcollateralization. On the closing date
the overcollateralization will be zero and is expected to build to the required
amount after the notes have been issued.
The noteholders' portion of interest payments on the mortgage loans is expected
to exceed the amount of interest due and payable on the notes. A portion of this
excess will be applied as payments of principal on the notes. This will result
in a limited acceleration of principal payments on the notes relative to the
amortization of the mortgage loans, thereby creating overcollateralization for
the notes. Once the required level of overcollateralization is reached, the
application of the excess payments will cease, until it is again needed to
maintain the required level of overcollateralization.
The required level of overcollateralization is based on certain minimum and
maximum levels of overcollateralization and on the performance of the mortgage
loans. As a result, the level of required overcollateralization will change over
time.
For example, an increase in the required level of overcollateralization will
result if the delinquency or default experience on the mortgage loans exceeds
certain set levels. In that event, amortization of the notes would be
accelerated until the level of overcollateralization reaches its required level.
We refer you to "Maturity and Prepayment Considerations" and "Description of the
Notes" in this prospectus supplement for more detail.
The Policy
Financial Guaranty Insurance Company, a New York stock insurance company, will
issue a surety bond for the benefit of the noteholders, which we refer to herein
as the policy. The policy will unconditionally and irrevocably guarantee payment
of accrued and unpaid interest due on the notes on each payment date, plus
principal on the notes, as described below. The policy will not guarantee any
payments of interest in excess of the maximum rate.
On each payment date, the indenture trustee will calculate to what extent the
funds available to make the payments of principal and interest are insufficient
to (i) pay accrued interest on the notes, subject to the maximum rate, or (ii)
investor charge off amounts not covered by the noteholders' portion of interest
collections or overcollateralization. If an insufficiency exists and it is
covered by the surety bond, then the indenture trustee will make a draw on the
policy. In addition, the surety bond will guarantee the full payment of the note
principal balance on the payment date occurring in January 2024.
We refer you to "Description of the Notes--The Policy" in this prospectus
supplement for more detail.
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S-8
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Optional Termination
On any payment date on or after the date on which the outstanding principal
balance of the notes is reduced to an amount less than or equal to 10% of the
outstanding principal balance of the notes at the close of business on the day
the notes are issued, the servicer will have the option of purchasing the
mortgage loans, which will have the effect of redeeming the notes.
We refer you to "Description of the Notes--Optional Termination" in this
prospectus supplement and "The Agreements--Termination; Optional Termination" in
the prospectus.
Registration of Notes
We will issue the notes in book-entry form. You will hold your interests either
through a depository in the United States or through one of two depositories in
Europe. While the notes are book-entry they will be registered in the name of
the applicable depository, or in the name of the depository's nominee. Transfers
within any depository system will be made in accordance with the usual rules and
operating procedures of that system. Cross-market transfers between two
different systems may be made through a third-party bank and/or the related
depositories. The limited circumstances under which definitive notes will
replace the book-entry notes are described in this prospectus supplement.
We refer you to "Risk Factors--Consequences of Owning Book-Entry Notes",
"Description of the Notes--Book-Entry Notes" and "Annex I" in this prospectus
supplement for more detail.
Federal Income Tax Consequences
In the opinion of McKee Nelson LLP, for federal income tax purposes, the notes
will be characterized as indebtedness, and the trust will not be characterized
as an association, publicly traded partnership taxable as a corporation, or as a
taxable mortgage pool. Each holder of a note, by the acceptance of a note, will
agree to treat the security as indebtedness for federal, state and local income
and franchise tax purposes.
We refer you to "Federal Income Tax Consequences" and "State Tax Consequences"
in this prospectus supplement concerning the application of federal, state and
local tax laws.
ERISA Considerations
Subject to the considerations and conditions described under "ERISA
Considerations" in this prospectus supplement and the prospectus, the notes may
be transferred to an employee benefit or other plan or arrangement subject to
the Employee Retirement Income Security Act of 1974, as amended, or to Section
4975 of the Internal Revenue Code of 1986, as amended.
We refer you to "ERISA Considerations" in this prospectus supplement and in the
prospectus.
Legal Investment Considerations
The Secondary Mortgage Market Enhancement Act of 1984 defines "mortgage related
securities" to include only first-lien mortgages. Because the pool of mortgage
loans owned by the trust includes second-lien mortgage loans, the notes will not
be "mortgage related securities" under that definition. Some institutions may be
limited in their legal investment authority to only first-lien mortgages or
"mortgage related securities" and will be unable to invest in the notes.
We refer you to "Legal Investment Considerations" in this prospectus supplement
and "Legal Investment" in the prospectus for more detail.
Note Rating
Before the notes can be issued, the owner trust must obtain ratings on the notes
of:
o AAA by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
o Aaa by Moody's Investors Service, Inc.
Ratings such as the ratings obtained for the notes address credit risk. When
evaluating credit risk, the rating agencies evaluate the likelihood of whether
or not you will receive your interest and principal payments. Credit risk does
not relate to the likelihood of prepayments on the mortgage loans. Prepayments
affect the timing of your payments, such that your actual return could differ
substantially from your anticipated return on your investment. The ratings do
not address any payments of interest that could accrue if the notes are subject
to the maximum rate of interest.
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S-9
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We refer you to "Risk Factors--Ratings on Notes Based Primarily on Claims-Paying
Ability of the Note Insurer" and "Rating" in this prospectus supplement for more
detail.
We refer you to "Risk Factors--Rating of the Securities Do Not Assure Their
Payment" and "Rating" in the prospectus.
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S-10
<Page>
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of notes. You should also carefully consider the information set forth
under "Risk factors" in the prospectus.
Notes May Not Be Appropriate The notes may not be an appropriate
Investments For Some Investors investment for you if you do not have
sufficient resources or expertise to
evaluate the particular characteristics
of the notes. This may be the case
because, among other things:
o if you purchase your notes at a
price other than par, your yield to
maturity will be sensitive to the
uncertain rate and timing of
principal prepayments on the
mortgage loans;
o the notes may be inappropriate
investments for you if you require
a distribution of a particular
amount of principal on a specific
date or an otherwise predictable
stream of distributions because the
rate of principal distributions on,
and the weighted average lives of,
the notes will be sensitive to the
uncertain rate and timing of
principal payments and draws on the
mortgage loans;
o you may not be able to reinvest the
principal amounts paid on your
notes, which in general are
expected to be greater during
periods of relatively low interest
rates, at a rate that is as high as
the interest rate on the notes or
your expected yield; and
o unless a secondary market for the
notes develops, the notes may be
illiquid investments.
You should also carefully consider the
further risks discussed below and under
the heading "Maturity and Prepayment
Considerations" in this prospectus
supplement and under the heading "Risk
Factors" in the prospectus.
Geographic Concentration Increases One risk associated with investing in
Risk That the Yield on the Notes May notes backed by mortgage loans is
Be Impaired created by any concentration of the
related mortgaged properties in one or
more geographic regions. If the regional
economy or housing market of any state
(or other region) having a significant
concentration of the properties
underlying the mortgage loans weakens,
the mortgage loans related to properties
in that region may experience high rates
of loss and delinquency, resulting in
losses to noteholders if the note
insurer fails to perform under the
policy. A region's economic condition
and housing market may be adversely
affected by a variety of events,
including natural disasters such as
earthquakes, hurricanes, floods and
eruptions, and civil disturbances. The
economic impact of any such events may
also be felt in areas beyond the region
immediately affected by the disaster or
disturbance. The properties underlying
the mortgage loans may be concentrated
in these regions. Such concentration may
result in greater losses to noteholders
than those generally present for similar
notes without such concentration. As of
March 1, 2004, approximately 22.39%,
7.59%, 6.50%, 6.31% and 5.41% of the
loans were secured by mortgaged
properties in California, Washington,
Virginia, Maryland and Oregon,
respectively. A weakening of the economy
of these states may result in increases
in the loss and delinquency rate for
mortgage loans concentrated in such
areas and if the note insurer fails to
perform under the policy, you may
experience
S-11
<Page>
delays in payment or suffer a loss.
Cash Flow Limited in Early Years of Unless the borrower has elected to
Mortgage Loans convert all or a portion of a mortgage
loan to a fixed rate of interest,
borrowers generally are not required to
make monthly payments of principal
during the draw period under the related
credit line agreements, although minimum
payments are required to at least equal,
and may exceed, accrued interest and
fees. Principal payments on the
converted portion of a mortgage loan
amortize over a period selected by the
borrower, not to exceed the original
maturity of the mortgage loan. As a
result, collections on mortgage loans
may vary. A substantial portion of the
mortgage loans by outstanding principal
balance as of the cut-off date may
permit the related borrowers to extend
their draw periods for one additional
five year term, but in no event will the
draw period for a mortgage loan extend
more than 10 years beyond the cut-off
date. Collections on the mortgage loans
may also vary due to seasonal purchasing
and payment habits of borrowers. As a
result there may be limited collections
available to make payments to you and
you may receive payments of principal
more slowly than anticipated.
The Failure to Deliver the Loan Under the terms of a sale and
Documents and the Failure to servicing agreement, among the
Record the Assignments May Cause a depositor, the servicer, the trust
Sale to the Depositor to be and the indenture trustee, so long as
Ineffective the seller's unsecured debt is assigned
a minimum rating of "Baa2" by Moody's
Investor Service, Inc. and "BBB" by
Standard and Poor's Ratings
Services, a division of The
McGraw-Hill Companies, Inc., the
loan documents with respect to each
home equity line of credit will be
retained by the seller, and
assignments of the related mortgage
to the trust will not be recorded.
Failure to deliver the documents to
the indenture trustee will make the
transfer of the home equity lines
of credit potentially ineffective
against a purchaser if a seller
fraudulently or inadvertently
resells a home equity line of
credit to a purchaser who had no
notice of the prior sale to the
depositor and the transfer to the
trust and who perfects its interest
in the home equity lines of credit
by taking possession of the
documents.
Each of the seller and the
depositor have taken steps to
structure the transfers of the home
equity lines of credit from the
seller to the depositor and the
subsequent transfer of the home
equity lines of credit to the trust
as "true sales" of the loans. If,
however, for any reason, including
the insolvency or bankruptcy of the
seller or the depositor, the seller
or the depositor is found not to
have sold the home equity lines of
credit, but is instead deemed to
have made a pledge of the related
home equity lines of credit to
secure a loan, then the depositor,
the trust and/or the indenture
trustee will have a perfected
security interest in the home
equity lines of credit because the
seller and the depositor have filed
financing statements to perfect the
depositor's and/or the trust's
and/or the indenture trustee's
security interest in the home
equity lines of credit conveyed by
the seller and the depositor and
pledged by the trust. The UCC
filings will not eliminate the
foregoing risks with respect to the
inadvertent or fraudulent
assignment of mortgages securing
the home equity lines of credit.
The circumstances under which the
seller would be required to prepare
assignments and segregate mortgage
notes in advance of delivery and
the circumstances under which the
seller would be required to deliver
the mortgage notes and other
documents related to
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each mortgage loan in each case are
described in this prospectus
supplement under "Description of
HELOCs--Assignment of HELOCs."
The Servicer Has Limited Ability to The servicer may agree to changes
Change the Term of the Mortgage Loans in the terms of a mortgage loan
if the changes:
o do not materially and adversely
affect the interest of the
noteholders or the note insurer;
and
o are consistent with prudent
business practice.
In addition, the servicer, within
certain limitations, may increase
the credit limit and reduce the
loan rate related to a mortgage
loan. Any increase in the credit
limit related to a mortgage loan
could increase the combined
loan-to-value ratio of that
mortgage loan and, accordingly, may
increase the likelihood and could
increase the severity of loss in
the event of a default under the
mortgage loan. In addition, any
reduction in the loan rate of a
mortgage loan could reduce the
excess cash flow available to
absorb losses.
We refer you to "The Servicing
Agreement--Modifications to HELOCs"
and "--Consent to Senior Liens" in
this prospectus supplement.
Interest Payable on the Notes Interest payable on the mortage
and Interest Payable on loans may be insufficient to pay
the Mortgage Loans Differ interest on the notes, which
accrues on the basis of LIBOR plus
0.21%, subject to a cap based in
part on the interest rates on the
mortgage loans. Interest payable on
the mortgage loans will accrue at
either a variable rate based on the
prime rate plus a designated
margin, subject to maximum
limitations on adjustments or, if
the borrower has elected to convert
the rate of interest applicable to
all or a portion of the mortgage
loan to a fixed rate, a fixed rate
based upon the five-year treasury
note rate, plus a margin, which
fixed rate may be lower than the
rate at which the notes accrue
interest. As a result, the notes
may accrue less interest than they
would accrue if the interest rate
on the notes were based solely on
LIBOR plus 0.21%.
LIBOR and the prime rate may not
respond to the same economic
factors and there is no necessary
correlation between them. In
addition, the spread between LIBOR
and any fixed rate locked in by a
borrower will vary over time. Any
reduction in the spread between
LIBOR and the prime rate (and the
applicable fixed rates of converted
mortgage loans) will also reduce
the amount of interest receipts on
the mortgage loans that would be
available to absorb losses and
charge-offs allocated to the
noteholders. In that event, if the
overcollateralization were depleted
and the note insurer failed to
perform under the policy, you would
experience a loss.
In addition, if the spread between
LIBOR and the prime rate is reduced
or eliminated, the interest payable
on the notes also may be reduced.
If the sum of LIBOR plus 0.21%
exceeds the maximum rate of
interest allowed on the notes, such
shortfalls will be paid to the
noteholders only if amounts are
available for such payment on a
subsequent payment date and at a
lower priority than interest is
normally paid to the noteholders.
Such shortfalls will not be
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guaranteed by the note insurer.
Ratings on Notes Based Primarily on The ratings on the notes depend
Claims-Paying Ability of the Note primarily on the claims paying ability
Insurer of the note insurer. Therefore, a
reduction of the rating assigned to the
claims-paying ability of the note
insurer may have a corresponding
reduction on the ratings assigned to the
notes. A reduction in the rating
assigned to the notes would reduce the
market value of the notes and may affect
your ability to sell them. The ratings
on your notes address credit risk and do
not address the likelihood of
prepayments.
We refer you to "Rating" in this
prospectus supplement.
Limited Information Regarding All of the mortgage loans may be prepaid
Prepayment History in whole or in part at any time. Neither
the seller nor the servicer is aware of
any publicly available studies or
statistics on the rate of prepayment of
home equity loans. Home equity loans
usually are not viewed by borrowers as
permanent financing and may experience a
higher rate of prepayment than
traditional mortgage loans. The trust's
prepayment experience may be affected by
a wide variety of factors, including:
o general economic conditions,
o interest rates,
o the availability of alternative
financing,
o homeowner mobility, and
o changes affecting the ability to
deduct interest payments on home
equity lines of credit for Federal
income tax purposes.
In addition, substantially all of the
mortgage loans contain due-on-sale
provisions, which may affect the rate of
prepayment.
We refer you to "Maturity and Prepayment
Considerations" in this prospectus
supplement.
Yield to Maturity of Notes May be The yield to maturity of the notes may
Affected by Repurchases be affected by certain repurchase
requirements. The seller will be
required to purchase mortgage loans from
the trust in the event certain breaches
of representations and warranties made
by it have not been cured. The seller
will also be required to randomly
purchase from the trust or substitute a
new mortgage loan for any mortgage loan
as to which a borrower has converted all
or a portion to a fixed rate mortgage
loan to the extent the aggregate
principal balance of the portions of the
mortgage loans with fixed rates exceeds
10% of the then current aggregate
principal balance of the mortgage loans.
These purchases will have the same
effect on the holders of the notes as a
prepayment of the related mortgage
loans.
Consequences of Owning Book-Entry Limit on Liquidity of Notes. Issuance of
Notes the notes in book-entry form may reduce
the liquidity of the notes in the
secondary trading market since investors
may be unwilling to purchase securities
for which they cannot obtain physical
notes.
Limit on Ability to Transfer or Pledge.
Since transactions in the notes can be
effected only through DTC, Clearstream,
Euroclear, participating organizations,
indirect participants and banks, your
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ability to pledge your notes to persons
or entities that do not participate in
the DTC, Clearstream or Euroclear system
or otherwise to take actions in respect
of the notes, may be limited due to lack
of a physical security representing the
notes.
Delays in Payments. As a beneficial
owner, you may experience some delay in
your receipt of payments of interest on
and principal of your notes since
payments will be forwarded by the
trustee to DTC and DTC will credit
payments to the accounts of its
participants which will credit them to
the accounts of the beneficial owners
either directly or indirectly through
indirect participants.
We refer you to "Description of the
Notes--Book-Entry Notes" in this
prospectus supplement.
Impact of Terrorist Attacks The economic impact of the United
States' military operations in Iraq, as
well as the possibility of any terrorist
attacks in response to these operations,
is uncertain but could have a material
effect on general economic conditions,
consumer confidence and market
liquidity. No assurance can be given as
to the effect of these events on
consumer confidence and the performance
of the HELOCs. Any adverse impact
resulting from these events would be
borne by the holders of the notes.
United States military operations also
may increase the likelihood of
shortfalls under the Servicemembers
Civil Relief Act and similar state laws.
An Insolvency of the Seller May The Federal Deposit Insurance
Delay, Accelerate or Reduce Payments Corporation has special powers under the
on the Notes banking laws to take certain actions on
the insolvency of the seller. The
Federal Deposit Insurance Corporation
has issued regulations surrendering
certain rights under the Federal Deposit
Insurance Act, as amended by the
Financial Institutions Reform, Recovery
and Enforcement Act of 1989, to reclaim,
recover or recharacterize a financial
institution's transfer of financial
assets such as the home equity lines of
credit if (i) the transfer involved a
securitization of the financial assets
and meets specified conditions for
treatment as a sale under relevant
accounting principles, (ii) the
financial institution received adequate
consideration for the transfer at the
time of the transfer, (iii) the parties
intended that the transfer constitute a
sale for accounting purposes and the
relevant documentation reflects such
intention and (iv) the financial assets
were not transferred fraudulently, in
contemplation of the financial
institution's insolvency, or with the
intent to hinder, delay or defraud the
financial institution or its creditors.
The seller's transfers of the home
equity lines of credit and the
agreements under which the seller made
and makes those transfers are intended
to satisfy all of these conditions.
However, if the Federal Deposit
Insurance Corporation were to assert a
different position, or the related
regulations were inapplicable, you might
experience delays and/or reductions in
payments on your notes. In addition, the
Federal Deposit Insurance Corporation
might have the right to repay the notes
early and for an amount that may be
greater or less than their principal
balance. Under these circumstances, you
may suffer a loss. Furthermore, the
insolvency of the seller would result in
the commencement of a rapid amortization
event. If a rapid amortization period
occurs, you are likely to be repaid
principal on
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your notes earlier than expected.
We refer you to "Description of the
HELOCs-Conservatorship and Receivership"
in this prospectus supplement.
Mortgage Loans May Convert to Fixed Although each of the mortgage loans in
Rates Which May Reduce the Yield on the mortgage pool is an adjustable rate
the Notes mortgage loan, the borrower can convert
all or a portion of the amount
outstanding under a mortgage loan from
an adjustable rate to a fixed rate as
long as the borrower is current in
payment on the borrower's mortgage loan.
The maximum aggregate principal balance
of the portion of the mortgage loans
with respect to which the related
borrower has made such an election that
will be permitted to remain in the trust
is 10% of the then current aggregate
principal balance of the mortgage loans.
The seller will be obligated to randomly
purchase from the trust or substitute a
new mortgage loan for converted mortgage
loans representing an aggregate
principal balance in excess of such 10%.
The fixed rate on a converted loan may
be lower than the interest rate on the
notes. Since the interest rate on the
notes may not exceed a rate based on the
weighted average of the net mortgage
loan rates, any conversion to a fixed
rate of a mortgage loan that has not
been purchased or substituted for by the
seller may increase the likelihood that
the interest rate on the notes will be
subject to the maximum rate cap. See
"Description of the HELOCs" and
"Maturity and Prepayment Considerations"
in this prospectus supplement.
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FORWARD-LOOKING STATEMENTS
We caution you that certain statements contained in or incorporated by
reference in this prospectus supplement and the accompanying prospectus consist
of forward-looking statements relating to future economic performance or
projections and other financial items. These statements can be identified by the
use of forward-looking words such as "may," "will," "should," "expects,"
"believes," "anticipates," "estimates," or other comparable words.
Forward-looking statements are subject to a variety of risks and uncertainties
that could cause actual results to differ from the projected results. Those
risks and uncertainties include, among others, general economic and business
conditions, regulatory initiatives and compliance with governmental regulations,
customer preferences, effects of prepayments, changes in interest rates and
various other matters, many of which are beyond our control. Because we cannot
predict the future, what actually happens may be very different from what we
predict in our forward-looking statements.
THE TRUST
General
First Horizon ABS Trust 2004-HE1 is a statutory trust formed under the
laws of the State of Delaware by the trust agreement, dated as of March 19,
2004, between First Horizon Asset Securities, Inc., the depositor, and
Wilmington Trust Company for the transactions described in this prospectus
supplement. The trust agreement constitutes the "governing instrument" under the
laws of the State of Delaware relating to statutory trusts. After its formation,
the trust will not engage in any activity other than (1) acquiring, holding and
managing the trust property described below, (2) issuing the notes and the
transferor interest, (3) making payments on the notes and the transferor
interest and (4) engaging in other activities that are necessary, suitable or
convenient to accomplish these purposes.
The trust property will consist of:
o each of the home equity lines of credit or "HELOCs" that are
transferred by the depositor to the trust;
o collections on the HELOCs received on or after March 1, 2004 (the
"Cut-Off Date");
o the outstanding balances as of the Cut-Off Date and any
additional balances generated under the HELOCs;
o mortgaged properties relating to the HELOCs that are acquired by
foreclosure or deed in lieu of foreclosure;
o the collection account and the distribution account, excluding,
in each case, net earnings thereon;
o the surety bond issued by the Note Insurer (the "Policy");
o an assignment of the depositor's rights under the purchase
agreement, including all rights of the depositor to purchase any
additions to the loan balances of the HELOCs;
o benefits under any hazard insurance policies covering the
mortgaged properties; and
o all proceeds from the items above.
The trust's principal offices are located in Wilmington, Delaware, in
care of, Wilmington Trust Company, as owner trustee, at Rodney Square North,
1100 North Market Street, Wilmington, Delaware 19890-0001.
The trust will not acquire any assets other than the property
described above. Because the trust will have no operating history upon its
establishment and will not engage in any business other than the duties
discussed above, no historical, pro forma financial statements, or ratios of
earnings to fixed charges with respect to the trust have been included in this
prospectus supplement.
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THE NOTE INSURER
Financial Guaranty Insurance Company (the "Note Insurer") has supplied
the following information for inclusion in this prospectus supplement. No
representation is made by the issuer or the underwriter as to the accuracy and
completeness of this information.
The Note Insurer, a New York stock insurance corporation, is a direct,
wholly-owned subsidiary of FGIC Corporation, and provides financial guaranty
insurance for public finance and structured finance obligations. The Note
Insurer is licensed to engage in financial guaranty insurance in all 50 states,
the District of Columbia, the Commonwealth of Puerto Rico and, through a branch,
in the United Kingdom.
On December 18, 2003, an investor group consisting of The PMI Group,
Inc. ("PMI"), affiliates of The Blackstone Group L.P. ("Blackstone"), affiliates
of The Cypress Group L.L.C. ("Cypress") and affiliates of CIVC Partners L.P.
("CIVC") acquired FGIC Corporation (the "FGIC Acquisition") from a subsidiary of
General Electric Capital Corporation ("GE Capital"). PMI, Blackstone, Cypress
and CIVC acquired approximately 42%, 23%, 23% and 7%, respectively, of FGIC
Corporation's common stock. FGIC Corporation paid GE Capital approximately
$284.3 million in pre-closing dividends from the proceeds of dividends it, in
turn, had received from the Note Insurer, and GE Capital retained approximately
$234.6 million in liquidation preference of FGIC Corporation's convertible
participating preferred stock and approximately 5% of FGIC Corporation's common
stock. Neither FGIC Corporation nor any of its shareholders is obligated to pay
any debts of the Note Insurer or any claims under any insurance policy,
including the Policy, issued by the Note Insurer.
The Note Insurer is subject to the insurance laws and regulations of
the State of New York, where the Note Insurer is domiciled, including Article 69
of the New York Insurance Law ("Article 69"), a comprehensive financial guaranty
insurance statute. The Note Insurer is also subject to the insurance laws and
regulations of all other jurisdictions in which it is licensed to transact
insurance business. The insurance laws and regulations, as well as the level of
supervisory authority that may be exercised by the various insurance regulators,
vary by jurisdiction, but generally require insurance companies to maintain
minimum standards of business conduct and solvency, to meet certain financial
tests, to comply with requirements concerning permitted investments and the use
of policy forms and premium rates and to file quarterly and annual financial
statements on the basis of statutory accounting principles ("SAP") and other
reports. In addition, Article 69, among other things, limits the business of
each financial guaranty insurance company to financial guaranty insurance and
certain related lines.
For the years ended December 31, 2003 and December 31, 2002, the Note
Insurer had written directly or assumed through reinsurance, guaranties of
approximately $42.4 billion and $47.9 billion par value of securities,
respectively (of which approximately 79 % and 81 %, respectively, constituted
guaranties of municipal bonds), for which it had collected gross premiums of
approximately $260.3 million and $232.6 million, respectively. For the twelve
months ended December 31, 2003, the Note Insurer had reinsured, through
facultative arrangements, approximately 2.0 % of the risks it had written.
Capitalization
The following table sets forth the capitalization of the Note Insurer
as of December 31, 2002 and December 31, 2003, respectively, on the basis of
generally accepted accounting principles ("GAAP"). The December 31, 2003
balances reflect the establishment of a new basis in the assets and the
liabilities of the Company resulting from the FGIC Acquisition and the
application of purchase accounting. The December 31, 2002 and 2001 balances are
based upon the historical basis of the Company's assets and liabilities.
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Financial Guaranty Insurance Company
Capitalization Table
(Dollars in Millions)
December 31, December 31,
2002 2003
------------ ------------
Unearned Premiums $ 684 $ 919
Other Liabilities 255 86
Stockholder's Equity
Common Stock 15 15
Additional Paid-in Capital 384 1,858
Accumulated Other 2
Comprehensive Income 49
Retained Earnings $1,741 $ 94
------ ------
Total Stockholder's Equity $2,189 $1,969
------ ------
Total Liabilities and
Stockholder's Equity $3,128 $2,974
====== ======
The audited financial statements of the Note Insurer as of December
31, 2002 and 2003 and for each of the years in the three-year period ended
December 31, 2003, which are included as Exhibit 99.1 to the Current Report on
Form 8-K filed by the depositor on March 22, 2004 (SEC file number 333-110100)
in connection with the registration statement of which this prospectus
supplement is a part, are hereby incorporated by reference in this prospectus
supplement. Any statement contained herein under the heading "The Note Insurer"
or in such Exhibit 99.1, shall be modified or superseded to the extent required
by any statement in any document subsequently incorporated by reference in this
prospectus supplement with the approval of the Note Insurer, and shall not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus supplement.
All financial statements of the Note Insurer (if any) included in
documents filed by the issuer with the Securities and Exchange Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, subsequent to
the date of this prospectus supplement and prior to the termination of the
offering of the notes shall be deemed to be incorporated by reference into this
prospectus supplement and to be a part hereof from the respective dates of
filing of such documents.
Copies of the Note Insurer's GAAP and SAP financial statements are
available upon request to: Financial Guaranty Insurance Company, 125 Park
Avenue, New York, New York 10017, Attention: Corporate Communications
Department. The Note Insurer's telephone number is (212) 312-3000.
Neither the Note Insurer nor any of its affiliates accepts any
responsibility for the accuracy or completeness of, nor has any of them
participated in the preparation of, the prospectus, the prospectus supplement or
any information or disclosure that is provided to potential purchasers of the
notes, or omitted from such disclosure, other than with respect to the accuracy
of information regarding the Note Insurer and the Policy set forth under the
heading "The Note Insurer" and "Description of the Notes--The Policy" herein. In
addition, the Note Insurer makes no representation regarding the notes or the
advisability of investing in the notes.
The Note Insurer's Credit Ratings
The financial strength of the Note Insurer is rated "AAA" by Standard
& Poor's Rating Services, a Division of The McGraw-Hill Companies, Inc., "Aaa"
by Moody's Investors Service, and "AAA" by Fitch Ratings. Each rating of the
Note Insurer should be evaluated independently. The ratings reflect the
respective ratings agencies' current assessments of the insurance financial
strength of the Note Insurer. Any further explanation of any rating may be
obtained only from the applicable rating agency. These ratings are not
recommendations to buy, sell or hold the notes, and are subject to revision or
withdrawal at any time by the rating agencies. Any downward revision or
withdrawal of any of the above ratings may have an adverse effect on the market
price of the notes. The
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Note Insurer does not guarantee the market price or investment value of the
notes nor does it guarantee that the ratings on the notes will not be revised or
withdrawn.
THE SELLER AND SERVICER
First Tennessee Bank National Association
The seller and servicer, First Tennessee Bank National Association
("FTBNA"), is a national banking association, with its principal executive
offices located at 165 Madison Avenue, Memphis, Tennessee, 38103, telephone
number (901) 523-4444. First Tennessee Bank's business is subject to examination
and regulation by federal and state banking authorities.
FTBNA is the primary banking subsidiary of First Tennessee National
Corporation ("FTNC"), a Tennessee corporation organized in 1968. FTNC is
registered as a bank holding company under the Bank Holding Company Act of 1956
and elected, effective March 13, 2000, to become a financial holding company
pursuant to the provisions of the Gramm-Leach-Bliley Act. At December 31, 2003,
First Tennessee National Corporation had consolidated total assets of
approximately $24.5 billion.
FTBNA operates 186 full-service financial centers and over 300
off-premises automated teller machines. FTBNA also offers financial services
online at www.firsttennessee.com and through its 24-hour telephone banking
servicing.
FTBNA has been in the business of servicing residential home equity
lines of credit for more than 10 years. FTBNA also services home equity lines of
credit originated or purchased through its mortgage banking subsidiary, First
Horizon Home Loans Corporation. First Horizon Home Loans Corporation originates
mortgage loans through its retail and wholesale operations and also purchases
mortgage loans from third-party mortgage bankers (known as "correspondent
lenders"). First Horizon Home Loans Corporation originates home equity lines of
credit pursuant to FTBNA's underwriting guidelines.
Credit and Underwriting Guidelines
The following is a description of FTBNA's HELOC underwriting
guidelines. Standardized underwriting criteria and approval processes apply to
HELOCs underwritten up to a maximum credit limit of $250,000, with combined
loan-to-value ratios ("CLTV") up to and including 100%. Product maximums and
CLTV maximums are contingent upon risk assessment criteria which take into
consideration, among other items, external credit score, debt-to-income, CLTV,
and property type. For example, primary residences may have CLTVs up to and
including 100% while second/vacation homes may only be financed up to 89.9%
CLTV. HELOCs may either be in a first or second lien position. For second liens,
loan amounts are further limited to a maximum amount as follows: (i) if the CLTV
is >= 90%, then the maximum combined loan amount is $800,000 and (ii) if the
CLTV is < 90%, then the maximum combined loan amount is $1,200,000.
Each applicant for a HELOC is required to complete an application,
which lists the applicant's outstanding debt, income, employment history, and
other demographic and personal information. A customer may submit an application
through one of several distribution channels including branch, telephone banking
unit, mortgage broker, U.S. mail, or through the internet. Once the application
is received and the data is entered into the application processing system, if
all necessary information is provided, a credit report is retrieved on-line. For
individuals who receive solicitations, a credit report is retrieved for both the
solicited applicant and any co-applicant. A credit bureau report will be
obtained for all HELOCs and, along with the applicant's representation of
collateral value and income, are appropriately analyzed to determine whether the
application is denied or sent on for contingency processing (title, flood,
appraisal) and routing to an analyst for further review. The contingency
processing and underwriting review are part of FTBNA's underwriting activities
managed by the Portfolio Management Department.
The credit approval process utilizes credit scoring, the application
of lending guidelines and, within the limits of these guidelines, limited
subjective assessments by experienced analysts. Analysts review the equity
position of the requested loan (including both the priority of the lien and the
CLTV) and the applicant's creditworthiness. The evaluation of creditworthiness
is designed to assess the applicant's ability and willingness to
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repay the loan. Specific requirements relating to the evaluation are outlined in
the risk assessment criteria matrices developed by the Portfolio Management
Department, which are automated within the application processing system
wherever possible. This evaluation generally consists of:
o reviewing and verifying customer and demographic
information;
o obtaining and reviewing an independent credit bureau report;
o reviewing the applicant's external credit score;
o reviewing the applicant's employment and income and, in the
case of a loan that requires an applicant to submit full
documentation (a "Full Documentation Loan"), verifying same
through a review of recent W-2s, pay stubs, assessments of
tax returns;
o evaluating the applicant's gross debt (as stated in the
related credit report) to income ratio;
o verifying eligibility for Lien Protection Insurance or
reviewing the title status by a written title policy;
o obtaining and evaluating the value of the real estate
through automated valuations or independent appraisals;
o evaluating flood risk, verifying flood insurance coverage,
if applicable.
Credit bureau information is reviewed for minimum acceptable credit
scores and consistent record of timely payments. The credit history is examined
to ensure any major negative events such as bankruptcy, repossession, or
foreclosure have not occurred within the past four years. Minimum acceptable
credit scores are established through an ongoing risk management and credit
scoring process.
The applicant's ability to earn a stable income in an amount
sufficient to make monthly payments on the loan is a key factor in determining
whether the requested loan represents an acceptable risk. The loan file must
clearly present the applicant's earning capabilities to enable the analyst to
make a decision when evaluating the applicant's loan request. The analyst has
the responsibility to obtain any additional information required to establish
the applicant's income. Currently, the extent of required income verification is
determined based on applicant's property type, assessed credit risk (based upon
the external credit score and debt-to-income ratio), loan amount, whether or not
self-employed, and the extent of unearned income. To use income from sources
other than employment for qualifying purposes, the applicant must demonstrate a
satisfactory history of receipt of the income. If income verification is
required, the following criteria are generally utilized:
o if salaried, income is verified through W-2s and current pay
stubs;
o if an applicant is self-employed, two previous years of tax
returns are required;
o generally, for applicants where income verification is not
required, income is requested and placed in the customer's
file; and
o a verbal verification of employment is also obtained on all
loans.
A gross debt-to-income ratio test is applied to each applicant by
dividing the applicant's monthly payments on all existing obligations, including
the proposed HELOC payment (based on a fully funded balance amortized over the
term of the loan), by the applicant's gross monthly income. Maximum ratios are
assigned as follows:
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- --------------------------------------------------------------------------------
Property Type Debt to Income Ratio
- --------------------------------------------------------------------------------
Primary Residence 50%
- --------------------------------------------------------------------------------
Second Home 45%
- --------------------------------------------------------------------------------
Valuation methods are based upon the amount requested by the
applicant, the expected CLTV, and external credit score of the applicant. An
automated valuation model ("AVM") is considered the primary tool for evaluating
the property and is used as long as the transaction meets other eligibility
criteria including property type, occupancy, report type, and confidence measure
for the particular approved vendor. If the transaction does not meet the AVM
eligibility criteria, a FNMA 2055 Exterior Inspection is ordered. Other
appropriate appraisal forms for property types ineligible for an AVM or exterior
inspection (e.g., duplex or condo) are also used when necessary.
Lien Protection Insurance (LPI) is used in lieu of a title search
unless the transaction is for purchase. LPI provides life of loan coverage
through approved vendors. If LPI cannot be used, a limited title policy or full
title policy (including appropriate endorsements) equal to the loan amount is
required with an effective date no later than the closing of the HELOC.
At the time the HELOCs are originated, property insurance naming FTBNA
as loss payee, with appropriate coverage for all collateral securing the loan,
is required. If the property is determined to be in a Special Flood Hazard Area,
flood insurance, with FTBNA named as loss payee, is also required.
Third Party HELOCs are originated through a channel of approved
brokers and correspondent lenders. All home equity line of credit applications
are underwritten by FTBNA prior to funding or purchase. The terms of the home
equity lines of credit offered through a loan officer of a retail branch of
FTBNA (the retail channel) are generally applicable to those that are referred
to FTBNA by a broker (the wholesale channel) and through correspondent lenders
(the correspondent channel). However, maximum loan amounts are lower for
wholesale originations at certain credit scores. Loans that do not require
applicants to submit documentation ("Stated Income Loans") are not available to
applicants with a credit bureau score below a specified minimum or a
debt-to-income ratio above a specified maximum. Maximum CLTV and loan amounts
for Stated Income Loans are lower than for fully documented loans.
FTBNA's internal Quality Control Department reviews loan files for
adherence to underwriting guidelines and policies. The quality control process
involves selecting closed files using statistical, target, and discretionary
methodologies. Analysts re-underwrite the loan and review the loan's data
integrity, documentation, appraisal, and re-verify employment. Results are
published to senior management. Portfolio Management Department's senior
management monitors exceptions regularly.
Servicing of the Mortgage Loans
FTBNA's collection servicing area is located in Knoxville, Tennessee.
FTBNA collections on HELOC accounts are based upon stage of delinquency and
credit score strategies for high-risk customers. Generally, at one day past due,
an account is moved from the consumer loan account system to FTBNA's collection
system "CACS", which is utilized to manage the timing and extent of collection
efforts. The collections manager uses the CACS and Concerto Dialer systems to
define a variety of collection strategies by stratifying delinquent accounts
based on borrower credit score, balance criteria and days past due.
Accounts tagged as high risk due to their most current credit score
receive intensified collection activity based upon their balance and
days-past-due criteria. Depending on the collection history, the CACS typically
tracks a history of collection efforts and borrower responses, as well as
relevant property information.
Typically, demand letters are sent to all borrowers at approximately
30 days past due. HELOCs are typically closed to further draws at approximately
30 days past due but may be re-opened for additional draws if they become
current (i.e., payment of at least 90% of the total outstanding scheduled
monthly payments are received). Once a borrower becomes 60 days past due, the
HELOCs are closed for additional draws and will continue to be closed for
additional draws regardless of whether they become current. A foreclosure
representative typically orders a property valuation when an account reaches 90
days past due. Generally, by the time the account reaches 150 days past due, but
no later than 180 days past due, an equity analysis is completed and the
decision to
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either refer the loan to the foreclosure department or charge-off the loan is
made by a collection supervisor or a more senior officer. At 180 days past due
the HELOC is charged off. The amount charged-off takes into account all
anticipated liquidation expenses (such as legal fees, real estate taxes, and
maintenance and preservation expenses).
Once an account is referred to FTBNA's foreclosure department, a
foreclosure specialist will obtain an updated property valuation, which may be
an appraisal or broker's price opinion or other type of valuation as appropriate
in the determination of the foreclosure specialist. Generally, at 90 days past
due, such appraisal will be used as a basis for consideration of initiating
foreclosure proceedings. If adequate equity exists to commence with foreclosure
proceedings the account will be forwarded to outside legal counsel for handling.
The foreclosure area will monitor the process with the attorney. If it is
determined that the cost of maintaining or paying off the senior lien exceeds
the economic benefit of taking title, FTBNA will generally charge-off the entire
unpaid principal amount of the loan and pursue other collection efforts. In the
event of buying out a first mortgage lien, the foreclosure specialist will
obtain the foreclosure manager's approval. All short sale requests will require
the foreclosure manager's approval including the customer's acknowledgment to
pay on the deficiency balance when applicable. Upon securing title to the
property, the foreclosure specialist will transfer the account to the Real
Estate Owned (REO) Department for the lower of the appraised value or net book
balance. Any additional charge off will be taken prior to the transfer to the
REO Department and would take into account all anticipated liquidation expenses
(such as legal fees, real estate taxes, maintenance and preservation expenses).
The REO Department is responsible for re-marketing and liquidating
properties obtained through foreclosure or deed in lieu of foreclosure. Local
affiliates are used to assist in property preservation and liquidation. Upon
receiving these properties, the REO Department will obtain an interior appraisal
and process an additional write-down if necessary. If the mortgaged property was
subject to a senior lien, the REO Department is responsible for paying off the
senior lien holder at the time of the property transfer.
FTBNA's servicing, collections and charge-off practices may change
over time in accordance with, among other things, FTBNA's business judgment,
changes in the portfolio and applicable laws and regulations.
Foreclosure, Delinquency and Loss Experience
The tables below summarize the delinquency, foreclosure and loss
experience of home equity line of credit loans owned by FTBNA and serviced by
FTBNA. The data includes all home equity line of credit loans owned by FTBNA
whether originated or purchased and reflects home equity line of credit loans
that were originated or underwritten under criteria different from the HELOCs
held by the trust. Further, the delinquency and loss figures presented below for
December 31, 2003 represent information for all home equity line of credit loans
currently owned by FTBNA, but may not be representative of the HELOCs included
in the trust. Accordingly, the information should not be considered a basis for
assessing the likelihood, amount or severity of delinquency or losses on the
mortgage loans and no assurances can be given that the foreclosure, delinquency
and loss experience presented in the following tables will be indicative of the
actual experience on the mortgage loans.
FTBNA determines the delinquency status of a home equity line of
credit on the basis of contractual delinquency. In certain limited
circumstances, including the receipt of payment of at least 90% of the total
outstanding scheduled monthly payments, FTBNA will "re-age" the mortgage loan so
that it is considered current. Due to the infrequency of FTBNA's re-aging
practice, the seller does not expect the practice to have a material effect on
the delinquency, foreclosure and loss experience.
There can be no assurance that the delinquency, foreclosure and loss
experience shown in the following tables will be representative of the results
that may be experienced for the HELOCs included in the trust.
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LOSS, DELINQUENCY AND FORECLOSURE EXPERIENCE
OF THE SERVICER'S PORTFOLIO OF HELOCS
As of As of
December 31, 2003 December 31, 2002
Principal Balance Percentage(1) Principal Balance Percentage(1)
---------------------------------------------------------------------
Portfolio $3,805,383,938 $2,352,658,981
Delinquencies
30-59 days 9,859,124 0.26% 9,521,494 0.40%
60-89 days 3,123,960 0.08% 4,492,324 0.19%
90-119 days 1,922,789 0.05% 3,065,419 0.13%
120 plus 3,141,828 0.08% 3,543,269 0.15%
Total Delinquency $ 18,047,701 0.47% $ 20,622,506 0.88%
Gross Charge-offs(2) $ 12,785,048 $ 11,509,627
Recoveries(3) 1,236,360 863,191
Net Charge-offs(4) $ 11,548,688 $ 10,646,436
As of As of
December 31, 2001 December 31, 2000
Principal Balance Percentage(1) Principal Balance Percentage(1)
---------------------------------------------------------------------
Portfolio $1,218,572,642 $970,529,927
Delinquencies
30-59 days 13,362,147 1.10% 9,696,096 1.00%
60-89 days 3,771,517 0.31% 2,767,334 0.29%
90-119 days 1,379,156 0.11% 2,377,347 0.24%
120 plus 2,775,811 0.23% 2,864,624 0.30%
Total Delinquency $ 21,288,632 1.75% $ 17,705,400 1.82%
Gross Charge-offs(2) $ 10,470,197 $ 6,050,114
Recoveries(3) 434,360 281,778
Net Charge-offs(4) $ 10,035,837 $ 5,768,336
- ----------
(1) "Delinquencies as a Percentage of Loans Outstanding" is based on the
number of payments contractually past due, excluding loans in
foreclosure. Delinquency categories include accounts on non-accrual
and accounts with respect to which the related borrower has declared
bankruptcy.
(2) "Gross Charge-offs" are amounts which have been determined to be
uncollectible relating to HELOCs for each calendar year.
(3) "Recoveries" are recoveries from liquidation proceeds and deficiency
judgments.
(4) "Net Charge-offs" represents "Gross Charge-offs" minus "Recoveries".
The servicer believes that the delinquency levels for its HELOC loan
servicing portfolio are attributable primarily to the growth and relative lack
of seasoning in its HELOC loan servicing portfolio over this time period. There
can be no assurance that the experience shown in the above tables will be
indicative of future loss and delinquency experience of the servicer's HELOC
loan servicing portfolio or of the HELOCs in the trust.
Management's Discussion and Analysis of Delinquency and Foreclosure Trends
For FTBNA's total portfolio, mortgage loan delinquencies generally
have decreased since December 31, 2001. Although these decreases may be due to a
variety of factors, FTBNA believes that growth in the portfolio, the amount of
turnover and decreased seasoning in FTBNA's servicing portfolio are contributing
factors to the decreases in these categories. There can be no assurance that
factors beyond the control of FTBNA, such as national or local economic
conditions or downturns in the residential real estate market will not result in
increased rates of mortgage loan delinquencies and foreclosure losses in the
future.
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If the residential real estate market should experience an overall
decline in property values such that the outstanding balances of the mortgage
loans, and any secondary financing on the mortgaged properties by a lender,
become equal to or greater than the value of the mortgaged properties, the
actual rates of delinquencies, foreclosures and losses could be significantly
higher than the rates indicated in the tables above. To the extent that such
losses occur in connection with the mortgage loans and are not otherwise covered
by the forms of credit enhancement described in this prospectus supplement, they
will be passed through as losses on the related notes and such losses will be
borne by the related noteholders.
MATURITY AND PREPAYMENT CONSIDERATIONS
The sale and servicing agreement, except as otherwise described in
this prospectus supplement, provides that the noteholders will be entitled to
receive on each payment date, payments allocable to principal of the notes, in
the amounts described in this prospectus supplement, until the related principal
balance is reduced to zero.
As described in this prospectus supplement, the actual maturity of the
notes will depend in part on the receipt of principal on the HELOCs or the
amount and timing of charge-offs of the HELOCs, which will result in principal
payments on the notes. In addition, the rate at which the principal on the notes
is paid will be increased, as compared to payments of principal on the HELOCs,
as a result of the application of excess interest as a payment of principal on
the notes in order to build overcollateralization. All of the HELOCs may be
prepaid in full or in part at any time. If relevant state law permits,
prepayment of a HELOC may be subject to an early termination fee of not more
than $250.
There can be no assurance as to the rate of losses or delinquencies on
any of the HELOCs; however, the rate of such losses and delinquencies are likely
to be higher than those of traditional first lien mortgage loans, particularly
in the case of HELOCs with high combined loan-to-value ratios. To the extent
that any losses are incurred on any of the HELOCs that are not covered by excess
interest allocable to noteholders, overcollateralization or the Policy,
noteholders will bear all risk of such losses resulting from defaults by the
related borrowers. Even where the Policy covers certain losses incurred on the
HELOCs, the effect of losses may be to increase prepayment rates on the HELOCs,
thus reducing the weighted average life and affecting the yield to maturity. In
addition, the rate of prepayments of the HELOCs and the yield to investors on
the notes may be affected by certain refinancing programs, which may include
general or targeted solicitations.
Although the loan rates on the HELOCs are subject to adjustment, the
loan rates adjust based on the Index, while the notes adjust based on LIBOR.
Changes in LIBOR may not correlate with changes in the Index and neither may
correlate with prevailing interest rates. It is possible that an increased level
of the Index could occur simultaneously with a lower level of prevailing
interest rates, which would be expected to result in faster prepayments, thereby
reducing the weighted average life of the notes. Conversely, if LIBOR were to
increase above the Index, the note rate would be limited to a maximum rate,
which would also adversely affect your yield. The "Index" for any date on which
the loan rate for a HELOC subject to adjustment is the highest "prime rate" as
published in The Wall Street Journal. If the "prime rate" is no longer
published, then the Index will be a comparable independent index selected by the
seller. In addition, each borrower may convert the loan rate on all or a portion
of the outstanding balances of its HELOC to a fixed rate of interest. Borrowers
may exercise this option during periods of rising interest rates as borrowers
attempt to limit their risk of higher rates. The availability of fixed rate
mortgage loans at competitive interest rates during periods of falling interest
rates also may encourage borrowers to exercise the option. As a result, there
may be periods during which the note rate would be limited to a maximum rate
that is lower than the note rate otherwise would be without this feature, which
would also adversely affect your yield. Additionally, the affected principal
balance with respect to which the interest rate has been converted to a fixed
rate will begin amortizing at the time of conversion and may be required to be
fully amortized over a shorter period than the remaining term of the loan,
thereby increasing the rate that principal is paid on the notes.
The seller is not aware of any publicly generated studies or
statistics available on the rate of prepayment of loans such as the HELOCs.
Generally, home equity lines of credit are not viewed by borrowers as permanent
financing. Accordingly, HELOCs may experience a higher rate of prepayment than
traditional mortgage loans. The trust's prepayment experience may be affected by
a wide variety of factors, including general economic conditions, changes in the
deductibility of interest payments on HELOCs for federal income tax purposes,
prevailing interest rates, the availability of alternative financing and
homeowner mobility.
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In addition, the trust's prepayment experience and the rate at which
the notes amortize will be affected by any repurchases of HELOCs by the seller
as a result of a breach of a representation and warranty or defective
documentation as well as by any purchase by the servicer pursuant to the sale
and servicing agreement, including certain repurchases related to the conversion
of the mortgage loans to fixed rate mortgage loans by the related borrower.
Substantially all of the HELOCs contain due-on-sale provisions, and
the servicer intends to enforce such provisions unless (i) such enforcement is
not permitted by applicable law or (ii) the servicer, in a manner consistent
with reasonable commercial practice, permits the purchaser of the mortgaged
property to assume the HELOC. To the extent permitted by applicable law, such
assumption will not release the original borrower from its obligations under the
HELOC. The enforcement of the due-on-sale provision will have the same effect as
a prepayment of the related HELOC.
Collections on the HELOCs may vary because, among other things,
borrowers may make payments during any month as low as the minimum monthly
payment for such month or as high as the entire outstanding principal balance
plus accrued interest and fees. In addition, borrowers may fail to make
scheduled payments. Collections on the HELOCs may also vary due to seasonal
purchasing and payment habits of borrowers. Accordingly, there may be times,
especially during the years that a substantial percentage of HELOCs are in the
draw period, that very little is distributed on the notes in respect of
principal.
No assurance can be given as to the level of prepayments that will be
experienced by the trust and it can be expected that a portion of borrowers will
not prepay their HELOCs to any significant degree.
DESCRIPTION OF THE HELOCS
General
The HELOCs in the trust were originated under loan agreements and
disclosure statements (the "Credit Line Agreements") and are secured by
mortgages or deeds of trust, which are primarily first and second mortgages or
deeds of trust, on mortgaged properties. The mortgaged properties securing the
HELOCs consist primarily of residential properties that are one- to four-family
properties. Based upon the address supplied by each borrower during the loan
application process, most of the mortgaged properties are owner occupied. The
HELOCs were underwritten in accordance with the standards in effect at the time
of origination. Current underwriting standards are described under "Description
of the HELOCs--HELOC Terms" in this prospectus supplement.
Unless otherwise stated, all of the information set forth below with
regard to the HELOCs is as of the Cut-Off Date. Prior to the closing date, some
of the HELOCs may be removed from the pool and other HELOCs may be substituted
for those HELOCs removed. The seller believes that the information in this
prospectus supplement relating to the HELOCs to be included in the pool as
presently constituted is representative of the characteristics of the HELOCs to
be included in the pool as of the closing date, although some characteristics
may vary.
In the information that follows, weighted average percentages are
based upon the principal balances of the HELOCs on the Cut-Off Date.
The pool of HELOCs consists of 6,228 HELOCs with an aggregate Cut-Off
Date pool balance of approximately $302,628,574.41. The average principal
balance was approximately $48,591.61 as of the Cut-Off Date, the minimum and
maximum current loan rate on the Cut-Off Date were 4.000% and 9.550% per annum,
respectively, and the weighted average current loan rate on the Cut-Off Date was
5.701% per annum. As of the Cut-Off Date, the weighted average credit limit
utilization rate was 95.512%, the minimum credit limit utilization rate was
0.036% and the maximum credit limit utilization rate was 100.000%. The credit
limit utilization rate is determined by dividing the Cut-Off date principal
balance of a HELOC by the credit limit of the related Credit Line Agreement. The
weighted average combined original loan-to-value ratio of the HELOCs was 87.325%
as of the Cut-Off Date. Approximately 76.86% of the mortgage loans are Full
Documentation Loans and approximately 23.14% of the mortgage loans are Stated
Income Loans.
As of the Cut-Off Date, no HELOC had a combined loan-to-value ratio
greater than 100.00% and no HELOC was delinquent 30 days or more.
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HELOC Pool Statistics
The seller has compiled the following additional information as of the
Cut-Off Date with respect to the HELOCs and the related mortgaged properties to
be included in the trust. The sum of the columns below may not equal the total
indicated due to rounding.
Principal Balances
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Mortgage Outstanding Outstanding Principal
Range of Principal Balances Loans Principal Balance Balance
- --------------------------- --------- ----------------- ---------------------
$0 - $20,000....................................... 1,113 $ 16,178,277.59 5.35%
$20,001 - $40,000.................................. 2,385 69,528,485.83 22.97
$40,001 - $60,000.................................. 1,197 58,364,298.59 19.29
$60,001 - $80,000.................................. 568 39,195,521.44 12.95
$80,001 - $100,000................................. 388 35,248,166.14 11.65
$100,001 - $120,000................................ 219 23,295,402.88 7.70
$120,001 - $140,000................................ 111 14,202,755.21 4.69
$140,001 - $160,000................................ 75 11,181,086.74 3.69
$160,001 - $180,000................................ 48 8,142,793.07 2.69
$180,001 - $200,000................................ 30 5,728,123.32 1.89
$200,001 - $220,000................................ 30 6,244,875.60 2.06
$220,001 - $240,000................................ 31 7,123,688.32 2.35
$240,001 - $260,000................................ 33 8,195,099.68 2.71
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
Occupancy Type
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Mortgage Outstanding Outstanding
Occupancy Loans Principal Balance Principal Balance
- --------- --------- ----------------- ---------------------
Owner Occupied..................................... 6,042 $293,552,499.54 97.00%
Second Home........................................ 186 9,076,074.87 3.00
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
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Original Combined Loan-to-Value Ratios
The combined loan-to-value ratio in the following table is a fraction
whose numerator is the sum of (i) the credit limit of the HELOCs and (ii) any
outstanding principal balances of mortgage loans senior or of equal priority to
the HELOCs (calculated generally at the date of origination of the related
HELOC) and whose denominator is the most recent appraised value of the related
mortgaged property, as of the Cut-Off Date.
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Mortgage Outstanding Outstanding Principal
Range of Original Combined Loan-to-Value Ratios (%) Loans Principal Balance Balance
- --------------------------------------------------- --------- ----------------- -----------------------
5.01 - 10.00....................................... 4 $ 105,871.80 0.03%
10.01 - 15.00...................................... 3 159,351.52 0.05
15.01 - 20.00...................................... 8 484,101.29 0.16
20.01 - 25.00...................................... 11 829,427.39 0.27
25.01 - 30.00...................................... 19 1,068,303.71 0.35
30.01 - 35.00...................................... 15 770,874.77 0.25
35.01 - 40.00...................................... 14 1,048,452.99 0.35
40.01 - 45.00...................................... 21 1,734,457.39 0.57
45.01 - 50.00...................................... 22 1,774,407.69 0.59
50.01 - 55.00...................................... 41 3,074,464.06 1.02
55.01 - 60.00...................................... 44 3,864,471.25 1.28
60.01 - 65.00...................................... 66 5,743,363.31 1.90
65.01 - 70.00...................................... 96 7,256,729.06 2.40
70.01 - 75.00...................................... 150 10,839,080.82 3.58
75.01 - 80.00...................................... 487 35,282,237.64 11.66
80.01 - 85.00...................................... 299 14,731,904.65 4.87
85.01 - 90.00...................................... 1,995 84,302,183.47 27.86
90.01 - 95.00...................................... 1,402 58,936,220.07 19.47
95.01 - 100.00..................................... 1,531 70,622,671.53 23.34
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
Loan Purpose
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Mortgage Outstanding Outstanding Principal
Purpose Loans Principal Balance Balance
- ------- --------- ----------------- ---------------------
Purchase........................................... 2,125 $ 93,948,524.78 31.04%
Rate/Term Refinance................................ 440 18,488,734.61 6.11
Cash-Out Refinance................................. 3,663 190,191,315.02 62.85
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
Property Type
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Mortgage Outstanding Outstanding Principal
Property Type Loans Principal Balance Balance
- ------------- --------- ----------------- ---------------------
Single Family...................................... 5,856 $287,274,133.63 94.93%
Townhouse.......................................... 15 458,780.03 0.15
Planned Unit Development........................... 2 86,614.29 0.03
Condominium........................................ 355 14,809,046.46 4.89
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
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Geographic Distribution
The geographic locations used for the following table were determined
by the billing address for the mortgage property securing the related HELOC.
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Mortgage Outstanding Outstanding Principal
Geographic Distribution Loans Principal Balance Balance
- ----------------------- --------- ----------------- ---------------------
Alabama............................................ 8 $ 358,964.26 0.12%
Arizona............................................ 234 10,542,975.02 3.48
Arkansas........................................... 8 303,456.32 0.10
California......................................... 958 67,766,264.34 22.39
Colorado........................................... 216 10,910,773.73 3.61
Connecticut........................................ 29 1,339,167.45 0.44
Delaware........................................... 56 2,779,051.36 0.92
District of Columbia............................... 16 989,010.20 0.33
Florida............................................ 232 11,927,343.58 3.94
Georgia............................................ 307 13,307,140.16 4.40
Idaho.............................................. 165 5,078,730.40 1.68
Illinois........................................... 80 4,355,563.81 1.44
Indiana............................................ 108 3,336,798.69 1.10
Iowa............................................... 11 300,347.73 0.10
Kansas............................................. 75 2,460,363.16 0.81
Kentucky........................................... 28 875,708.16 0.29
Louisiana.......................................... 10 344,543.86 0.11
Maine.............................................. 49 2,041,808.47 0.67
Maryland........................................... 396 19,092,757.54 6.31
Massachusetts...................................... 145 8,622,639.63 2.85
Michigan........................................... 126 4,747,895.91 1.57
Minnesota.......................................... 49 2,568,842.89 0.85
Mississippi........................................ 12 340,625.50 0.11
Missouri........................................... 235 8,667,463.61 2.86
Montana............................................ 9 442,317.51 0.15
Nebraska........................................... 30 1,118,037.13 0.37
Nevada............................................. 133 5,899,483.62 1.95
New Hampshire...................................... 85 4,231,063.50 1.40
New Jersey......................................... 145 6,785,054.43 2.24
New Mexico......................................... 50 2,300,429.37 0.76
New York........................................... 26 1,302,675.64 0.43
North Carolina..................................... 157 6,668,987.25 2.20
Ohio............................................... 131 5,190,895.25 1.72
Oklahoma........................................... 20 650,425.60 0.21
Oregon............................................. 363 16,386,839.64 5.41
Pennsylvania....................................... 376 13,190,241.97 4.36
Rhode Island....................................... 56 2,713,832.34 0.90
South Carolina..................................... 20 646,790.94 0.21
Tennessee.......................................... 80 3,088,654.07 1.02
Utah............................................... 113 4,789,231.98 1.58
Vermont............................................ 5 397,743.17 0.13
Virginia........................................... 362 19,662,312.09 6.50
Washington......................................... 490 22,982,229.97 7.59
West Virginia...................................... 7 387,532.78 0.13
Wisconsin.......................................... 16 667,728.02 0.22
Wyoming............................................ 1 67,832.36 0.02
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
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Current FICO Scores
The weighted average score derived from proprietary scoring models
developed by Fair, Isaac and Co., Inc. (the "FICO Score") as of the Cut-Off Date
is 714.
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Mortgage Outstanding Outstanding Principal
Range of FICO Scores Loans Principal Balance Balance
- -------------------- --------- ----------------- ---------------------
540 - 559.......................................... 1 $ 30,180.00 0.01%
560 - 579.......................................... 3 125,457.01 0.04
580 - 599.......................................... 4 149,887.11 0.05
600 - 619.......................................... 14 687,854.41 0.23
620 - 639.......................................... 356 14,172,534.82 4.68
640 - 659.......................................... 548 23,078,280.41 7.63
660 - 679.......................................... 832 39,939,662.16 13.20
680 - 699.......................................... 838 42,426,669.65 14.02
700 - 719.......................................... 892 45,451,247.36 15.02
720 - 739.......................................... 823 38,541,840.18 12.74
740 - 759.......................................... 768 38,804,570.86 12.82
760 - 779.......................................... 640 31,833,945.01 10.52
780 - 799.......................................... 422 23,319,636.11 7.71
800 - 819.......................................... 85 4,025,886.49 1.33
820 - 839.......................................... 2 40,922.83 0.01
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
Credit Limit
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Mortgage Outstanding Outstanding Principal
Range of Credit Limits Loans Principal Balance Balance
- ---------------------- --------- ----------------- ---------------------
$0 - $20,000....................................... 1,035 $ 15,480,076.65 5.12%
$20,001 - $40,000.................................. 2,370 68,661,417.25 22.69
$40,001 - $60,000.................................. 1,225 58,504,291.22 19.33
$60,001 - $80,000.................................. 571 38,369,312.95 12.68
$80,001 - $100,000................................. 496 43,769,091.54 14.46
$100,001 - $120,000................................ 138 14,597,518.61 4.82
$120,001 - $140,000................................ 113 13,973,457.56 4.62
$140,001 - $160,000................................ 91 12,700,324.43 4.20
$160,001 - $180,000................................ 47 7,519,879.67 2.48
$180,001 - $200,000................................ 42 7,615,288.98 2.52
$200,001 - $220,000................................ 23 4,396,741.19 1.45
$220,001 - $240,000................................ 29 6,262,090.08 2.07
$240,001 - $260,000................................ 48 10,779,084.28 3.56
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
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<Page>
Credit Limit Utilization Rates
The credit limit utilization rates in the following table were
determined by dividing the principal balances as of the Cut-Off Date by the
credit limits of the related HELOCs.
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Mortgage Outstanding Outstanding Principal
Range of Credit Limit Utilization Rates (%) Loans Principal Balance Balance
- ------------------------------------------- --------- ----------------- ---------------------
0.000 - 4.999...................................... 25 $ 19,830.08 0.01%
5.000 - 9.999...................................... 13 72,086.79 0.02
10.000 - 14.999.................................... 5 61,477.40 0.02
15.000 - 19.999.................................... 5 111,400.62 0.04
20.000 - 24.999.................................... 11 180,959.11 0.06
25.000 - 29.999.................................... 8 142,918.92 0.05
30.000 - 34.999.................................... 8 229,697.19 0.08
35.000 - 39.999.................................... 9 211,598.40 0.07
40.000 - 44.999.................................... 16 577,287.62 0.19
45.000 - 49.999.................................... 15 529,089.39 0.17
50.000 - 54.999.................................... 17 867,344.38 0.29
55.000 - 59.999.................................... 14 473,358.17 0.16
60.000 - 64.999.................................... 16 661,253.37 0.22
65.000 - 69.999.................................... 20 1,046,779.71 0.35
70.000 - 74.999.................................... 17 642,206.24 0.21
75.000 - 79.999.................................... 42 2,032,731.99 0.67
80.000 - 84.999.................................... 142 6,453,806.82 2.13
85.000 - 89.999.................................... 190 8,959,921.89 2.96
90.000 - 94.999.................................... 259 10,891,036.29 3.60
95.000 - 99.999.................................... 2,571 115,672,012.24 38.22
100.000............................................ 2,825 152,791,777.79 50.49
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
Original Term to Maturity
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Original Term to Maturity Mortgage Outstanding Outstanding Principal
(Months) Loans Principal Balance Balance
- -------- --------- ----------------- ---------------------
240 ............................................... 6,228 $302,628,574.41 100.00%
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
Remaining Term to Maturity
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Remaining Term to Maturity Mortgage Outstanding Outstanding Principal
(Months) Loans Principal Balance Balance
- -------- --------- ----------------- ---------------------
235................................................ 1,588 $ 72,184,327.15 23.85%
236................................................ 871 50,770,676.08 16.78
237................................................ 1,936 91,083,536.37 30.10
238................................................ 1,833 88,590,034.81 29.27
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
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Margins
The weighted average margin for the HELOCs as of the Cut-Off Date was
1.701%.
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Mortgage Outstanding Outstanding Principal
Range of Margins (%) Loans Principal Balance Balance
- -------------------- --------- ----------------- ---------------------
0.000.............................................. 447 $ 34,248,354.14 11.32%
0.001 to 0.250..................................... 163 12,620,801.57 4.17
0.251 to 0.500..................................... 111 8,376,746.36 2.77
0.501 to 0.750..................................... 108 8,215,215.98 2.71
0.751 to 1.000..................................... 958 40,442,950.70 13.36
1.001 to 1.250..................................... 289 15,005,426.77 4.96
1.251 to 1.500..................................... 286 14,980,101.38 4.95
1.501 to 1.750..................................... 418 18,220,022.77 6.02
1.751 to 2.000..................................... 1,388 60,870,776.82 20.11
2.001 to 2.250..................................... 297 13,316,990.31 4.40
2.251 to 2.500..................................... 200 9,452,879.75 3.12
2.501 to 2.750..................................... 385 16,873,423.02 5.58
2.751 to 3.000..................................... 253 12,146,298.21 4.01
3.001 to 3.250..................................... 143 6,138,357.60 2.03
3.251 to 3.500..................................... 153 6,529,107.62 2.16
3.501 to 3.750..................................... 225 9,735,198.92 3.22
3.751 to 4.000..................................... 238 9,974,213.44 3.30
4.001 to 4.250..................................... 81 2,815,097.17 0.93
4.251 to 4.500..................................... 35 1,091,980.78 0.36
4.501 to 4.750..................................... 26 869,052.85 0.29
4.751 to 5.000..................................... 19 584,913.39 0.19
5.001 to 5.250..................................... 2 38,790.24 0.01
5.251 to 5.500..................................... 2 71,869.61 0.02
5.501 to 5.750..................................... 1 10,005.01 0.00
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
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Current Loan Rates
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Mortgage Outstanding Outstanding Principal
Range of Current Loan Rates (%) Loans Principal Balance Balance
- ------------------------------- --------- ----------------- ---------------------
0.000 - 4.000...................................... 447 $ 34,248,354.14 11.32%
4.001 - 4.250...................................... 163 12,620,801.57 4.17
4.251 - 4.500...................................... 111 8,376,746.36 2.77
4.501 - 4.750...................................... 108 8,215,215.98 2.71
4.751 - 5.000...................................... 958 40,442,950.70 13.36
5.001 - 5.250...................................... 289 15,005,426.77 4.96
5.251 - 5.500...................................... 286 14,980,101.38 4.95
5.501 - 5.750...................................... 418 18,220,022.77 6.02
5.751 - 6.000...................................... 1,388 60,870,776.82 20.11
6.001 - 6.250...................................... 297 13,316,990.31 4.40
6.251 - 6.500...................................... 200 9,411,130.47 3.11
6.501 - 6.750...................................... 386 16,939,172.30 5.60
6.751 - 7.000...................................... 253 12,146,298.21 4.01
7.001 - 7.250...................................... 144 6,187,665.85 2.04
7.251 - 7.500...................................... 153 6,529,107.62 2.16
7.501 - 7.750...................................... 223 9,661,890.67 3.19
7.751 - 8.000...................................... 238 9,974,213.44 3.30
8.001 - 8.250...................................... 81 2,815,097.17 0.93
8.251 - 8.500...................................... 35 1,091,980.78 0.36
8.501 - 8.750...................................... 26 869,052.85 0.29
8.751 - 9.000...................................... 19 584,913.39 0.19
9.001 - 9.250...................................... 2 38,790.24 0.01
9.251 - 9.500...................................... 2 71,869.61 0.02
9.501 - 9.750...................................... 1 10,005.01 0.00
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
Maximum Loan Rates
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Mortgage Outstanding Outstanding Principal
Maximum Loan Rate (%) Loans Principal Balance Balance
- --------------------- --------- ----------------- ---------------------
15.000............................................. 50 $ 2,300,429.37 0.76%
16.000............................................. 1 60,200.00 0.02
18.000............................................. 280 13,822,212.51 4.57
18.950............................................. 362 19,662,312.09 6.50
21.000............................................. 5,059 244,363,753.90 80.75
25.000............................................. 476 22,419,666.54 7.41
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
Initial Draw Period
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Initial Draw Period Mortgage Outstanding Outstanding Principal
(Months) Loans Principal Balance Balance
- -------- --------- ----------------- ---------------------
60................................................. 5,375 $254,671,601.39 84.15%
120................................................ 853 47,956,973.02 15.85
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
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Remaining Draw Period
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Remaining Draw Period Mortgage Outstanding Outstanding Principal
(Months) Loans Principal Balance Balance
- -------- --------- ----------------- ---------------------
55................................................. 1,415 $ 63,136,087.21 20.86%
56................................................. 745 42,530,277.31 14.05
57................................................. 1,644 74,779,251.79 24.71
58................................................. 1,571 74,225,985.08 24.53
115................................................ 173 9,048,239.94 2.99
116................................................ 126 8,240,398.77 2.72
117................................................ 292 16,304,284.58 5.39
118................................................ 262 14,364,049.73 4.75
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
Origination Year
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Mortgage Outstanding Outstanding Principal
Origination Year Loans Principal Balance Balance
- ---------------- --------- ----------------- ---------------------
2003............................................... 6,228 $302,628,574.41 100.00%
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
Lien Position
Percentage of Cut-Off
Number of Aggregate Date Aggregate
Mortgage Outstanding Outstanding Principal
Lien Position Loans Principal Balance Balance
- ------------- --------- ----------------- ---------------------
First.............................................. 196 $ 20,258,994.96 6.69%
Second............................................. 6,032 282,369,579.45 93.31
----- --------------- ------
Total.............................................. 6,228 $302,628,574.41 100.00%
===== =============== ======
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HELOC Terms
The general terms of the HELOCs are described under "The Trust
Fund--The Loans" in the prospectus.
A borrower may make a draw under a HELOC, from time to time, by using
special checks or other means provided to the borrower. The draws will be funded
by the seller.
Minimum monthly payments will be required to be made during the draw
period, but these payments will not be sufficient to fully amortize a HELOC
during the draw period. Borrowers may make payments in excess of their monthly
payment without penalty and the excess funds will first be used to pay any
applicable fees and then be applied towards outstanding principal. Other fees,
including the annual membership fees and late payment charges, may vary by
state.
The borrower's right to make a draw under a HELOC may be suspended or
terminated or the borrower may be required to pay the entire balance due plus
all other accrued but unpaid charges immediately, if
o the borrower fails to make any required payment by the due date;
o the total outstanding principal balance including all charges
payable exceeds the credit limit;
o the borrower made any statement or signature on any document
which is fraudulent or contained a material misrepresentation;
o the borrower dies or becomes incompetent;
o the borrower becomes bankrupt or insolvent;
o the borrower becomes subject to any judgment, lien, attachment or
an execution is issued against the mortgaged property;
o the borrower fails to obtain and maintain required property
insurance; or
o the borrower sells or transfers the mortgaged property or does
not maintain the property.
In addition, the borrower's right to make a draw under a HELOC may be
suspended or a borrower's credit limit may be reduced, if:
o the borrower is in default under the HELOC;
o government action impairs the originator's lien priority; or
o a regulatory agency has notified the originator that continued
advances would constitute an unsafe and unsound practice.
The billing statement details all debits and credits and specifies the
minimum payment due and the available credit line. Notice of changes in the
applicable loan rate are provided to the borrower with the billing statements.
The monthly payment due dates for the HELOCs vary.
Interest accrued each month with respect to each HELOC adjusts based
on the index, which is the prime rate published in The Wall Street Journal for
the day that the loan resets. If more than one prime rate is published, the
highest rate will be used. All of the HELOCs are subject to maximum loan rates
specified in the Credit Line Agreements. No HELOC is subject to a minimum loan
rate or a periodic loan rate cap or floor.
Servicing Compensation and Payment of Expenses
With respect to each Due Period, the servicing compensation to be paid
to the servicer in respect of its servicing activities relating to the HELOCs is
referred to as the "Servicing Fee" and will be paid from Interest Collections in
respect of the HELOCs. The amount of the servicing fee is equal to 0.50% per
annum which is
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referred to as the servicing fee rate, multiplied by the sum of the outstanding
principal balance of each HELOC as of the first day of each Due Period. The
servicing fee will be calculated on the basis of twelve 30-day months and a
360-day year. All assumption fees, late payment charges and other fees and
charges, to the extent collected from borrowers, will be retained by the
servicer as additional servicing compensation.
With respect to each payment date, the "Due Period" is the prior
calendar month.
The servicer will pay ongoing expenses associated with the trust and
incurred by it in connection with its responsibilities under the sale and
servicing agreement, including, without limitation, payment of the fees of the
owner trustee and any custodian appointed by the trustees. In addition, the
servicer will be entitled to reimbursement for expenses it incurs in connection
with defaulted HELOCs and in connection with restoring mortgaged properties
related to defaulted HELOCs, to the extent that recoveries are realized. The
servicer's right of reimbursement is senior to the rights of holders of the
securities to receive any proceeds from the liquidation of the related mortgaged
property.
Assignment of HELOCs
On or before the closing date, the seller will sell to the depositor
and the depositor will transfer to the trust all of its right, title and
interest in and to each HELOC, including its right to purchase from the seller
any additional balances arising in the future, related Credit Line Agreements,
mortgages and other mortgage loan documents, including all collections received
on or with respect to each HELOC after the Cut-Off Date. The trust, concurrently
with the transfer, will deliver the securities. Each HELOC transferred to the
trust will be identified on a mortgage loan schedule delivered to the indenture
trustee. The mortgage loan schedule will include information including the
principal balance as of the Cut-Off Date for each HELOC, as well as information
with respect to the loan rate.
The mortgage loan documents for each HELOC, including, without
limitation, the note for each HELOC, will be retained by the seller as custodian
and bailee for the benefit of the noteholders and the Note Insurer. The seller
will retain the mortgage loan documents either itself or through an affiliate.
However, the related assignment of mortgage or deed of trust in recordable form
for each HELOC will not be prepared unless the seller's long-term senior
unsecured debt rating is not at least "BBB" by Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc. ("S&P") and "Baa2" by
Moody's Investors Services ("Moody's" and together with S&P, the "rating
agencies") (the "Assignment Preparation Trigger"). At such time as assignments
of mortgage or deed of trust are required to be prepared, the Seller will also
segregate the mortgage notes from other documents relating to the Mortgage
Loans. If the rating of the Seller's long-term senior unsecured debt falls below
the Assignment Preparation Trigger, the Seller will deliver the mortgage notes
to the indenture trustee within 90 days of such event. The balance of the
mortgage loan documents (other than the assignments of mortgage or deed of trust
if they have not been required to be prepared) will be required to be delivered
to the indenture trustee within 90 days following an event of servicer
termination ("Event of Servicer Termination"). Events that could give rise to
the servicer's termination are described below under "Servicing
Agreement--Events of Servicing Termination" in this prospectus supplement.
Within 90 days of either (a) the rating of the long-term senior unsecured debt
being reduced below the Assignment Preparation Trigger or (b) an Event of
Servicer Termination, the Seller will submit the assignments of mortgage or deed
of trust for recording in the appropriate recording offices in the relevant
jurisdictions. Such recordation will not be required if opinions of counsel
satisfactory to the indenture trustee and the Note Insurer are delivered to the
indenture trustee and the Note Insurer to the effect that recordation of such
assignments is not required in the relevant jurisdictions to perfect the
security interests of the trust, the noteholders or the Note Insurer in the
HELOCs.
If, as described above, the seller is required to deliver the mortgage
notes following an Assignment Event, and the balance of the mortgage loan
documents following an Event of Servicing Termination, the indenture trustee, or
the custodians on behalf of the indenture trustee, will review the mortgage
notes or the mortgage loan documents required to be reviewed pursuant to the
sale and servicing agreement, as applicable, in each case within 60 days of the
related delivery. If the indenture trustee, or the custodian on behalf of the
indenture trustee, finds that any document required to be reviewed by it to be
defective or missing and the defect or omission is not cured by the seller
within 90 days following notification of the defect by the indenture trustee to
the seller, the seller will be obligated to repurchase the HELOC as described in
the following paragraph.
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The seller will make representations and warranties as to the accuracy
in all material respects of information furnished to the indenture trustee and
the trust with respect to each HELOC. In addition, the seller will represent and
warrant, on the closing date, that, among other things: (1) at the time of
transfer to the trust, the seller has transferred or assigned all of its right,
title and interest in each HELOC and the related documents, free of any lien,
subject to exceptions; (2) each HELOC was generated under a Credit Line
Agreement that complied, at the time of origination, in all material respects
with applicable state and federal laws including but not limited to applicable
local, state and federal predatory and abusive lending laws; and (3) none of the
HELOCs are high-cost loans as defined by applicable local, state and federal
predatory and abusive lending laws. Upon discovery of a breach of any
representation and warranty that materially and adversely affects the interests
of the holders in a HELOC, the seller will have a period of 90 days after
discovery or notice of the breach to effect a cure. If the breach cannot be
cured within the 90-day period, the seller will be obligated to repurchase the
HELOC and to either (i) deposit the Purchase Price (as defined below) into the
collection account or, (ii) direct that the defective HELOC be retransferred to
it and that the transferor interest be reduced by the principal balance and
accrued interest on the defective HELOC and the seller will be required to
deposit the balance of the Purchase Price in the collection account. The amount
of such deposit is referred to as the "Transferor Deposit Amount." Upon
retransfer, the principal balance of the HELOC will be deducted from the pool
balance. In lieu of any repurchase, the seller may substitute one or more
Eligible Substitute HELOCs (as defined below). Any repurchase or substitution
will be considered a payment in full of the defective HELOC. The obligation of
the seller to accept a retransfer of a defective HELOC is the sole remedy
regarding any defects in the HELOCs and related documents available to the owner
trustee or the holders.
With respect to any HELOC, the "Purchase Price" is equal to the
principal balance of the HELOC at the time of any transfer described above plus
accrued and unpaid interest to the date of repurchase together with any expenses
incurred as a result of the defect and costs and damages incurred by the trust
due to such HELOCs violation of applicable local, state or federal predatory or
abusive lending laws.
An "Eligible Substitute HELOC" is a HELOC substituted by the seller
for a defective HELOC which must, on the date of the substitution, satisfy the
criteria specified in the sale and servicing agreement. To the extent the
principal balance of an Eligible Substitute HELOC is less than the principal
balance of the related defective HELOC, the seller will be required to make a
deposit to the collection account equal to the difference (each, a "Substitution
Adjustment Amount").
In certain circumstances, the interest of the depositor, the trust,
and the indenture trustee in the HELOCs could be impaired, and payments to you
could be delayed and, if the Note Insurer fails to perform under the Policy,
reduced. For instance,
o a prior or subsequent transferee of HELOCs could have an interest
in the HELOCs superior to the interest of the depositor, the
trust, and the indenture trustee;
o until the indenture trustee has possession of the mortgage notes,
the indenture trustee's interest in the HELOCs may not have
priority over any person or entity that acquires possession of
the mortgage notes;
o a tax, governmental, or other nonconsensual lien that attaches to
the property of the seller or the depositor could have priority
over the interest of the depositor, the trust, and the indenture
trustee in the HELOCs;
o the administrative expenses of a conservator or receiver for the
seller could be paid from collections on the HELOCs before the
depositor, the trust, or the indenture trustee receives any
payments; and
o if insolvency proceedings were commenced by or against the
servicer, or if certain time periods were to pass, the depositor,
the trust, and the indenture trustee may lose any perfected
interest in collections held by the servicer and commingled with
its other funds.
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<Page>
Conservatorship or Receivership
The seller is chartered as a national banking association and is
regulated and supervised by the Office of the Comptroller of the Currency, which
is required to appoint the Federal Deposit Insurance Corporation (the "FDIC") as
conservator or receiver for the seller if certain events occur relating to the
seller's financial condition or the propriety of its actions. In addition, the
FDIC could appoint itself as conservator or receiver for the seller.
The seller will treat each transfer of HELOCs to the depositor as a
sale. Arguments may be made, however, that these transfers constitute the grant
of a security interest under general applicable law. Nevertheless, the FDIC has
issued regulations surrendering certain rights under the Federal Deposit
Insurance Act, as amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (the "FDIA"), to reclaim, recover, or recharacterize a
financial institution's transfer of financial assets such as the HELOCs if (i)
the transfer involved a securitization of the financial assets and meets
specified conditions for treatment as a sale under relevant accounting
principles, (ii) the financial institution received adequate consideration for
the transfer at the time of the transfer, (iii) the parties intended that the
transfer constitute a sale for accounting purposes and the relevant documents
reflect such intentions, and (iv) the financial assets were not transferred
fraudulently, in contemplation of the financial institution's insolvency, or
with the intent to hinder, delay, or defraud the financial institution or its
creditors. The seller's transfer of the HELOCs and the purchase agreement are
intended to satisfy all of these conditions.
If one or more conditions required under the FDIC's regulations were
found not to have been met, however, the FDIC could reclaim, recover, or
recharacterize the seller's transfer of the HELOCs. The FDIA would limit the
depositor's, the trust's, or the indenture trustee's damages in this event to
its "actual direct compensatory damages" determined as of the date that the FDIC
was appointed as conservator or receiver for the seller. The FDIC, moreover,
could delay its decision whether to reclaim, recover, or recharacterize the
seller's transfer of the HELOCs for a reasonable period following its
appointment as conservator or receiver for the seller. Therefore, if the FDIC
were to reclaim, recover, or recharacterize the seller's transfer of the HELOCs,
payments to you could be delayed and, if the Note Insurer fails to perform under
the Policy, reduced.
Even if the conditions set forth in the regulations were satisfied and
the FDIC did not reclaim, recover, or recharacterize the seller's transfer of
the HELOCs, you could suffer a loss on your investment if the Note Insurer fails
to perform under the Policy and (i) the purchase agreement, the sale and
servicing agreement, the administration agreement, or the seller's transfer of
the HELOCs, were found to violate applicable regulatory requirements, (ii) the
depositor, the trust, or the indenture trustee were required to comply with the
claims process established under the FDIA in order to collect payments on the
HELOCs, (iii) the FDIC were to request a stay of any action by the depositor,
the trust, or the indenture trustee to enforce the purchase agreement, the sale
and servicing agreement, the administration agreement, the indenture, or the
notes, or (iv) the FDIC were to repudiate other parts of the purchase agreement,
the sale and servicing agreement, or the administration agreement, such as any
obligation to collect payments on or otherwise service the HELOCs or to provide
administrative services to the depositor or the trust.
The depositor is a wholly-owned subsidiary of First Horizon Home Loans
Corporation, which is a wholly-owned subsidiary of the seller. Certain
provisions of the FDIA and regulations issued by banking authorities may apply
not only to the seller but to its subsidiaries as well. If the depositor were
found to have violated any of these provisions or regulations, payments to you
could be delayed and, if the Note Insurer fails to perform under the Policy,
reduced. In addition, if the seller entered conservatorship or receivership, the
FDIC could exercise control over the HELOCs or the other assets of the depositor
or the trust on an interim or permanent basis. Although steps have been taken to
minimize this risk, the FDIC could argue that:
o the assets of the depositor (including the HELOCs) constitute
assets of the seller available for liquidation and distribution
by a conservator or receiver for the seller;
o the depositor and its assets (including the HELOCs) should be
substantively consolidated with the seller and its assets;
o the FDIC's control over the HELOCs is necessary for the seller to
reorganize or to protect the public interest; or
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<Page>
o the FDIC has the power to disaffirm actions of a subsidiary of an
insured depository institution.
If these or similar arguments were made, whether successfully or not,
payments to you could be delayed and, if the Note Insurer fails to perform under
the Policy, reduced. Furthermore, regardless of any decision made by the FDIC or
ruling made by a court, the fact that the seller has entered conservatorship or
receivership could have an adverse effect on the liquidity and value of the
notes.
In addition, regardless of the terms of the purchase agreement, the
sale and servicing agreement, or the indenture, and regardless of the
instructions of those authorized to direct the depositor's, the trust's or the
indenture trustee's actions, the FDIC as conservator or receiver for the seller
may have the power (i) to prevent or require the commencement of a Rapid
Amortization Event, (ii) to prevent, limit, or require the early liquidation of
HELOCs and termination of the trust, or (iii) to require, prohibit, or limit the
continued transfer of HELOCs. Furthermore, regardless of the terms of the sale
and servicing agreement or the administration agreement, the FDIC (i) could
prevent the appointment of a successor servicer or another administrator for the
depositor or the trust or (ii) could authorize the seller to stop servicing the
HELOCs or administering the depositor or the trust. If any of these events were
to occur, payments to you could be delayed and, if the Note Insurer fails to
perform under the Policy, reduced.
Optional Transfer of HELOCs to the Seller
Upon notice to the Note Insurer and subject to the conditions of the
sale and servicing agreement, on any payment date, the seller may, but shall not
be obligated to, except upon a breach of a representation or warranty, remove
from the trust a portion of the HELOCs without notice to the noteholders. Except
upon a breach of a representation or warranty, the seller will randomly select
the HELOCs to be removed. HELOCs to be removed will only be removed upon
satisfaction of conditions specified in the sale and servicing agreement,
including:
o the seller representing and warranting that no selection
procedures which are adverse to the interests of the noteholders
or the Note Insurer were used by the seller in selecting the
HELOCs to be removed;
o no Rapid Amortization Event has occurred or will occur as a
result of the removal; and
o notice of removal of the HELOC is given to the Note Insurer and
the rating agencies.
Upon any such removal, the transferor interest will be reduced by an
amount equal to the aggregate principal balances of the HELOCs removed.
DESCRIPTION OF THE NOTES
General
The notes will be issued under an indenture dated as of March 1, 2004,
between the trust and The Bank of New York, as indenture trustee. The following
summaries describe provisions of the notes and the indenture. The summaries do
not purport to be complete and are subject to, and qualified in their entirety
by reference to, the provisions of the applicable agreement. As used in this
prospectus supplement, agreement shall mean either the sale and servicing
agreement or the indenture, as the context requires.
The notes will be issued in fully registered, certificated form only.
The notes will be freely transferable and exchangeable at the corporate trust
office of the indenture trustee.
Book-Entry Notes
The notes will be in book-entry form. Persons acquiring beneficial
ownership interests in the notes, or beneficial owners, will hold their notes
through The Depository Trust Company, New York, New York ("DTC") in the United
States, or Clearstream Banking, societe anonyme ("Clearstream") or Euroclear
Bank S.A./N.V. ("Euroclear") in Europe if they are participants of those
systems, or indirectly through organizations which are participants in those
systems.
The book-entry notes will initially be registered in the name of Cede
& Co., the nominee of DTC. Unless and until definitive notes are issued, it is
anticipated that the only note owner under the indenture will be Cede &
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<Page>
Co., as nominee of DTC. Clearstream and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Clearstream's and Euroclear's names on the books of their respective
depositaries, which in turn will hold positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank N.A. will act
as depositary for Clearstream and The Chase Manhattan Bank will act as
depositary for Euroclear. Beneficial owners will not be noteholders as that term
is used in the indenture. Beneficial owners are only permitted to exercise their
rights indirectly through the participating organizations that use the services
of DTC, including securities brokers and dealers, banks and trust companies,
clearing corporations and certain other organizations, and DTC. Beneficial
owners may hold their beneficial interests in minimum denominations of $25,000
and multiples of $1,000 in excess thereof.
The beneficial owner's ownership of a book-entry note will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary that maintains the beneficial owner's account for such
purpose. In turn, the financial intermediary's ownership of that book-entry note
will be recorded on the records of the applicable depository, or of a
participating firm that acts as agent for the financial intermediary, whose
interest will in turn be recorded on the records of the depository, if the
beneficial owner's financial intermediary is not a participant of DTC, and the
records of Clearstream or Euroclear, as appropriate.
Payments on the notes and transfers of the securities take place
through book-entry notations. The indenture trustee makes payments to the
holding depository, which in turn makes payments to its participants. The
participants will then, in turn, credit the payments to the accounts of
beneficial owners either directly or through indirect participants.
Consequently, beneficial owners of the book-entry notes may experience delay in
their receipt of payments. The payments will be subject to tax reporting in
accordance with relevant United States tax laws and regulations.
Transfers of the notes are made similarly through book-entry
notations. Each beneficial owner instructs its financial intermediary of the
transaction, and the information is eventually passed on to the holding
depository. Each financial intermediary and the depository will note the
transaction on its records and either debit or credit the account of the selling
and purchasing beneficial owners. Payments and transfers between DTC
participants, Clearstream participants and Euroclear participants will occur in
accordance with the rules and operating procedures of each depository. For
information on transfers between depositories, see "Annex I--Global Clearance,
Settlement and Tax Documentation Procedures" at the end of this prospectus
supplement.
DTC has advised the depositor as follows: DTC is a limited-purpose
trust company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions of
Section 17A of the Securities Exchange Act of 1934, as amended. DTC holds
securities that its participants deposit with DTC. DTC also facilitates the
settlement among DTC participants of securities transactions, such as transfers
and pledges, in deposit securities through electronic computerized book-entry
changes in DTC participants' accounts, which eliminates the need for physical
movements of securities. DTC participants include underwriters, securities
brokers and dealers, banks, trust companies, clearing corporations and similar
organizations. Certain of such participants (or their representatives), together
with other entities, own DTC. Indirect access to the DTC system is available to
others such as banks, brokers and dealers and trust companies that clear through
or maintain a custodial relationship with a DTC participant, either directly or
indirectly.
Clearstream was incorporated as a limited liability company under
Luxembourg law. Clearstream is owned by Cedel International, societe anonyme and
Deutsche Borse AG. The shareholders of these two entities are banks, securities
dealers and financial institutions. Clearstream holds securities for its
participants, or participating organizations, and facilitates the clearance and
settlement of securities transactions between Clearstream participants through
electronic book-entry changes in accounts of Clearstream participants,
eliminating the need for physical movement of notes. Transactions may be settled
in Clearstream in any of 31 currencies, including United States dollars.
Clearstream provides to its participants, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities, securities lending and borrowing and collateral management.
Clearstream interfaces with domestic markets in several countries. As a
registered bank, Clearstream is regulated by the Luxembourg Commission for the
Supervision of the Financial Sector. Clearstream has established an electronic
bridge with the Euroclear Operator to facilitate settlement of trades between
Clearstream and Euroclear. Clearstream participants are recognized financial
institutions around the world, including
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underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and other organizations. Indirect access to Clearstream is also
available to others, like banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Clearstream participant,
either directly or indirectly. In the United States, Clearstream customers are
limited to securities brokers and dealers and banks, and may include the
underwriters for the book-entry notes. Clearstream is an indirect participant in
DTC.
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, thereby eliminating
the need for physical movement of securities and the risk from lack of
simultaneous transfers of securities and cash. Transactions may be settled in
many currencies, including U.S. dollars. In addition to safekeeping (custody)
and securities clearance and settlement, the Euroclear system includes
securities lending and borrowing and interfaces with domestic markets in several
countries generally similar to the arrangements for cross-market transfers with
DTC. Euroclear is operated by Euroclear Bank S.A./N.V., under contract with
Euroclear Clearance System plc, a UK corporation ("Euroclear Clearance System").
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 Euroclear Clearance System. The Euroclear Clearance
System 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 and may
include the underwriter specified in this prospectus supplement. Indirect access
to the Euroclear system is also available to other firms that clear through or
maintain a custodial relationship with a Euroclear participant, either directly
or indirectly. Euroclear is an indirect participant in DTC.
The Euroclear operator is a Belgian bank. The Belgian Banking
Commission and the National Bank of Belgium regulate and examine the Euroclear
Operator.
The terms and conditions governing use of Euroclear and the related
operating procedures of Euroclear and applicable Belgian law govern securities
clearance accounts and cash accounts with the Euroclear Operator. Specifically,
these terms and conditions govern:
o transfers of securities and cash within Euroclear,
o withdrawal of securities and cash from Euroclear; and
o receipts of payments with respect to securities in Euroclear.
All securities in Euroclear are held on a fungible basis without
attribution of specific notes 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
securities through Euroclear participants.
Distributions with respect to book-entry notes held beneficially
through Euroclear will be credited to the cash accounts of Euroclear
participants in accordance with the Euroclear Terms and Conditions, to the
extent received by the Euroclear Operator and by Euroclear.
Distributions with respect to the book-entry notes held beneficially
through Clearstream will be credited to cash accounts of Clearstream customers
in accordance with its rules and procedures, to the extent received by
Clearstream.
Title to book-entry notes will pass by book-entry registration of the
transfer within the records of Euroclear, Clearstream or DTC, as the case may
be, in accordance with their respective procedures. Book-entry notes may be
transferred within Euroclear and within Clearstream and between Euroclear and
Clearstream in accordance with procedures established for these purposes by
Euroclear and Clearstream, Luxembourg. Book-entry notes may be transferred
within DTC in accordance with procedures established for this purpose by DTC.
Transfers of book-entry notes between Euroclear and Clearstream and DTC may be
effected in accordance with procedures established for this purpose by
Euroclear, Clearstream and DTC.
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Initial settlement for the book-entry notes will be made in
immediately available funds. Secondary market trading between DTC participants
will occur in the ordinary way in accordance with DTC rules and will be settled
in immediately available funds. Secondary market trading between Euroclear
participants and/or Clearstream participants will occur in the ordinary way in
accordance with the applicable rules and operating procedures of Euroclear and
Clearstream and will be settled using the procedures applicable to conventional
Eurobonds in immediately available funds.
Cross-market transfers between persons holding directly or indirectly
through DTC on the one hand, and directly or indirectly through Euroclear or
Clearstream participants, on the other, will be effected by DTC in accordance
with DTC rules on behalf of the relevant European international clearing system
by its respective depositary in the United States. However, those 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 will, if the
transaction meets its settlement requirements, deliver instructions to its U.S.
depositary to take action to effect final settlement on its behalf by delivering
or receiving book-entry notes to or from DTC, and making or receiving payment in
accordance with normal procedures for same-day funds settlement applicable to
DTC. Euroclear participants and Clearstream participants may not deliver
instructions directly to their respective depositaries in the United States.
Because of time-zone differences, credits of book-entry notes received
in Euroclear or Clearstream as a result of a transaction with a DTC participant
will be made during subsequent securities settlement processing and dated the
business day following DTC settlement date. These credits or any transactions in
book-entry notes settled during such processing will be reported to the relevant
Euroclear or Clearstream participants on that business day. Cash received in
Euroclear or Clearstream as a result of sales of book-entry notes by or through
a Euroclear participant or a Clearstream participant to a DTC participant will
be received with value on DTC settlement date but will be available in the
relevant Euroclear or Clearstream cash account only as of the business day
following settlement in DTC.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures in order to facilitate transfers of notes among participants of DTC,
Euroclear and Clearstream, they are under no obligation to perform or continue
to perform the procedures and the procedures may be discontinued at any time.
See "Appendix I" to this prospectus supplement.
For a discussion of the federal income tax consequences for non-United
States persons, see "Appendix I" to this prospectus supplement.
Monthly and annual reports with respect to the trust 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 of the beneficial
owners are credited.
DTC has advised the indenture trustee that, unless and until
definitive notes are issued, DTC will take any action permitted to be taken by
the holders of the book-entry notes under the indenture only at the direction of
one or more financial intermediaries to whose DTC accounts the book-entry notes
are credited, to the extent that actions are taken on behalf of financial
intermediaries whose holdings include those book-entry notes. Clearstream or the
Euroclear operator, as the case may be, will take any other action permitted to
be taken by a noteholder under the indenture 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 depositary to effect
actions on its behalf through DTC. DTC may take actions, at the direction of its
participants, with respect to some notes which conflict with actions taken with
respect to other notes.
Definitive notes will be issued to beneficial owners of the book-entry
notes, or their nominees, rather than to DTC, only if: (a) DTC or the issuer
advises the indenture trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the book-entry securities and the issuer or the
indenture trustee is unable to locate a qualified successor or (b) after the
occurrence of an event of default under the indenture, beneficial owners having
percentage interests aggregating not less than 51% of the principal balance of
the book-entry securities advise the indenture trustee and DTC through the
financial
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intermediaries and the DTC participants in writing that the continuation of a
book-entry system through DTC, or a successor to DTC, is no longer in the best
interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the indenture trustee will be required to notify all
beneficial owners of the occurrence of the event and the availability through
DTC of definitive securities. Upon surrender by DTC of the global note or notes
representing the book-entry notes and instructions for re-registration, the
issuer will issue and the indenture trustee will authenticate definitive notes,
and the indenture trustee will recognize the holders of the definitive notes as
holders under the indenture.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of securities among participants of
DTC, Clearstream and Euroclear, they are under no obligation to perform or
continue to perform the procedures and the procedures may be discontinued at any
time.
Payments
On each payment date, collections on the HELOCs received during the
preceding Due Period and allocable to the noteholders will be applied as
follows:
A. From Investor Interest Collections, reduced by the Indenture Trustee Fee:
(1) to the Note Insurer, the premium due for the Policy;
(2) to the noteholders, accrued interest and any overdue accrued
interest, in each case accrued at a rate that is not higher than
the Maximum Rate (as defined in "--Interest" below) on the notes;
(3) to the noteholders, as a payment of principal, Investor
Charge-Off Amounts incurred during the preceding calendar month
and the Investor Charge-Off Amounts incurred during previous
periods that were not subsequently funded by Investor Interest
Collections, overcollateralization or draws under the Policy;
(4) to the Note Insurer, as reimbursement for prior draws made under
the Policy;
(5) to the noteholders, as a payment of principal, the amount
necessary to build the overcollateralization to the Specified O/C
amount;
(6) to the Note Insurer, any other amounts owed to the Note Insurer
pursuant to the Insurance Agreement;
(7) to the noteholders, any carryover interest amounts from prior
periods when the rate at which interest on the notes was
calculated at the Maximum Rate, with interest accrued thereon at
the note rate (such carryover interest amounts are referred to as
"LIBOR Carryover Interest Shortfalls"); and
(8) to the owner of the transferor interest, any remaining amounts.
B. Principal Collections:
(1) to the noteholders, the lesser of the outstanding principal
balance of the notes and the Investor Principal Distribution
Amount; and
(2) to the owner of the transferor interest, any remaining amounts.
Certain Definitions
The "Charge-Off Amount" for any Charged-Off HELOC is the amount of the
principal balance that has been written down.
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A "Charged-Off HELOC" is (i) a mortgage loan with a balance that has
been written down on the servicer's servicing system in accordance with its
policies and procedures and (ii) any mortgage loan that is more than 180 days
past due.
The "Closing Date" is March 25, 2004.
The "Excess O/C Amount" for a payment date is the amount by which the
amount of overcollateralization, assuming the full Investor Principal
Distribution Amount was paid on the notes for such payment date, exceeds the
Specified O/C Amount; provided, however, that following the occurrence of a
Rapid Amortization Event the Excess O/C Amount shall be zero.
The "Floating Allocation Percentage" for any payment date is the
percentage equivalent of a fraction with a numerator of the Invested Amount for
the previous payment date (in the case of the first payment date, the Invested
Amount as of the Closing Date) and a denominator of the Pool Balance at the end
of the related Due Period (in the case of the first payment date, the Pool
Balance as of the Cut-Off Date).
For each payment date the "Interest Collections" are amounts collected
during the related Due Period on the HELOCs and allocated to interest in
accordance with the terms of the related Credit Line Agreements, together with
the interest portion of any Purchase Price, Substitution Adjustment Amount and
Transferor Deposit Amount paid during the related Due Period and any Net
Recoveries on HELOCs that were previously Charged-Off HELOCs.
The "Indenture Trustee Fee" for any payment date while The Bank of New
York is the indenture trustee, will be an amount agreed upon between The Bank of
New York and FTBNA.
The "Interest Period" with respect to each payment date and the notes
other than the first payment date, the period from the payment date in the month
preceding the month of such payment date through the day before such payment
date; and with respect to the first payment date, the period from the Closing
Date through April 25, 2004.
The "Invested Amount" for any payment date is the Invested Amount on
the Closing Date reduced by (i) the aggregate amount of Investor Principal
Distribution Amounts (before taking into account O/C Reduction Amounts) up to
and including the related payment date and (ii) the aggregate of Investor
Charge-Off Amounts up to and including such payment date. The Invested Amount on
the Closing Date will be $302,628,574.
The "Investor Charge-Off Amount" for any payment date is the Floating
Allocation Percentage of Charge-Off Amounts incurred during the related Due
Period.
"Investor Interest Collections" for any payment date is the Floating
Allocation Percentage of Net Interest Collections for the related Due Period.
The "Investor Principal Distribution Amount" on every payment date
from the first payment date through the payment date in March 2009, unless a
Rapid Amortization Event has occurred is equal to the excess, if any, of all
Principal Collections received during the related Due Period over the amount of
all additional balances drawn under the mortgage loans during the related Due
Period; and on every payment date after the payment date in March 2009 or if a
Rapid Amortization Event has previously occurred, is equal to all Principal
Collections received during the related Due Period. In each case such amount
will be reduced by the O/C Reduction Amount.
"Net Interest Collections" is an amount equal to the Interest
Collections minus the Servicing Fee.
"Net Recoveries" with respect to a HELOC are equal to the aggregate of
all amounts received upon liquidation of the HELOC, including, without
limitation, insurance proceeds, reduced by related expenses.
The "O/C Reduction Amount" for a payment date is the lesser of the
Excess O/C Amount for such payment date and the Investor Principal Distribution
Amount for such payment date (before taking into account the O/C Reduction
Amount).
The "payment date" in each month will be the 25th day of the month or,
if that day is not a business day, the next business day.
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The "Pool Balance" for any payment date is the aggregate of the
Principal Balances of the HELOCs at the end of the related Due Period.
For each payment date the "Principal Collections" are amounts
collected during the related Due Period on the HELOCs and allocated to principal
in accordance with the terms of the related credit line agreement together with
the principal portion of any Purchase Price, Transferor Deposit Amount or any
Substitution Adjustment Amounts paid during the preceding Due Period.
The "Specified O/C Amount" is the amount set forth in the sale and
servicing agreement.
Interest
Note Rate. Interest will accrue on the unpaid principal balance of the
notes during the related Interest Period at the lesser of (i) a floating rate
equal to LIBOR plus 0.21% and (ii) the Maximum Rate. Interest will be calculated
on the basis of the actual number of days in each Interest Period and a 360-day
year. The rate at which interest accrues on the notes is referred to as the
"note rate". A failure to pay interest on any notes on a payment date and that
continues for five days constitutes an event of default under the indenture.
The "Maximum Rate" for any payment date is equal to the product of (i)
the average of the mortgage loan rates, minus the servicing fee rate, the rate
at which the indenture trustee's fees are calculated, the rate at which the
premium on the Policy is calculated and 25 basis points, for each mortgage loan,
weighted on the basis of the related Principal Balance of each HELOC on the
first day of the related Due Period and converted to a rate based on actual
days/360, multiplied by (ii) a fraction the numerator of which is the Invested
Amount for the previous payment date and the denominator of which is the
principal balance of the notes after taking into account all payments of
principal on such previous payment date.
The "Principal Balance" of a HELOC on any day is equal to the Cut-Off
Date principal balance of the HELOC, plus (i) any additional balances
transferred to the trust in respect of the HELOC, minus (ii) all collections
credited against the principal balance of the HELOC in accordance with the
related credit line agreement prior to that day, and minus (iii) all prior
related Charge-Off Amounts.
With respect to each "LIBOR Determination Date", "LIBOR" is the rate
for deposits in United States dollars for a period of one month which appears on
Telerate Page 3750 as of 11:00 a.m., London time on that date. If the rate does
not appear on Telerate Page 3750, the rate for the LIBOR Determination Date will
be determined on the basis of the rates at which deposits in United States
dollars are offered by the reference banks at approximately 11:00 a.m., London
time, on that date to prime banks in the London interbank market for a period of
one month. The indenture trustee will request the principal London office of
each of the reference banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate for that LIBOR Determination Date will be
the arithmetic mean of the quotations. If fewer than two quotations are provided
as requested, the rate for that LIBOR Determination Date will be the arithmetic
mean of the rates quoted by the reference banks, selected by the servicer, at
approximately 11:00 a.m., New York City time, on that day for loans in United
States dollars to leading European banks for a period of one month.
A "determination date" is, with respect to any payment date, the third
business day preceding such payment date.
A "LIBOR Business Day" is any day other than (i) a Saturday or a
Sunday and (ii) a day on which banking institutions in the State of New York or
in the city of London, England are required or authorized by law to be closed.
A "LIBOR Determination Date" is, with respect to any Interest Period,
the second LIBOR Business Day preceding the first day of such period.
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The Policy
The Policy will be issued by the Note Insurer by the Closing Date
pursuant to the Insurance and Indemnity Agreement (the "Insurance Agreement") to
be dated as of the Closing Date, among the seller, the depositor, the servicer,
the indenture trustee and the Note Insurer.
The following summary of the provisions of the Policy does not purport
to be complete and is qualified in its entirety by reference to the Policy.
The Note Insurer, in consideration of the payment of a premium and
subject to the terms and conditions of the Policy, will unconditionally and
irrevocably agree to pay Insurance Policy Draw Amounts to the indenture trustee
for the benefit of the holders.
For the purposes of the Policy, the following terms have the following
meanings:
"Insurance Policy Draw Amount" for any payment date means an amount
equal to the sum of:
(x) the excess of the Aggregate Investor Interest over the Available
Investor Interest, plus
(y) the Guaranteed Principal Distribution Amount; plus
(z) any Preference Amount to be paid pursuant to the terms of the
Policy on the payment date.
"Guaranteed Payment" for any payment date means the sum of the amounts
set forth in clauses (x) and (y) above.
"Aggregate Investor Interest" for any payment date means the amount to
be distributed to Noteholders as described in clause A(2) under "Description of
the Notes--Payments" pursuant to the terms of the notes, the sale and servicing
agreement and the indenture.
"Available Investor Interest" for any payment date means the Investor
Interest Collections for such payment date remitted to the indenture trustee at
the close of business on or prior to the second business day (or the first
business day, if permitted pursuant to the Sale and Servicing Agreement)
preceding such payment date.
"Guaranteed Principal Distribution Amount" means (a) for any payment
date, other than the maturity date, the amount, if any, by which the Note
Principal Balance (after giving effect to all payments of principal on the notes
on such payment date pursuant to the Sale and Servicing Agreement, but without
giving effect to payments under the Policy to be made on such payment date)
exceeds the Invested Amount for such payment date, and (b) with respect to the
maturity date, the outstanding Note Principal Balance (after giving effect to
all payments of principal on the notes on such date pursuant to the Sale and
Servicing Agreement).
"Note Principal Balance", with respect to any date of determination,
is (a) the original principal balance of the notes on the Closing Date less (b)
the aggregate amounts previously distributed as principal to the Noteholders.
"Notice" means a written notice in the form attached as an exhibit to
the Policy by registered or certified mail or telephonic or telegraphic notice,
subsequently confirmed by written notice delivered via telecopy, telex or hand
delivery from the indenture trustee to the Note Insurer specifying the
information set forth therein.
"Noteholder" means, as to a particular note, the person, other than
the issuer, the seller, the servicer, the depositor, the indenture trustee, the
owner trustee or any subservicer retained by the servicer, who, on the
applicable payment date, is entitled under the terms of such note to a
distribution thereon.
The Note Insurer will pay a Guaranteed Payment with respect to the
notes out of its own funds by 12:00 noon (New York City Time) in immediately
available funds to the indenture trustee on the later of (i) the second business
day following the day on which the Note Insurer shall have received Notice that
a Guaranteed Payment is due in respect of the notes and (ii) the payment date on
which the Guaranteed Payment is payable to the Noteholders pursuant to the Sale
and Servicing Agreement, for disbursement to the Noteholders in the same manner
as other payments with respect to the notes are required to be made. Any Notice
received by the Note Insurer after 12:00
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noon New York City time on a given business day or on any day that is not a
business day shall be deemed to have been received by the Note Insurer on the
next succeeding business day.
Upon such payment, the Note Insurer shall be fully subrogated to the
rights of the Noteholders to receive the amount so paid. The Note Insurer's
obligations with respect to the notes hereunder with respect to each payment
date shall be discharged to the extent funds consisting of the related
Guaranteed Payment are received by the indenture trustee on behalf of the
Noteholders for payment to such Noteholders, as provided in the Sale and
Servicing Agreement and the indenture, whether or not such funds are properly
applied by the indenture trustee.
If any portion or all of any amount that is insured hereunder that was
previously distributed to a Noteholder is recoverable and recovered from such
Noteholder as a voidable preference by a trustee in bankruptcy pursuant to the
U.S. Bankruptcy Code, pursuant to a final non-appealable order of a court
exercising proper jurisdiction in an insolvency proceeding (a "Final Order")
(such recovered amount, a "Preference Amount"), the Note Insurer will pay on the
guarantee described in the third paragraph of this section, an amount equal to
each such Preference Amount by 12:00 noon on the next Payment Date after the
second business day following receipt by the Note Insurer of (w) a certified
copy of the Final Order, (x) an opinion of counsel satisfactory to the Note
Insurer that such order is final and not subject to appeal, (y) an assignment,
in form reasonably satisfactory to the Note Insurer, irrevocably assigning to
the Note Insurer all rights and claims of the indenture trustee and/or such
Noteholder relating to or arising under such Preference Amount and appointing
the Note Insurer as the agent of the indenture trustee and/or such Noteholder in
respect of such Preference Amount, and (z) a Notice appropriately completed and
executed by the indenture trustee or such Noteholder, as the case may be. Such
payment shall be made to the receiver, conservator, debtor-in-possession or
trustee in bankruptcy named in the Final Order and not to the indenture trustee
or Noteholder directly (unless the Noteholder has previously paid such amount to
such receiver, conservator, debtor-in-possession or trustee named in such Final
Order in which case payment shall be made to the indenture trustee for
distribution to the Noteholder upon proof of such payment reasonably
satisfactory to the Note Insurer). Notwithstanding the foregoing, in no event
shall the Note Insurer be (i) required to make any payment under the Policy in
respect of any Preference Amount to the extent such Preference Amount is
comprised of amounts previously paid by the Note Insurer hereunder, or (ii)
obligated to make any payment in respect of any Preference Amount, which payment
represents a payment of the principal amount of any notes, prior to the time the
Note Insurer otherwise would have been required to make a payment in respect of
such principal, in which case the Note Insurer shall pay the balance of the
Preference Amount when such amount otherwise would have been required.
Any of the documents required under clauses (w) through (z) of the
preceding paragraph that are received by the Note Insurer after 2:00 p.m. New
York City time on a given business day or on any day that is not a business day
shall be deemed to have been received by the Note Insurer on the next succeeding
business day. All payments made by the Note Insurer hereunder in respect of
Preference Amounts will be made with the Note Insurer's own funds.
The Policy is non-cancelable for any reason, including nonpayment of
any premium. The premium on the Policy is not refundable for any reason,
including the payment of the notes prior to its maturity. The Policy shall
expire and terminate without any action on the part of the Note Insurer or any
other Person on the date that is the later of (i) the date that is one year and
one day following the date on which the notes shall have been paid in full and
(ii) if any proceeding referenced in the second preceding paragraph has been
commenced on or prior to the date specified in clause (i) above, the 30th day
after the entry of a final, non-appealable order in resolution or settlement of
such proceeding.
The Policy will not cover LIBOR Interest Carryover Amounts, nor does
the Policy guarantee to the holders of the notes any particular rate of
principal payment. In addition, the Policy does not cover shortfalls, if any,
attributable to the liability of the Issuer or the indenture trustee for
withholding taxes, if any, (including interest and penalties in respect of any
liability for withholding taxes). The Policy also does not cover the failure of
the indenture trustee to make any payment required under the Indenture to the
holder of a note.
The Policy is subject to and shall be governed by the laws of the
State of New York. The proper venue for any action or proceeding on the Policy
shall be the County of New York, State of New York. The insurance provided by
the Policy is not covered by the New York Property/Casualty Insurance Security
Fund (New York Insurance Code, Article 76).
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In the event that payments under any note are accelerated, nothing
contained in the Policy shall obligate the Note Insurer to make any payment of
principal or interest on such note on an accelerated basis, unless such
acceleration of payment is at the sole option of the Note Insurer; it being
understood that a payment shortfall in respect of the redemption of any notes by
reason of the redemption of the notes pursuant to the Sale and Servicing
Agreement or the Indenture does not constitute acceleration for the purposes of
the Policy.
Rapid Amortization Events
A "Rapid Amortization Event" is any of the following events:
(a) Net Interest Collections or Principal Collections for any payment
date are not enough to make any payment of principal or interest
in each case that is due on the notes, and such failure continues
for a period of five business days;
(b) the occurrence of certain events of insolvency with respect to
the trust, the depositor or the servicer;
(c) if the aggregate draws under the Policy exceed 1% of the Cut-Off
Date Pool Balance;
(d) the trust becomes subject to regulation by the Commission as an
investment company within the meaning of the Investment Company
Act of 1940, as amended; and
(e) failure on the part of the trust, the depositor, the seller or
the servicer to perform any of its material obligations under the
sale and servicing agreement, the trust agreement or the
indenture.
If any event described in clause (a) or (e) occurs, a Rapid
Amortization Event will occur only if, after the applicable grace period, either
the indenture trustee, the Note Insurer, or the noteholders holding notes
evidencing more than 51% of the aggregate principal amount of the notes, by
written notice to the holder of the transferor interest, the depositor and the
servicer (and to the indenture trustee, if given by the Note Insurer, or the
noteholders) declare that a Rapid Amortization Event has occurred. If any event
described in clauses (b), (c), or (d) occurs, a Rapid Amortization Event will
occur without any notice or other action on the part of the indenture trustee,
the Note Insurer or the noteholders immediately on the occurrence of such event.
Notwithstanding the foregoing, if a conservator, receiver or
trustee-in-bankruptcy is appointed for the servicer or depositor and no Rapid
Amortization Event exists other than the conservatorship, receivership or
insolvency of the depositor, the conservator, receiver or trustee-in-bankruptcy
may have the power to prevent the commencement of a Rapid Amortization Event.
Termination of Trust
The trust will terminate on the payment date following the later of
(a) payment in full of all amounts owing to the Note Insurer, unless the Note
Insurer shall otherwise consent, and (b) the earliest of (i) the payment date
occurring in January 2024, (ii) the final payment or other liquidation of the
last HELOC in the trust and (iii) the servicer's exercise of its right to
purchase the HELOCs as described below under "Optional Termination".
Optional Termination
The HELOCs will be subject to optional repurchase by the servicer on
any payment date on or after the date on which the outstanding principal balance
of the notes is reduced to an amount less than or equal to 10% of the
outstanding principal balance of the notes on the Closing Date. The optional
repurchase price will be equal to the sum of the outstanding principal balance
of the HELOCs, accrued and unpaid interest thereon at the weighted average of
the loan rates through the day preceding the final payment date, any LIBOR
Interest Carryover Amounts that remain unpaid and all amounts due and owing to
the Note Insurer.
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Reports to Securityholders
The indenture trustee will prepare and will make available to the Note
Insurer and each noteholder on each payment date, a statement setting forth for
the notes, among other things:
(i) The Note Principal Balance after all distributions on the
previous payment date and on the related payment date, the Pool
Balance at the beginning of the related Due Period, the original
principal balance of the notes and the Pool Balance of the mortgage
loans on the Cut-Off Date;
(ii) The aggregate amount of Interest Collections and Principal
Collections;
(iii) The amount of Investor Interest Collections and the
Investor Principal Distribution Amount;
(iv) The note rate on the notes for such payment date;
(v) The number of days in the related Interest Period;
(vi) The aggregate amount of additional balances that were
conveyed to the trust during the related Due Period;
(vii) The aggregate Principal Balance and aggregate credit limit
of HELOCs modified pursuant to the sale and servicing agreement, and
the weighted average of the loan rates and the weighted average of the
margins, in each case after giving effect to the modifications;
(viii) The aggregate amount required to be paid by the seller in
respect of repurchases and substitutions of HELOCs;
(ix) The amount to be paid on the notes as interest for the
related payment date and the amount to be paid on the notes as
principal for the related payment date;
(x) The amount, if any, of the outstanding LIBOR Carryover
Interest Shortfall after giving effect to the payments on the related
payment date;
(xi) The amount of the draws under the Policy, if any, to be made
on the related payment date, separately stating the amounts to be paid
in respect of the Guaranteed Principal Payment Amount and the amount
of interest due on the notes for such payment date;
(xii) The amount of any LIBOR Carryover Interest Shortfall paid
on such payment date and remaining LIBOR Carryover Interest
Shortfalls;
(xiii) The amount to be paid to the owner of the transferor
interest in respect of the related payment date;
(xiv) The weighted average of the loan rates and the weighted
average of the maximum loan rates for all of the HELOCs, weighted on
the basis of the Principal Balances of all of the HELOCs at the end of
the related Due Period;
(xv) The weighted average of the margins for each HELOC, weighted
on the basis of the Principal Balance of the HELOC at the end of the
related Due Period;
(xvi) The amount to be paid to the Note Insurer pursuant to the
Insurance Agreement;
(xvii) The amount of the premium to be paid to the Note Insurer
pursuant to the Insurance Agreement;
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(xviii) The Invested Amount (after all distributions on that
payment date), the amount of overcollateralization (after all
distributions on that payment date), the O/C Reduction Amount, the
Excess O/C Amount and the Specified O/C Amount for the payment date;
(xix) The amount of Interest Collections to be paid as principal
to the noteholders on such payment date;
(xx) The number of HELOCs outstanding at the beginning and at the
end of the related Due Period;
(xxi) The Pool Balance as of the end of the related Due Period;
(xxii) The number and aggregate principal balances of HELOCs: (A)
that are 30-59 days, 60-89 days and 90 or more days past due, (B)
secured by mortgaged properties that have been the subject of
foreclosure but have not yet been liquidated as of the end of the
preceding Due Period, (C) that are in foreclosure and (D) with related
borrowers that are the subject of any bankruptcy or insolvency
proceeding;
(xxiii) The Net Recoveries received during the related Due
Period;
(xxiv) The cumulative Investor Charge-Off Amount and the Investor
Charge-Off Amount incurred during the related Due Period; and
(xxv) Whether a Rapid Amortization Event has occurred and, if so,
specifying the Rapid Amortization Events.
In the case of the aggregate amount of Principal Collections received
during the related Due Period, the amount paid on the notes as interest for the
related payment date, the amount paid on the notes as principal for the related
payment date and the Note Principal Balance after all distributions on the
payment date, such amounts shall also be expressed as a dollar amount per
security with a $1,000 denomination.
THE SERVICING AGREEMENT
The servicer shall establish and maintain on behalf of the trust a
collection account for the benefit of the noteholders and the Note Insurer. The
collection account will be an Eligible Account (as defined below). Subject to
the investment provision described in the following paragraphs, within two
business days of receipt by the servicer of amounts in respect of the HELOCs,
excluding amounts representing annual fees, assessments, credit insurance
charges, insurance proceeds to be applied to the restoration or repair of a
mortgaged property or similar items, the servicer will deposit the amounts in
the collection account. Amounts so deposited may be invested in Eligible
Investments, as described in the sale and servicing agreement, maturing no later
than two business days prior to the date on which the amount on deposit in the
collection account is required to be deposited in the distribution account or on
the payment date if approved by the rating agencies.
Notwithstanding the timing of deposits to the collection account
described above, the servicer will maintain possession of the collections on the
HELOCs as part of its general funds until the business day prior to the related
payment date. The servicer will be permitted to do this so long (i) as the
rating of its short-term debt obligations are at least "A-1" by S&P and "P-l" by
Moody's and (ii) no Event of Servicing Termination has occurred which has not
been cured. During this period the servicer will record on a loan payment record
all amounts received in respect of the mortgage loans during each due period.
During any period that the servicer is permitted to maintain possession of the
collections as described in this paragraph, the servicer will, not later than
the third business day prior to each payment date, notify the owner trustee and
the indenture trustee of the amount of collections to be included in Interest
Collections and Principal Collections for the related payment date.
The indenture trustee will establish one or more distribution accounts
into which amounts will be deposited from amounts withdrawn from the collection
account for distribution to noteholders on a payment date. The distribution
account will be an Eligible Account. Amounts on deposit in the distribution
account will be invested in Eligible Investments maturing on or before the
related payment date.
An "Eligible Account" is an account that is maintained at an
institution that is:
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(1) a depository institution (which may be the indenture trustee)
organized under the laws of the United States or any one of the states thereof,
including the District of Columbia (or any domestic branch of a foreign bank)
which at all times (a) has a short-term unsecured debt rating of "P-1" by
Moody's, (b) has a short-term unsecured debt rating of "A-l" by Standard &
Poor's and (c) has its accounts fully insured by the Federal Deposit Insurance
Corporation or maintains trust accounts in a fiduciary capacity, or (2) any
other institution that is acceptable to each rating agency. If so qualified, the
indenture trustee or the servicer may be considered such an institution for the
purpose of this definition.
"Eligible Investments" are specified in the sale and servicing
agreement and are limited to investments which meet the criteria of the rating
agencies from time to time as being consistent with their then current ratings
of the securities.
Modifications to HELOCs
Subject to applicable law, and subject to satisfaction of the
conditions in the sale and servicing agreement, the servicer may change the
terms of a HELOC at any time, including, among other things, increasing the
credit limit of a HELOC or reducing the margin of a HELOC.
Consent to Senior Liens
The servicer, acting as agent for the trust, may permit the placement
of a subsequent senior mortgage on any mortgaged property; provided, however,
that, either (i) the resulting combined loan-to-value ratio is not greater than
the combined loan-to-value ratio at the time the HELOC was originated, or (ii)
certain other limitations relating to the aggregate number of affected HELOCs,
increases in margins and combined loan-to-value ratios are complied with.
The sale and servicing agreement limits the aggregate principal
balance of mortgage loans with respect to which the servicer is permitted to
consent to the placing of a senior lien.
Hazard Insurance
The sale and servicing agreement provides that the servicer will
maintain hazard insurance on the mortgaged properties relating to the HELOCs.
While the terms of the related Credit Line Agreements typically require
borrowers to maintain hazard insurance, the servicer will not monitor the
maintenance of hazard insurance.
The sale and servicing agreement requires the servicer to maintain for
any mortgaged property relating to a HELOC acquired upon foreclosure of a HELOC,
or by deed in lieu of foreclosure, hazard insurance with extended coverage in an
amount equal to the lesser of (1) the maximum insurable value of the mortgaged
property and (2) the outstanding balance of the HELOC plus the outstanding
balance on any mortgage loan senior to the HELOC at the time of foreclosure or
deed in lieu of foreclosure, plus accrued interest and the servicer's good faith
estimate of the related liquidation expenses to be incurred in connection
therewith. The sale and servicing agreement provides that the servicer may
satisfy its obligation to cause hazard policies to be maintained by maintaining
a blanket policy insuring against losses on the mortgaged properties. The
servicer will initially satisfy these requirements by maintaining a blanket
policy. As set forth above, all amounts collected by the servicer, net of any
reimbursements to the servicer, under any hazard policy, except for amounts to
be applied to the restoration or repair of the mortgaged property, will
ultimately be deposited in the collection account.
The standard form of fire and extended coverage policy typically
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm and hail, and the like, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies relating to the HELOCs will be underwritten by
different insurers and therefore will not contain identical terms and
conditions, the basic terms of the policies are dictated by state laws and most
of the policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement, including earthquakes, landslides and mudflows, nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in some cases vandalism. The foregoing list is merely indicative of kinds
of uninsured risks and is not intended to be all-inclusive or an exact
description of the insurance policies relating to the mortgaged properties.
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Realization Upon Defaulted Mortgage Loans
The servicer will foreclose upon or otherwise comparably convert to
ownership mortgaged properties securing the HELOCs that come into default when
in accordance with applicable servicing procedures under the sale and servicing
agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with foreclosure or other conversion, the
servicer will follow practices as it deems necessary or advisable and as are in
keeping with its general servicing activities, provided the servicer will not be
required to expend its own funds in connection with foreclosure or other
conversion, correction of default on a related senior mortgage loan or
restoration of any property unless, in its sole judgment, foreclosure,
correction or restoration will increase net liquidation proceeds. The servicer
will be reimbursed out of liquidation proceeds for advances of its own funds as
liquidation expenses before any net liquidation proceeds are distributed to the
securityholders.
Evidence as to Compliance
The sale and servicing agreement provides for delivery on or before
March 1 of each year, beginning on March 1, 2005, to the indenture trustee and
the Note Insurer of an annual statement signed by an officer of the servicer to
the effect that the servicer has fulfilled its material obligations under the
sale and servicing agreement throughout the preceding fiscal year, except as
specified in such statement.
On or before March 1 of each year, beginning March 1, 2005, the
servicer will furnish a report prepared by a firm of nationally recognized
independent public accountants (who may also render other services to the
servicer) to the indenture trustee pursuant to the sale and servicing agreement.
Events of Servicing Termination
"Events of Servicing Termination" will consist of, among other events,
the following:
(i) any failure by the servicer to deposit in the collection
account or distribution account any deposit required to be made under
the sale and servicing agreement, which failure continues unremedied
for two business days after the giving of written notice of such
failure to the servicer by the indenture trustee, or to the servicer
and the indenture trustee by the Note Insurer or the holders of 25% of
the note principal balance;
(ii) the failure by the servicer to make any required servicing
advance, which failure continues unremedied for a period of 30 days or
any failure by the servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the sale and
servicing agreement that materially and adversely affects the interest
of the noteholders or the Note Insurer and continued unremedied for 30
days after the giving of written notice of such failure to the
servicer by the indenture trustee, or to the servicer and the
indenture trustee by the Note Insurer or the holders of 25% of the
principal balance; or
(iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings relating
to the servicer and certain actions by the servicer indicating
insolvency, reorganization or inability to pay its obligations.
Under the above circumstances, the indenture trustee with the consent
of the Note Insurer or the Note Insurer or the noteholders representing not less
than 51% of the note principal balance (with the consent of the Note Insurer, so
long as no insurer default exists), may deliver written notice to the servicer
terminating all the rights and obligations of the servicer under the sale and
servicing agreement.
Rights Upon an Event of Servicing Termination
Upon the termination of the servicer all of the rights and obligations
of the servicer under the sale and servicing agreement and in and to the HELOCs
will be terminated and the indenture trustee will succeed to all the
responsibilities, duties and liabilities of the servicer under the sale and
servicing agreement and will be entitled to the compensation arrangements and
reimbursements provided in the sale and servicing agreement. In the event that
the indenture trustee is unwilling or unable to act as servicer, it may with the
consent of the Note Insurer, and will, at
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the direction of the Note Insurer appoint, or petition a court of competent
jurisdiction for the appointment of, an established housing and home finance
institution, bank or other mortgage loan or home equity loan servicer having a
net worth of at least $50,000,000 and acceptable to the Note Insurer to act as
successor to the servicer under the servicing agreement; provided such
appointment does not result in the qualification, reduction or withdrawal of the
rating on the notes without regard to the Policy. Pending such appointment the
indenture trustee will be obligated to act in such capacity and to appoint a
successor servicer unless prohibited by law. Such successor will be entitled to
receive the compensation and reimbursements provided in the sale and servicing
agreement (or such other compensation as the trust and such successor may
agree). A receiver or conservator for the servicer may be empowered to prevent
the termination and replacement of the servicer where the only Event of
Servicing Termination that has occurred is described in clause (iii) under
"Events of Servicing Termination."
Amendment
The sale and servicing agreement may be amended from time to time by
the servicer, the trust and the indenture trustee, with the consent of the Note
Insurer, provided that the rating agencies confirm in writing that such
amendment will not result in a downgrading or a withdrawal of the rating then
assigned to the notes (without regard to the Policy).
Matters Regarding the Servicer
Neither the servicer nor any director, officer or employee of the
servicer will be under any liability to the trust or the related noteholders for
any action taken or for refraining from the taking of any action in good faith
under the sale and servicing agreement or for errors in judgment; provided,
however, that neither the servicer nor any director, officer or employee of the
depositor, will be protected against any liability which would otherwise be
imposed by reason of willful malfeasance, bad faith or gross negligence in the
performance of duties or by reason of reckless disregard of its obligations and
duties under the sale and servicing agreement.
THE INDENTURE
The following summary describes all of the material terms of the
indenture.
Events of Default; Rights Upon Event of Default
With respect to the notes, events of default under the indenture will
consist of (each, an "event of default"):
o a default for five days or more in the payment of any interest on
any note;
o a default in the payment of the unpaid principal balance of the
notes on the maturity date for the notes;
o a default in the observance or performance of any covenant or
agreement of the trust made in the indenture or the sale and
servicing agreement and the continuation of the default for a
period of 30 days after notice of the default is given to the
trust by the indenture trustee or to the trust and the indenture
trustee by the holders of at least 51% in principal amount of the
notes then outstanding;
o any representation or warranty made by the trust in the
indenture, the sale and servicing agreement or in any certificate
delivered under the indenture having been incorrect in a material
respect as of the time made, and the breach not having been cured
within 30 days after notice of the breach is given to the trust
by the indenture trustee or to the trust and the indenture
trustee by the holders of at least 51% in principal amount of
notes then outstanding; or
o events of bankruptcy, insolvency, receivership or liquidation of
the trust.
The amount of principal required to be paid to noteholders under the
indenture will usually be limited to amounts on deposit in the distribution
account that are available to be paid as principal in accordance with the
provisions of the sale and servicing agreement described above under
"Description of the Notes--Payments." Therefore, the failure to pay principal on
the notes typically will not result in the occurrence of an event of default
until the maturity date for the notes. If there is an event of default with
respect to a note due to late payment or
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nonpayment of interest due on a note, additional interest will accrue on the
unpaid interest at the interest rate on the note, to the extent lawful until the
interest is paid. The additional interest on unpaid interest shall be due at the
time the interest is paid. If there is an event of default due to late payment
or nonpayment of principal on a note, interest will continue to accrue on the
principal at the interest rate on the note until the principal is paid. If an
event of default should occur and be continuing with respect to the notes, the
Note Insurer, the indenture trustee with the written consent of the Note Insurer
or holders of a majority in principal amount of notes then outstanding with the
written consent of the Note Insurer may declare the principal of the notes to be
immediately due and payable. The declaration may, under some circumstances, be
rescinded by the holders of a majority in principal amount of the notes then
outstanding. If the notes are due and payable following an event of default, the
indenture trustee may institute proceedings to collect amounts due or foreclose
on trust property or exercise remedies as a secured party. If an event of
default occurs and is continuing with respect to the 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 holders of the
notes, if the indenture trustee reasonably believes it will not be adequately
indemnified against the costs, expenses and liabilities which might be incurred
by it in complying with the request. Subject to the provisions for
indemnification and limitations contained in the indenture, the holders of a
majority in principal amount of the outstanding notes will have the right to
direct the time, method and place of conducting any proceeding or any remedy
available to the indenture trustee, and the holders of a majority in principal
amount of the notes then outstanding may, in some cases, waive any default with
respect to the default, except a default in the payment of principal or interest
or a default in respect of a covenant or provision of the indenture that cannot
be modified without the waiver or consent of all the holders of the outstanding
notes.
No holder of a note will have the right to institute any proceeding
with respect to the indenture, unless:
o the holder previously has given the indenture trustee written
notice of a continuing event of default;
o the holders of not less than 25% in principal amount of the
outstanding notes have made written request to the indenture
trustee to institute the proceeding in its own name as indenture
trustee;
o the holder or holders have offered the indenture trustee
reasonable indemnity;
o the indenture trustee has for 60 days failed to institute the
proceeding; and
o no direction inconsistent with the written request has been given
to the indenture trustee during the 60-day period by the holders
of a majority in principal amount of the notes.
In addition, the indenture trustee and the noteholders, by accepting
the notes, will covenant that they will not at any time institute against the
trust any bankruptcy, reorganization or other proceeding under any federal or
state bankruptcy or similar law.
With respect to the trust, neither the indenture trustee nor the owner
trustee in its individual capacity, nor any owner of the transferor interest nor
any of their respective owners, beneficiaries, agents, officers, directors,
employees, affiliates, successors or assigns will, in the absence of an express
agreement to the contrary, be personally liable for the payment of the principal
of or interest on the notes or for the agreements of the trust contained in the
indenture.
Covenants
The indenture will provide that the trust may not consolidate with or
merge into any other entity, unless:
o the entity formed by or surviving the consolidation or merger is
organized under the laws of the United States, any state or the
District of Columbia;
o the entity expressly assumes the trust's obligation to make due
and punctual payments upon the notes and the performance or
observance of any agreement and covenant of the trust under the
indenture;
o no event of default shall have occurred and be continuing
immediately after the merger or consolidation;
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o the trust has been advised that the ratings of the securities
then in effect would not be reduced or withdrawn by any rating
agency as a result of the merger or consolidation; and
o the Note Insurer shall have consented to such action and the
trust has received an opinion of counsel to the effect that the
consolidation or merger would have no material adverse tax
consequence to the trust or to any noteholder.
The trust will not, among other things:
o except as expressly permitted by the indenture, sell, transfer,
exchange or otherwise dispose of any of the assets of the trust;
o claim any credit on or make any deduction from the principal and
interest payable in respect of the notes, other than amounts
withheld under the Code or applicable state law, or assert any
claim against any present or former holder of notes because of
the payment of taxes levied or assessed upon the trust;
o dissolve or liquidate in whole or in part;
o permit the validity or effectiveness of the indenture to be
impaired or permit any person to be released from any covenants
or obligations with respect to the notes under the indenture
except as may be expressly permitted by the indenture;
o permit any lien, charge excise, claim, security interest,
mortgage or other encumbrance to be created on or extended to or
otherwise arise upon or burden the assets of the trust or any
part of the assets of the trust, or any interest in the assets of
the trust or the proceeds of the assets of the trust;
o engage in any activity other than as specified under "The Trust"
in this prospectus supplement; or
o incur, assume or guarantee any indebtedness other than
indebtedness incurred under the notes and the indenture.
Annual Compliance Statement
The trust will be required to file annually with the indenture trustee
a written statement as to the fulfillment of the trust's obligations under the
indenture.
Indenture Trustee's Annual Report
The indenture trustee will be required to mail each year to all
noteholders and the Note Insurer a report relating to any change in its
eligibility and qualification to continue as indenture trustee under the
indenture, any amounts advanced by it under the indenture, the amount, interest
rate and maturity date of any indebtedness owing by the trust to the indenture
trustee in its individual capacity, any change in 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, but if none of those changes have occurred, then no
report shall be required.
Satisfaction and Discharge of Indenture
The indenture will be discharged with respect to the collateral
securing the notes upon the delivery to the indenture trustee for cancellation
of all the notes or, with limitations, upon deposit with the indenture trustee
of funds sufficient for the payment in full of all the notes.
Modification of Indenture
With the consent of the Note Insurer, the rating agencies and the
holders of a majority of the outstanding notes, the trust and the indenture
trustee may execute a supplemental indenture to add provisions to, change in any
manner or eliminate any provisions of, the indenture, or modify, except as
provided below, in any manner the rights
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of the noteholders. Without the consent of the holder of each outstanding note
affected, however, no supplemental indenture will, among other things:
o change the due date of any installment of principal of or
interest on any note or reduce the principal amount of any note,
the interest rate specified on any note or the redemption price
with respect to any note or change any place of payment where or
the coin or currency in which any note or any interest on any
note is payable;
o impair the right to institute suit for the enforcement of
provisions of the indenture regarding payment;
o modify or alter the provisions of the indenture regarding the
voting of notes held by the trust, the seller or an affiliate of
any of them;
o decrease the percentage of the aggregate principal amount of
notes required to amend the sections of the indenture which
specify the applicable percentage of aggregate principal amount
of the notes necessary to amend the indenture or other related
agreements; or
o permit the creation of any lien ranking prior to or on a parity
with the lien of the indenture with respect to any of the
collateral for the notes or, except as otherwise permitted or
contemplated in the indenture, terminate the lien of the
indenture on any collateral for the notes or deprive the holder
of any note of the security afforded by the lien of the
indenture.
The trust and the indenture trustee may also enter into supplemental
indentures with the consent of the Note Insurer, without obtaining the consent
of the noteholders, for the purpose of, among other things, adding any
provisions to or changing in any manner or eliminating any of the provisions of
the indenture or of modifying in any manner the rights of the noteholders;
provided that the action will not materially and adversely affect the interest
of any noteholder. Any such proposed amendment will be deemed to not adversely
affect in any material respect the interests of the noteholders if an opinion of
counsel is received to that effect or if the rating agencies confirm in writing
that such amendment would not result in a reduction of the ratings then assigned
to the notes. In addition, no such supplemental indenture will conflict with the
provisions listed above requiring the consent of each noteholder or, without the
consent of a majority of noteholders, permit the trust to:
o modify the definition of "Eligible Investments" (except as
provided in the indenture to expand the types of Eligible
Investments specified in that definition);
o enter into a derivative contract for the benefit of the
noteholders;
o or increase the transferor's discretion in the selection of
accounts to be transferred to the transferor, or the frequency of
such transfer, under the sale and servicing agreement.
However, the preceding sentence will not prevent the adoption without
noteholder consent of any supplemental indenture that otherwise would require
the consent of a majority of noteholders if such supplemental indenture does not
materially and adversely affect the interest of any noteholder and if the
adoption of that supplemental indenture is necessary to correct manifest errors
in the transaction documents, conform the transaction documents to any
inconsistencies with the prospectus supplement, comply with rating agency
requirements or conform to then-current financial accounting standards, as
described in the indenture. Any such proposed amendment will be deemed to not
adversely affect in any material respect the interests of the noteholders if an
opinion of counsel is received to that effect or if the rating agencies confirm
in writing that such amendment would not result in a reduction of the ratings
then assigned to the notes.
Voting Rights
At all times, the voting rights of noteholders under the indenture
will be allocated among the notes pro rata in accordance with their outstanding
principal balances. Pursuant to the indenture, unless an insurer default exists,
the Note Insurer will be deemed to be the holder of 100% of the outstanding
notes for all purposes, other than with respect to payment on the notes, and
will be entitled to exercise all of the rights of the holders thereunder.
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Matters Regarding the Indenture Trustee, the Depositor and the Seller
Subject to limitations set forth in the indenture, the indenture
trustee and any director, officer, employee or agent of the indenture trustee
shall be indemnified by the trust and held harmless against any loss, liability
or expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the indenture
other than any loss, liability or expense incurred by reason of willful
malfeasance, bad faith or gross negligence in the performance of its duties
under the indenture or by reason of reckless disregard of its obligations and
duties under the indenture. All persons into which the indenture trustee may be
merged or with which it may be consolidated or any person resulting from the
merger or consolidation shall be the successor of the indenture trustee under
each indenture.
THE TRUST AGREEMENT
The following summary describes all of the material terms of the trust
agreement.
Amendment
The trust agreement may be amended by the seller, the depositor and
the owner trustee with the consent of the Note Insurer, but without consent of
the noteholders, to cure any ambiguity, to correct or supplement any provision
or for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the trust agreement or of modifying in any
manner the rights of the noteholders; provided, however, that the action will
not, as evidenced by an opinion of counsel, adversely affect in any material
respect the interests of any noteholders or the Note Insurer. Any such proposed
amendment will be deemed to not adversely affect in any material respect the
interests of the noteholders or the Note Insurer if the rating agencies confirm
in writing that such amendments will not result in a reduction of the ratings
then assigned to the notes, without giving effect to the Policy. The trust
agreement may also be amended by the seller, the depositor and the owner trustee
with the consent of the holders of notes evidencing at least a majority in
principal amount of then outstanding notes and the owner of transferor interest
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the trust agreement or modifying in any
manner the rights of the holders; provided, however, that no such amendment will
be effective unless the Note Insurer consents to such action or such action will
not adversely affect in any material respect the interests of any noteholders or
the Note Insurer, as evidenced by an opinion of counsel or an affirmation of the
ratings of the notes, without giving effect to the Policy.
Matters Regarding the Owner Trustee, the Depositor and the Seller
Neither the owner trustee nor any director, officer or employee of the
depositor, the seller or the owner trustee will be under any liability to the
trust or the related securityholders for any action taken or for refraining from
the taking of any action in good faith under the trust agreement or for errors
in judgment; provided, however, that the owner trustee and any director, officer
or employee of the depositor, the seller or the owner trustee will not be
protected against any liability which would otherwise be imposed by reason of
willful malfeasance, bad faith or gross negligence in the performance of duties
or by reason of reckless disregard of obligations and duties under the trust
agreement. Subject to limitations set forth in the trust agreement, the owner
trustee and any director, officer, employee or agent of the owner trustee shall
be indemnified by the seller and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the trust
agreement other than any loss, liability or expense incurred by reason of
willful malfeasance, bad faith or gross negligence in the performance of its
duties under the trust agreement or by reason of reckless disregard of its
obligations and duties under the trust agreement. All persons into which the
owner trustee may be merged or with which it may be consolidated or any person
resulting from the merger or consolidation shall be the successor of the owner
trustee under the trust agreement.
ADMINISTRATION AGREEMENT
The Bank of New York, in its capacity as administrator, will enter
into the administration agreement with the trust and the owner trustee in which
the administrator will agree, to the extent provided in the administration
agreement, to provide notices and perform other administrative obligations
required by the indenture and the trust agreement.
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THE INDENTURE TRUSTEE
The Bank of New York is the indenture trustee under the indenture. The
mailing address of the indenture trustee is 101 Barclay Street, 8W, New York,
New York 10286, Attention: Corporate Trust Mortgage-Backed Securities Group,
First Horizon ABS Trust 2004-HE1.
THE OWNER TRUSTEE
Wilmington Trust Company is the owner trustee under the trust
agreement. The mailing address of the owner trustee is Rodney Square North, 1100
North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Trust
Administration.
USE OF PROCEEDS
The net proceeds from the sale of the securities will be applied by
the depositor on the closing date towards the purchase price of the HELOCs, the
payment of expenses related to the sale and the purchase of the HELOCs and other
corporate purposes.
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of McKee Nelson LLP, special tax counsel to the trust,
assuming compliance with the Trust Agreement, the Indenture, and the Sale and
Servicing Agreement by the parties to those agreements, for federal income tax
purposes, the trust will not be classified as an association taxable as a
corporation, a publicly traded partnership taxable as a corporation, or as a
taxable mortgage pool and the notes will be treated as debt instruments. Each
beneficial owner of an interest in notes will agree to treat the notes as debt
instruments for federal income tax purposes. Alternative characterizations of
the trust and the notes are, however, possible, and we encourage prospective
investors to consult their tax advisors concerning the tax consequences to them
of an investment in notes.
For a discussion of the tax treatment of interest, original issue
discount, market discount, and bond premium on the notes, see "Material Federal
Income Tax Consequences - Taxation of Debt Securities" in the prospectus.
If the note rate for any payment date is limited to the Maximum Rate,
a beneficial owner of notes will become entitled to receive LIBOR Carryover
Interest Shortfalls on subsequent payment dates to the extent funds are
available on such subsequent payment dates for payment of such amounts. In
effect, interest that accrues on the notes in excess of the Maximum Rate will be
deferred, and, as a result, some or all of the interest accrued on the notes may
not be treated as "qualified stated interest" as that term is defined in the
prospectus under "Material Federal Income Tax Consequences - Taxation of Debt
Securities - Interest and Acquisition Discount." If stated interest payments do
not represent qualified stated interest, they will be taxed as original issue
discount. Nevertheless, for federal income tax reporting purposes, stated
interest on the notes will be treated as qualified stated interest.
It is expected that, assuming stated interest on the notes is
qualified stated interest, based on anticipated offering prices for the notes,
the notes will not be issued with original issue discount.
Solely for purposes of accruing original issue discount and market
discount, if any, and for purposes of amortizing any bond premium, the Sale and
Servicing Agreement will set forth a prepayment assumption and an assumed rate
at which additional balances will be drawn.
For additional information regarding federal income tax consequences,
see "Federal Income Tax Consequences" in the prospectus.
STATE TAX CONSEQUENCES
In addition to the federal income tax consequences described above in
"Federal Income Tax Consequences," potential investors should consider the state
income tax consequences of the acquisition, ownership, and disposition of the
notes. State income tax law may differ substantially from the corresponding
federal tax law,
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and this discussion does not purport to describe any aspect of the income tax
laws of any state. Therefore, we suggest that potential investors consult their
own tax advisors with respect to the various tax consequences of investments in
the securities.
ERISA CONSIDERATIONS
Section 406 of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") and Section 4975 of the Internal Revenue Code of 1986 (the
"Code") prohibit a pension, profit sharing or other employee benefit or other
plan, including an individual retirement account or a Keogh plan, that is
subject to Title I of ERISA or to Section 4975 of the Code from engaging in
transactions involving "plan assets" with persons that are "parties in interest"
under ERISA or "disqualified persons" under the Code with respect to the Plan.
Some governmental plans, although not subject to ERISA or the Code, are subject
to federal, state or local laws ("Similar Law") that impose similar requirements
(those plans subject to ERISA, Section 4975, or Similar Law referred to as
"Plans"). A violation of these "prohibited transaction" rules may generate
excise tax and other liabilities under ERISA and the Code or under Similar Law
for those persons.
ERISA also imposes duties on persons who are fiduciaries of Plans
subject to ERISA, including the requirements of investment prudence and
diversification, and the requirement that the Plan's investments be made in
accordance with the documents governing the Plan. Under ERISA, any person who
exercises any authority or control with respect to the management or disposition
of the assets of a Plan is considered to be a fiduciary of the Plan.
Subject to the considerations discussed in "ERISA Considerations" in
the prospectus, the notes may be purchased by a Plan. A fiduciary of a Plan must
determine that the purchase of a note is consistent with its fiduciary duties
under ERISA and does not result in a nonexempt prohibited transaction as defined
in Section 406 of ERISA or Section 4975 of the Code. Each purchaser of a note
will be deemed to represent that either (i) it is not acquiring the notes with
the assets of a Plan or (ii) its purchase and holding of the note will not cause
a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975
of the Code which is not eligible for exemptive relief under Prohibited
Transaction Class Exemption ("PTCE") 84-14, PTCE 90-1, PTCE 91-38, PTCE 95-60,
PTCE 96-23 or a similar prohibited transaction exemption and does not cause a
non-exempt violation of any similar law. A PTCE may not apply to all prohibited
transactions that could arise in connection with a Plan's investment in the
notes and Plans should be aware that ownership of the trust may change as a
result of a transfer of the transferor interest.
In addition, the fiduciary of any Plan for which the underwriter, the
seller, any trustee, any provider of services to the trust or any of their
affiliates (a) has investment or administrative discretion with respect to Plan
assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to Plan assets for a fee and under an agreement
or understanding that the advice (i) will serve as a primary basis for
investment decisions with respect to the Plan assets and (ii) will be based on
the particular investment needs for the Plan; or (c) is an employer maintaining
or contributing to the Plan should consult with its counsel concerning whether
an investment in the notes may constitute or give rise to a prohibited
transaction before investing in a note.
Any person that proposes to acquire a note on behalf of or with plan
assets of any Plan should consult with counsel concerning the application of the
fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Code or the proposed investment.
LEGAL INVESTMENT CONSIDERATIONS
The notes will not constitute "mortgage related securities" for
purposes of SMMEA. Accordingly, many institutions with legal authority to invest
in mortgage related securities may not be legally authorized to invest in the
notes. No representation is made herein as to whether the notes constitute legal
investments for any entity under any applicable statute, law, rule, regulation
or order. Prospective purchasers are urged to consult with their counsel
concerning the status of the notes as legal investments for such purchasers
prior to investing in notes.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, the depositor has agreed to sell the notes to FTN Financial Capital
Markets, a division of FTBNA, an affiliate of the depositor, the seller and the
servicer, and the underwriter has agreed to purchase all of the notes if any of
the notes are purchased thereby.
It is expected that delivery of the notes will be made only in
book-entry form through the Same Day Funds Settlement System of DTC on or about
March 25, 2004, against payment therefor in immediately available funds.
The depositor has been advised that the underwriter proposes initially
to offer the notes to the public at the offering price set forth on the cover
page of this prospectus supplement. After the initial public offering, such
public offering price may change.
Until the distribution of the notes is completed, the rules of the
Securities and Exchange Commission may limit the ability of the underwriter to
bid for and purchase the notes. As an exception to these rules, the underwriter
is permitted to engage in certain transactions that stabilize the prices of the
notes. Such transactions consist of bids or purchase for the purpose of pegging,
fixing or maintaining the price of such notes.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the depositor nor the underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the notes. In addition, neither the
depositor nor the underwriter makes any representation that the underwriter will
engage in such transactions or that such transactions will not be discontinued
without notice.
After the initial distribution of the notes offered hereby, FTN
Financial Securities Corp. (an affiliate of the depositor, the seller and the
servicer) intends to make a secondary market in the notes offered hereby, but
has no obligation to do so. There can be no assurance that a secondary market
for the notes will develop or, if it does develop, that it will continue or that
it will provide noteholders with a sufficient level of liquidity of investment.
The notes will not be listed on any securities exchange.
This prospectus supplement and the accompanying prospectus may be used
by FTN Financial Securities Corp. in connection with offers and sales of the
notes in market-making transactions at negotiated prices related to prevailing
market prices at the time of sales. FTN Financial Securities Corp. may act as
principal or agent in such transactions. FTN Financial Securities Corp. has no
obligation to make a market in the notes and may discontinue any market-making
activities at any time without notice, in its sole discretion.
The depositor and the servicer have agreed to indemnify the
underwriter against, or make contributions to the underwriter with respect to,
liabilities customarily indemnified against, including liabilities under the
Securities Act of 1933, as amended.
Proceeds to the depositor are expected to be $301,720,116 from the
sale of the notes, before deducting expenses payable by the depositor estimated
to be $450,000.
EXPERTS
The predecessor basis financial statements of Financial Guaranty
Insurance Company as of December 31, 2002 and for each of the years in the
two-year period ended December 31, 2002, have been included in the Form 8-K of
the depositor, which is incorporated by reference in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, which is also incorporated by reference therein, and upon the
authority of said firm as experts in accounting and auditing.
The financial statements of Financial Guaranty Insurance Company as of
December 31, 2003 and for the periods from December 18, 2003 through December
31, 2003, and from January 1, 2003 through December 17, 2003 appearing in the
Form 8-K of the depositor, which is incorporated by reference, have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
included therein and incorporated herein by
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reference. Such financial statements are incorporated herein by reference in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the securities will be passed
upon for the depositor by McKee Nelson, LLP, New York, New York and for the
underwriter by Sidley Austin Brown & Wood LLP, New York, New York. McKee Nelson,
LLP, New York, New York will pass upon certain legal matters on behalf of the
seller.
RATING
It is a condition to issuance that each class of the notes be rated
not lower than "AAA" by S&P and "Aaa" by Moody's. A securities rating addresses
the likelihood of the receipt by noteholders of payments on the HELOCs. The
rating takes into consideration the structural, legal and tax aspects associated
with the notes. The ratings on the securities do not, however, constitute
statements regarding the possibility that noteholders might realize a lower than
anticipated yield. The ratings assigned to the Notes do not address the
likelihood of the receipt by noteholders of any payment in respect of LIBOR
Carryover Interest Shortfalls. The ratings assigned to the notes will depend
primarily upon the creditworthiness of the Note Insurer. Any reduction in a
rating assigned to the financial strength of the Note Insurer below the ratings
initially assigned to the notes may result in a reduction of one or more of the
ratings assigned to the notes. A securities 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 securities rating should be
evaluated independently of similar ratings on different securities.
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INDEX OF DEFINED TERMS
Aggregate Investor Interest.............................................. S-46
Article 69............................................................... S-18
Assignment Preparation Trigger........................................... S-36
Available Investor Interest.............................................. S-46
AVM...................................................................... S-22
Blackstone............................................................... S-18
CACS..................................................................... S-22
Cede..................................................................... I-1
Charged-Off HELOC........................................................ S-44
Charge-Off Amount........................................................ S-43
CIVC..................................................................... S-18
Clearstream.............................................................. S-39
Closing Date............................................................. S-44
CLTV..................................................................... S-20
Code..................................................................... S-59
Credit Line Agreements................................................... S-26
Cut-Off Date............................................................. S-17
Cypress.................................................................. S-18
determination date....................................................... S-45
disqualified persons..................................................... S-59
DTC...................................................................... S-39
Due Period............................................................... S-36
Eligible Account......................................................... S-50
Eligible Investments..................................................... S-51
Eligible Substitute HELOC................................................ S-37
ERISA.................................................................... S-59
ERISA Considerations..................................................... S-59
Euroclear................................................................ S-39
Euroclear Clearance System............................................... S-41
event of default......................................................... S-53
Event of Servicer Termination............................................ S-36
Excess O/C Amount........................................................ S-44
FDIA..................................................................... S-38
FDIC..................................................................... S-38
FGIC Acquisition......................................................... S-18
FICO Score............................................................... S-30
Floating Allocation Percentage........................................... S-44
FTBNA.................................................................... S-20
FTNC..................................................................... S-20
Full Documentation Loan.................................................. S-21
GAAP..................................................................... S-18
GE Capital............................................................... S-18
Guaranteed Payment....................................................... S-46
Guaranteed Principal Distribution Amount................................. S-46
HELOCs................................................................... S-17
Indenture Trustee Fee.................................................... S-44
Index.................................................................... S-25
Insurance Agreement...................................................... S-46
Insurance Policy Draw Amount............................................. S-46
Interest Collections..................................................... S-44
Interest Period.......................................................... S-44
Invested Amount.......................................................... S-44
Investor Charge-Off Amount............................................... S-44
Investor Interest Collections............................................ S-44
Investor Principal Distribution Amount................................... S-44
LIBOR.................................................................... S-45
LIBOR Business Day....................................................... S-45
LIBOR Carryover Interest Shortfalls...................................... S-43
LIBOR Determination Date................................................. S-45
Maximum Rate............................................................. S-45
Moody's.................................................................. S-36
Net Interest Collections................................................. S-44
Net Recoveries........................................................... S-44
Note Principal Balance................................................... S-46
note rate................................................................ S-45
Noteholder............................................................... S-46
Notice................................................................... S-46
O/C Reduction Amount..................................................... S-44
parties in interest...................................................... S-59
payment date............................................................. S-44
plan assets.............................................................. S-59
Plans.................................................................... S-59
PMI...................................................................... S-18
Policy................................................................... S-17
Pool Balance............................................................. S-45
Principal Balance........................................................ S-45
Principal Collections.................................................... S-45
prohibited transaction................................................... S-59
PTCE..................................................................... S-59
Purchase Price........................................................... S-37
Rapid Amortization Event................................................. S-48
rating agencies.......................................................... S-36
S&P...................................................................... S-36
SAP...................................................................... S-18
Servicing Fee............................................................ S-35
Similar Law.............................................................. S-59
Specified O/C Amount..................................................... S-45
Stated Income Loans...................................................... S-22
Substitution Adjustment Amount........................................... S-37
Transferor Deposit Amount................................................ S-37
U.S. Person.............................................................. I-4
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered First
Horizon ABS Notes, Series 2004-HE1 (the "Global Securities") will be available
only in book-entry form. Investors in the Global Securities may hold these
Global Securities through any of DTC, Clearstream or Euroclear. The Global
Securities will be tradeable 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.
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 investors holding Global
Securities through Clearstream or Euroclear and investors holding Global
Securities through DTC participants will be effected on a
delivery-against-payment basis through the respective depositaries of
Clearstream and Euroclear, in those capacities, and other DTC participants.
Although DTC, Clearstream and Euroclear are expected to follow the
procedures described below to facilitate transfers of interests in the Global
Securities among participants of DTC, Clearstream and Euroclear, they are under
no obligation to perform or continue to perform those procedures, and those
procedures may be discontinued at any time. None of the issuer, the indenture
trustee, the depositor or the servicer will have any responsibility for the
performance by DTC, Clearstream and Euroclear or their respective participants
or indirect participants of their respective obligations under the rules and
procedures governing their obligations.
Non-U.S. holders, as described below, of Global Securities will be
subject to U.S. withholding taxes unless the 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. ("Cede") 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 the positions in
accounts as DTC participants.
Investors electing to hold their Global Securities through DTC
participants, rather than through Clearstream or Euroclear accounts, will be
subject to the settlement practices applicable to prior similar issues.
Investors' 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 seller's
accounts are located to ensure that settlement can be made on the desired value
date.
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Transfers between DTC Participants.
Secondary market trading between DTC participants will be settled
using the DTC procedures applicable to similar pass-through note issues in
same-day funds.
Transfers between Clearstream and/or Euroclear Participants.
Secondary market trading between Clearstream participants or Euroclear
participants and/or investors holding Global Securities through them will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
Transfers between DTC seller and Clearstream or Euroclear purchaser.
When Global Securities are to be transferred on behalf of a seller
from the account of a DTC participant to the account of a Clearstream
participant or a Euroclear participant for a purchaser, 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 operator will instruct its respective depositary to receive the
Global Securities against payment. Payment will include interest accrued on the
Global Securities from and including the last payment date to and excluding the
settlement date. Payment will then be made by the respective depositary of the
DTC participant's account against delivery of the Global Securities. After
settlement has been completed, the Global Securities will be credited to the
respective clearing system, and by the clearing system, in accordance with its
usual procedures, to the Clearstream participant's or Euroclear participant's
account. The securities credit will appear the next business 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 from cash on hand. Under this approach, they may take on
credit exposure to Clearstream or Euroclear operator 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. Under this
procedure, Clearstream participants or Euroclear participants receiving Global
Securities for purchasers would incur overdraft charges for one day, to the
extent 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 would tend to offset the amount of
these overdraft charges, although this result will depend on each Clearstream
participant's or Euroclear participant's particular cost of funds.
Since the settlement through DTC will take place during New York
business hours, DTC participants are subject to DTC procedures for transferring
Global Securities to the respective depositary of Clearstream or Euroclear 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 seller settling the sale through a DTC participant, a cross-market
transaction will settle no differently than a sale to a purchaser settling
through a DTC participant.
Finally, intra-day traders that use Clearstream participants or
Euroclear participants to purchase Global Securities from DTC participants or
sellers settling through them for delivery to Clearstream participants or
Euroclear participants should note that these trades will automatically fail on
the sale side unless affirmative action is taken. At least three techniques
should be readily available to eliminate this potential condition:
(a) borrowing Global Securities through Clearstream or Euroclear for
one day, until the purchase side of the intra-day trade is reflected in their
Clearstream or Euroclear accounts, in accordance with the clearing system's
customary procedures;
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(b) borrowing the Global Securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give sufficient time for
such Global Securities to be reflected in the relevant Clearstream or Euroclear
accounts 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.
Transfer 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 Depositary, to a DTC participant. The
seller will send instructions to Clearstream or the Euroclear operator through a
Clearstream participant or Euroclear participant at least one business day prior
to settlement. In these cases Clearstream or Euroclear will instruct the
respective depositary, as appropriate, to deliver the Global Securities to the
DTC participant's account against payment. Payment will include interest accrued
on the Global Securities from and including the last payment date to but
excluding the settlement date. The payment will then be reflected in the account
of the Clearstream participant or Euroclear participant the following business
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 through DTC in New York. 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.
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 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 the beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) the 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 Noteholders of Global Securities that are non-U.S. Persons
and are individuals or entities treated as corporations for U.S. federal tax
purposes 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). More complex rules may apply to other entities. If the
information shown on Form W-8BEN changes, a new W-8BEN must be filed within 30
days of the 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 effectively connected with its
conduct of a trade or business in the United States, can obtain an exemption
from the withholding tax by filing Form W-8ECI (Certificate of Foreign Person's
Claim for Exemption from Withholding on Income Effectively Connected with the
Conduct of a Trade or Business in the United States).
Exemption or reduced rate for non-U.S. Persons resident in treaty
countries (Form W-8BEN).
Non-U.S. Persons that are Noteholders residing in a country that has a
tax treaty with the United States and are individuals or entities treated as
corporations for U.S. federal tax purposes 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). More
complex rules may apply to other entities.
I-3
<Page>
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 (Payer's Request for Taxpayer Identification Number and
Certification).
U.S. Federal Income Tax Reporting Procedure.
The Noteholder of a Global Security or, in the case of a Form W-8ECI
filer, his agent, 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. Except for a more favorable rule applicable to
a Form W-8BEN that retains the U.S. taxpayer identification number of the
Beneficial Owner, Form W-8BEN and Form W-8ECI are effective until the end of the
third succeeding calendar year from the date the form is signed. However, if
information shown on the form changes, a new Form W-8BEN must be filed within 30
days of the change.
The term "U.S. Person" means
o a citizen or resident of the United States,
o an entity treated as a corporation or partnership organized in or
under the laws of the United States, any state of the United
States or the District of Columbia, other than an entity treated
as a partnership that is not treated as a United States person
under any applicable Treasury Department regulations,
o an estate the income of which is includible in gross income for
United States tax purposes, regardless of its source,
o 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, and
o some trusts treated as United States persons before August 20,
1996 that elect to continue to be so treated to the extent
provided in regulations.
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. We
suggest that investors consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
o For complete information about the notes read both this prospectus
supplement and the prospectus. This prospectus supplement must be
accompanied by the prospectus if it is being used to offer and sell the
notes.
The Notes
o the notes are issued by a trust, whose assets consist primarily of a pool
of adjustable rate home equity line of credit loans and property relating
to those loans
o the notes are secured by assets of the trust
o the notes currently have no trading market
o the notes are obligations of the trust only and are not obligations of any
other person
Credit Enhancement
o will be provided in the form of excess interest, overcollateralization and
a note insurance policy issued by Financial Guaranty Insurance Company
I-4
PROSPECTUS
First Horizon Asset Securities Inc.
Depositor
Mortgage and Asset Backed Securities
(Issuable in Series)
You should carefully consider the risk factors beginning on page 6 of this
prospectus
The Trusts
Each trust will be established to hold assets in its trust fund transferred to
it by First Horizon Asset Securities Inc. The assets in each trust fund will be
specified in the prospectus supplement for the particular trust and will
generally consist of:
o first lien mortgage loans secured by one- to four-family residential
properties or participations in that type of loan,
o mortgage pass-through securities issued or guaranteed by Ginnie Mae,
Fannie Mae, or Freddie Mac, or
o private mortgage-backed securities backed by first lien mortgage loans
secured by one- to four-family residential properties or
participations in that type of loan.
o closed-end and/or revolving home equity loans, secured in whole or in
part by first and/or subordinate liens on one- to four-family
residential properties or participations in that type of loan, or
o home improvement installment sale contracts and installment loan
agreements that are secured by first or subordinate liens on one- to
four-family residential properties or participations in those types of
contracts.
The Securities
The securities of a series will consist of certificates which evidence
beneficial ownership of a trust established by the depositor, and/or notes
secured by the assets of a trust fund. The depositor or a trust established by
the depositor will sell the securities pursuant to a prospectus supplement. The
securities will be grouped into one or more series, each having its own distinct
designation. Each series of securities will be issued in one or more classes and
each class will evidence the right to receive a specified portion of future
payments on the assets in the trust fund that the series relates to. A
prospectus supplement for a series will specify all of the terms of the series
and of each of the classes in the series.
Offers of Securities
The securities may be offered to the public through several different methods,
including offerings through underwriters.
The SEC and state securities regulators have not approved or disapproved of
these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
October 30, 2003
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS AND EACH ACCOMPANYING
PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of which may
not apply to a particular series; and
o the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series.
The prospectus supplement will contain information about a particular series
that supplements the information contained in this prospectus, and you should
rely on that supplementary information in the prospectus supplement.
You should rely only on the information in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement.
----------
If you require additional information, the mailing address of our principal
executive offices is First Horizon Asset Securities Inc., 4000 Horizon Way,
Irving, Texas 75063 and the telephone number is (214) 441-4000. For other means
of acquiring additional information about us or a series of securities, see
"Incorporation of Certain Documents by Reference" beginning on page 25.
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TABLE OF CONTENTS
PAGE
RISK FACTORS......................................................................6
THE TRUST FUND...................................................................16
General.......................................................................16
The Loans.....................................................................17
Participation Certificates....................................................20
Agency Securities.............................................................21
Private Mortgage-Backed Securities............................................22
Substitution of Trust Fund Assets.............................................24
AVAILABLE INFORMATION............................................................24
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................24
REPORTS TO SECURITYHOLDERS.......................................................25
USE OF PROCEEDS..................................................................25
THE DEPOSITOR....................................................................25
LOAN PROGRAM.....................................................................25
Underwriting Standards........................................................25
Qualifications of Sellers.....................................................28
Representations by Sellers; Repurchases.......................................28
DESCRIPTION OF THE SECURITIES....................................................30
General.......................................................................30
Distributions on Securities.................................................. 31
Advances......................................................................33
Reports to Securityholders....................................................34
Categories of Classes of Securities...........................................35
Indices Applicable to Floating Rate and Inverse Floating Rate Classes.........37
Book-entry Registration of Securities.........................................41
CREDIT ENHANCEMENT...............................................................45
General.......................................................................45
Subordination.................................................................45
Letter of Credit..............................................................46
Insurance Policies, Surety Bonds and Guaranties...............................46
Over-collateralization........................................................46
Reserve Accounts..............................................................47
Pool Insurance Policies.......................................................48
Special Hazard Insurance Policies.............................................49
Bankruptcy Bonds..............................................................50
Cross Support.................................................................50
Financial Instruments.........................................................51
YIELD AND PREPAYMENT CONSIDERATIONS..............................................51
THE AGREEMENTS...................................................................53
Assignment of the Trust Fund Assets...........................................53
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Payments on Loans; Deposits to Security Account...............................56
Pre-Funding Account.......................................................... 58
Sub-servicing by Sellers......................................................59
Collection Procedures.........................................................59
Hazard Insurance..............................................................60
Realization upon Defaulted Loans..............................................62
Servicing and Other Compensation and Payment of Expenses......................62
Evidence as to Compliance.....................................................63
Certain Matters Regarding the Master Servicer and the Depositor...............63
Events of Default; Rights upon Event of Default...............................64
Amendment.....................................................................66
Termination; Optional Termination.............................................67
The Trustee...................................................................68
LEGAL ASPECTS OF THE LOANS.......................................................68
General.......................................................................68
Foreclosure.................................................................. 69
Environmental Risks...........................................................72
Rights of Redemption..........................................................73
Anti-deficiency Legislation and Other Limitations on Lenders..................73
Due-on-Sale Clauses...........................................................74
Enforceability of Prepayment and Late Payment Fees............................74
Applicability of Usury Laws...................................................75
Home Improvement Contracts....................................................75
Installment Contracts.........................................................76
Servicemembers Civil Relief Act...............................................77
Junior Mortgages and Rights of Senior Mortgagees..............................77
The Title I Program...........................................................78
Consumer Protection Laws......................................................81
Home Ownership and Equity Protection Act of 1994 and Similar State Laws.......81
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.........................................82
General.......................................................................83
Taxation of Debt Securities...................................................84
Taxation of the REMIC and its Holders.........................................88
REMIC Expenses; Single Class REMICs...........................................88
Taxation of the REMIC.........................................................89
Taxation of Holders of Residual Interest Securities...........................90
Administrative Matters........................................................93
Tax Status as a Grantor Trust.................................................94
Sale or Exchange..............................................................96
Miscellaneous Tax Aspects.....................................................96
Tax Treatment of Foreign Investors........................................... 97
Tax Characterization of the Trust Fund as a Partnership.......................98
Tax Consequences to Holders of the Notes......................................98
Tax Consequences to Holders of the Certificates for a Trust Fund
Treated as a Partnership..................................................100
STATE TAX CONSIDERATIONS........................................................103
ERISA CONSIDERATIONS............................................................103
LEGAL INVESTMENT................................................................109
METHOD OF DISTRIBUTION..........................................................110
LEGAL MATTERS...................................................................110
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FINANCIAL INFORMATION...........................................................110
RATING..........................................................................111
ANNEX I.........................................................................112
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RISK FACTORS
You should carefully consider the following information since it identifies
known material sources of risk associated with an investment in the securities.
Limited Source of Payments -- No
Recourse To Sellers, Depositor or
Servicer.......................... The applicable prospectus supplement may
provide that securities will be payable
from other trust funds in addition to
their associated trust fund, but if it
does not, they will be payable solely
from their associated trust fund. If the
trust fund does not have sufficient
assets to distribute the full amount due
to you as a securityholder, your yield
will be impaired, and perhaps even the
return of your principal may be
impaired, without your having recourse
to anyone else.
Furthermore, at the times specified in
the applicable prospectus supplement,
some assets of the trust fund may be
released and paid out to other people,
such as the depositor, a servicer, a
credit enhancement provider, or any
other person entitled to payments from
the trust fund. Those assets will no
longer be available to make payments to
you. Those payments are generally made
after other specified payments that may
be set forth in the applicable
prospectus supplement have been made.
You will not have any recourse against
the depositor or any servicer if you do
not receive a required distribution on
the securities. Nor will you have
recourse against the assets of the trust
fund of any other series of securities.
The securities will not represent an
interest in the depositor, any servicer,
any seller to the depositor, or anyone
else except the trust fund. The only
obligation of the depositor to a trust
fund comes from certain representations
and warranties made by it about assets
transferred to the trust fund. If these
representations and warranties turn out
to be untrue, the depositor may be
required to repurchase some of the
transferred assets. First Horizon Asset
Securities Inc., which is the depositor,
does not have significant assets and is
unlikely to have significant assets in
the future. So if the depositor were
required to repurchase a loan because of
a breach of a representation, its only
sources of funds for the repurchase
would be:
o funds obtained from enforcing a
corresponding obligation of a
seller or originator of the loan,
or
o funds from a reserve fund or
similar credit enhancement
established to pay for loan
repurchases.
The only obligations of the master
servicer to a trust fund (other than its
master servicing obligations) come from
certain representations and warranties
made by it in connection with its loan
servicing activities. If these
representations and warranties turn out
to be untrue, the master servicer may be
required to repurchase or substitute for
some of the loans. However, the master
servicer may not have the financial
ability to make the required repurchase
or substitution.
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The only obligations to a trust fund of
a seller of loans to the depositor comes
from certain representations and
warranties made by it in connection with
its sale of the loans and certain
document delivery requirements. If these
representations and warranties turn out
to be untrue, or the seller fails to
deliver required documents, it may be
required to repurchase or substitute for
some of the loans. However, the seller
may not have the financial ability to
make the required repurchase or
substitution.
Credit Enhancement May Not
Be Sufficient To Protect You
from Losses....................... Credit enhancement is intended to reduce
the effect of loan losses. But credit
enhancements may benefit only some
classes of a series of securities and
the amount of any credit enhancement
will be limited as described in the
applicable prospectus supplement.
Furthermore, the amount of a credit
enhancement may decline over time
pursuant to a schedule or formula or
otherwise, and could be depleted from
payments or for other reasons before the
securities covered by the credit
enhancement are paid in full. In
addition, a credit enhancement may not
cover all potential sources of loss. For
example, a credit enhancement may or may
not cover fraud or negligence by a loan
originator or other parties. Also, the
trustee may be permitted to reduce,
substitute for, or even eliminate all or
a portion of a credit enhancement so
long as the rating agencies that have
rated the securities at the request of
the depositor indicate that the
reduction would not cause them to change
adversely their rating of the
securities.
Consequently, securityholders may suffer
losses even though a credit enhancement
exists and its provider does not
default.
Nature of Mortgages Junior
Status of Liens Securing Home
Equity Loans Could Adversely
Affect You........................ The mortgage and deeds of trust securing
the home equity loans will be primarily
junior liens subordinate to the rights
of the mortgagee under the related
senior mortgage(s) or deed(s) of trust.
Accordingly, the proceeds from any
liquidation, insurance or condemnation
proceeds will be available to satisfy
the outstanding balance of the junior
lien only to the extent that the claims
of the related senior mortgagees have
been satisfied in full, including any
related foreclosure costs. In addition,
if a junior mortgagee forecloses on the
property securing a junior mortgage, it
forecloses subject to any senior
mortgage and must take one of the
following steps to protect its interest
in the property:
o pay the senior mortgage in full at
or prior to the foreclosure sale,
or
o assume the payments on the senior
mortgage in the event the mortgagor
is in default under the senior
mortgage.
The trust fund may effectively be
prevented from foreclosing on the
related property since it will have no
funds to satisfy any senior mortgages or
make payments due to any senior
mortgagees.
Some states have imposed legal limits on
the remedies of a secured
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lender in the event that the proceeds of
any sale under a deed of trust or other
foreclosure proceedings are insufficient
to pay amounts owed to that secured
lender. In some states, including
California, if a lender simultaneously
originates a loan secured by a senior
lien on a particular property and a loan
secured by a junior lien on the same
property, that lender as the holder of
the junior lien may be precluded from
obtaining a deficiency judgment with
respect to the excess of:
o the aggregate amount owed under
both the senior and junior loans
over
o the proceeds of any sale under a
deed of trust or other foreclosure
proceedings.
See "Legal Aspects of the Loans --
Anti-Deficiency Legislation; Bankruptcy
Laws; Tax Liens."
Declines in Property Values May
Adversely Affect You.............. The value of the properties underlying
the loans held in the trust fund may
decline over time. Among the factors
that could adversely affect the value of
the properties are:
o an overall decline in the
residential real estate market in
the areas in which they are
located,
o a decline in their general
condition from the failure of
borrowers to maintain their
property adequately, and
o natural disasters that are not
covered by insurance, such as
earthquakes and floods.
In the case of home equity loans,
declining property values could diminish
or extinguish the value of a junior
mortgage before reducing the value of a
senior mortgage on the same property.
If property values decline, the actual
rates of delinquencies, foreclosures,
and losses on all underlying loans could
be higher than those currently
experienced in the mortgage lending
industry in general. These losses, to
the extent not otherwise covered by a
credit enhancement, will be borne by the
holder of one or more classes of
securities.
Delays In Liquidation May Adversely
Affect You........................ Even if the properties underlying the
loans held in the trust fund provide
adequate security for the loans,
substantial delays could occur before
defaulted loans are liquidated and their
proceeds are forwarded to investors.
Property foreclosure actions are
regulated by state statutes and rules
and are subject to many of the delays
and expenses of other lawsuits if
defenses or counterclaims are made,
sometimes requiring several years to
complete. Furthermore, in some states if
the proceeds of the foreclosure are
insufficient to repay the loan, the
borrower is not liable for the deficit.
Thus, if a borrower defaults, these
restrictions may impede the trust's
ability to dispose of the property and
obtain sufficient proceeds to repay the
loan in full.
In addition, the servicer will be
entitled to deduct from liquidation
proceeds all expenses reasonably
incurred in attempting to recover on the
defaulted loan, including legal fees and
costs, real estate
-8-
taxes, and property maintenance and
preservation expenses.
In addition, the servicer will be
entitled to deduct from liquidation
proceeds all expenses reasonably
incurred in attempting to recover on the
defaulted loan, including legal fees and
costs, real estate taxes, and property
maintenance and preservation expenses.
Disproportionate Effect of
Liquidation Expenses May
Adversely Affect You.............. Liquidation expenses of defaulted loans
generally do not vary directly with the
outstanding principal balance of the
loan at the time of default. Therefore,
if a servicer takes the same steps for a
defaulted loan having a small remaining
principal balance as it does for a
defaulted loan having a large remaining
principal balance, the amount realized
after expenses is smaller as a
percentage of the outstanding principal
balance of the small loan than it is for
the defaulted loan having a large
remaining principal balance.
Consumer Protection Laws May
Adversely Affect You.............. Federal, state and local laws
extensively regulate various aspects of
brokering, originating, servicing and
collecting mortgage loans. Among other
things, these laws may regulate interest
rates and other charges, require
disclosure, impose financial privacy
requirements, mandate specific business
practices, and prohibit unfair and
deceptive trade practices. In addition,
licensing requirements may be imposed on
persons that broker, originate, service
or collect mortgage loans. Additional
requirements may be imposed under
federal, state or local laws on
so-called "high cost" mortgage loans,
which typically are defined as loans
that have interest rates or origination
costs in excess of prescribed levels.
These laws may limit certain loan terms,
such as prepayment penalties, or the
ability of a creditor to refinance a
loan unless it is in the borrower's
interest. In addition, certain of these
laws may allow claims against loan
brokers or mortgage originators,
including claims based on fraud or
misrepresentation, to be asserted
against person acquiring the mortgage
loans, such as the trust fund.
The federal laws that may apply to loans
held in the trust fund include the
following:
o the Truth in Lending Act and
Regulation Z promulgated under that
act, which require certain
disclosures to the borrowers
regarding the terms of the
residential loans;
o the Equal Credit Opportunity Act
and Regulation B promulgated under
that act, 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 borrower's credit experience;
and
o the Home Equity Loan Consumer
Protection Act of 1988, which
requires additional disclosures,
limits changes that may be made to
the loan documents without the
-9-
borrower's consent. This act also
restricts a lender's ability to
declare a default or to suspend or
reduce a borrower's credit limit to
certain enumerated events.
Certain mortgage loans may be
subject to the Home Ownership and
Equity Protection Act of 1994. The
provisions of this act may:
o impose additional disclosure and
other requirements on creditors
with respect to non purchase money
mortgage loans with high interest
rates or high up-front fees and
charges;
o impose specific statutory
liabilities on creditors who fail
to comply with their provisions;
and
o affect the enforceability of the
related loans.
In addition, any assignee of the
creditor, including the applicable trust
fund, would generally be subject to all
claims and defenses that the consumer
could assert against the creditor,
including, without limitation, the right
to rescind the mortgage loan.
The home improvement contracts are also
subject to the so-called holder in due
course rules which comprise the
Preservation of Consumers' Claims and
Defenses regulations of the Federal
Trade Commission and other similar
federal and state statutes and
regulations. These laws
o protect the homeowner from
defective craftsmanship or
incomplete work by a contractor;
o permit the obligated party to
withhold payment if the work does
not meet the quality and durability
standards agreed to by the
homeowner and the contractor; and
o subject any person to whom the
seller assigns its consumer credit
transaction to all claims and
defenses which the obligor in a
credit sale transaction could
assert against the seller of the
goods.
Some violations of these federal laws
may limit the ability to collect the
principal or interest on the loans held
in the trust fund, and in addition could
subject the trust fund to damages and
administrative enforcement. Losses on
loans from the application of those laws
that are not otherwise covered by a
credit enhancement will be borne by the
holders of one or more classes of
securities.
Losses on Balloon Payment Mortgages
Are Borne by You.................. Some of the mortgage loans held in the
trust fund may not be fully amortizing
over their terms to maturity and, thus,
will require substantial principal
payments (that is, balloon payments) at
their stated maturity. Loans with
balloon payments involve a greater
degree of risk than fully amortizing
loans because typically the borrower
must be able to refinance the loan or
sell the property to make the balloon
payment at maturity. The ability of a
borrower to do this will depend on
factors such as mortgage rates at the
time of sale or refinancing, the
borrower's equity in the property, the
relative strength of the local housing
market, the financial condition of the
borrower, and tax laws. Losses on these
loans that are not
-10-
otherwise covered by a credit
enhancement will be borne by the holders
of one or more classes of certificates.
Your Risk of Loss May Be Higher than
You Expect If Your Securities Are
Backed by Loans that Were
Underwritten to Standards which do
not Conform to the Standards of
Freddie Mac or Fannie Mae......... The trust fund may also include loans
that were originated under standards
that were less stringent than the
standards generally acceptable to
Freddie Mac and Fannie Mae with regard
to the borrower's credit standing and
repayment ability. The related borrowers
may have payment histories and
debt-to-income ratios which would not
satisfy Freddie Mac and Fannie Mae
underwriting guidelines and may have a
record of major derogatory credit items
such as outstanding judgments or prior
bankruptcies. On a case by case basis,
the related seller may determine that,
based upon compensating factors, a
prospective borrower not strictly
qualifying under its applicable
underwriting risk category guidelines
warrants an underwriting exception.
As a result of the application of less
stringent underwriting standards,
certain mortgage loans in a mortgage
pool 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 a more traditional
manner. Furthermore, changes in the
values of the related mortgaged
properties may have a greater effect on
the delinquency, foreclosure, bankruptcy
and loss experience of these mortgage
loans than on mortgage loans originated
in a more traditional manner. No
assurance can be given that the values
of the related mortgage properties have
remained or will remain at the levels in
effect on the dates of origination of
the related mortgage loans.
Your Risk of Loss May Be Higher than
You Expect If Your Securities Are
Backed by Partially Unsecured Home
Equity Loans...................... The trust fund may also include home
equity loans that were originated with
loan-to-value ratios or combined
loan-to-value ratios in excess of the
value of the related mortgaged property.
Under these circumstances, the trust
fund could be treated as a general
unsecured creditor as to any unsecured
portion of any related loan. In the
event of a default under a loan that is
unsecured in part, the trust fund will
have recourse only against the
borrower's assets generally for the
unsecured portion of the loan, along
with all other general unsecured
creditors of the borrower.
The Prepayment Rate on Home Equity
Loans and Home Improvement
Contracts is Uncertain............ Home equity loans and home improvement
contracts have been originated in
significant volume only during the past
few years and the depositor is not aware
of any publicly available studies or
statistics on the rate of prepayment of
these types of loans.
-11-
Generally, if prevailing interest rates
fall significantly below the coupon
rates on the loans, the loans are likely
to be subject to higher prepayment rates
than if prevailing rates remain at or
above the coupon rates on the loans.
Conversely, if prevailing interest rates
rise significantly above the coupon rate
on the home equity loans, the rate of
prepayments is likely to decrease. The
average life of your securities and, if
purchased at other than par, the yields
realized by you will be sensitive to
levels of payment (including
prepayments) on the loans.
In general, if you purchase a security
at a premium to the outstanding
principal amount of the security, the
yield on your security may be adversely
affected by a higher than anticipated
level of prepayments of the loans.
Conversely, if you purchase a security
at a discount to the outstanding
principal balance of the security, the
yield on your security may be adversely
affected by a lower than anticipated
level of prepayments.
You May be Unable to Reinvest
Distributions in Comparable
Investments....................... Asset-backed securities usually produce
more returns of principal to investors
when market interest rates fall below
the interest rates on the loans and
produce less returns on principal when
market interest rates rise above the
interest rates on the loans. If
borrowers refinance their loans as a
result of lower interest rates, you will
receive an unanticipated payment of
principal. As a result, you are likely
to receive more money to reinvest at a
time when other investments generally
are producing a lower yield than that on
the securities, and are likely to
receive less money to reinvest when
other investments generally are
producing a higher yield than that on
the securities. You will bear the risk
that the timing and amount of
distributions on your securities will
prevent you from obtaining your desired
yield.
You Could Be Adversely Affected by
Violations of Environmental
Laws.............................. Federal, state, and local laws and
regulations impose a wide range of
requirements on activities that may
affect the environment, health, and
safety. In some circumstances, these
laws and regulations impose obligations
on owners or operators of residential
properties such as those that secure the
loans held in the trust fund. Failure to
comply with these laws and regulations
can result in fines and penalties that
could be assessed against the trust as
owner of the related property.
In some states, a lien on the property
due to contamination has priority over
the lien of an existing mortgage. Also,
a mortgage lender may be held liable as
an "owner" or "operator" for costs
associated with the release of petroleum
from an underground storage tank under
some circumstances. If the trust is
considered the owner or operator of a
property, it will suffer losses as a
result of any liability imposed for
environmental hazards on the property.
Ratings of the Securities Do Not
Assure Their Payment.............. Any class of securities issued under
this prospectus and the accompanying
prospectus supplement may be rated by
one or more nationally recognized rating
agencies. A rating is based on the
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adequacy of the value of the trust
assets and any credit enhancement for
that class, and reflects the rating
agency's assessment of how likely it is
that holders of the class of securities
will receive the payments to which they
are entitled. A rating does not
constitute an assessment of how likely
it is that principal prepayments on the
underlying loans will be made, the
degree to which the rate of prepayments
might differ from that originally
anticipated, or the likelihood that the
securities will be redeemed early. A
rating is not a recommendation to
purchase, hold, or sell securities
because it does not address the market
price of the securities or the
suitability of the securities for any
particular investor.
A rating may not remain in effect for
any given period of time and the rating
agency could lower or withdraw the
rating entirely in the future. For
example, the rating agency could lower
or withdraw its rating due to:
o a decrease in the adequacy of the
value of the trust assets or any
related credit enhancement,
o an adverse change in the financial
or other condition of a credit
enhancement provider, or
o a change in the rating of the
credit enhancement provider's
long-term debt.
The amount, type, and nature of credit
enhancement established for a class of
securities will be determined on the
basis of criteria established by each
rating agency rating classes of the
securities. These criteria are sometimes
based upon an actuarial analysis of the
behavior of similar loans in a larger
group. That analysis is often the basis
upon which each rating agency determines
the amount of credit enhancement
required for a class. The historical
data supporting any actuarial analysis
may not accurately reflect future
experience, and the data derived from a
large pool of similar loans may not
accurately predict the delinquency,
foreclosure, or loss experience of any
particular pool of mortgage loans.
Mortgaged properties may not retain
their values. If residential real estate
markets experience an overall decline in
property values such that the
outstanding principal balances of the
loans held in a particular trust fund
and any secondary financing on the
related mortgaged properties become
equal to or greater than the value of
the mortgaged properties, the rates of
delinquencies, foreclosures, and losses
could be higher than those now generally
experienced in the mortgage lending
industry. In addition, adverse economic
conditions may affect timely payment by
mortgagors on their loans whether or not
the conditions affect real property
values and, accordingly, the rates of
delinquencies, foreclosures, and losses
in any trust fund. Losses from this that
are not covered by a credit enhancement
will be borne, at least in part, by the
holders of one or more classes of
securities.
You May Have Difficulty Reselling
Your Securities Due to a Lack of a
Secondary Market, Fluctuating
Market Values or Periods of
Illiquidity....................... No market for any of the securities will
exist before they are issued. We cannot
assure you that a secondary market will
develop or, if it develops, that it will
continue. Consequently, you may not be
able
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to sell your securities readily or at
prices that will enable you to realize
your desired return or yield to
maturity. 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
mortgage and 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.
Illiquidity can also have an adverse
effect on the price of securities that
have been structured to support other
classes of certificates or that have
been structured to meet the investment
requirements of limited categories of
investors. For example, a particular
investor may require a security with a
specified maturity date, a call
protection feature, or a specific type
of amortization feature. The unique
nature of the security may inhibit its
marketability to other investors.
Book-entry Registration Limited
Liquidity ........................ Securities issued in book-entry form may
have only limited liquidity in the
resale market, since investors may be
unwilling to purchase securities for
which they cannot obtain physical
instruments.
Limit on Ability to Transfer or
Pledge............................ Transactions in book-entry securities
can be effected only through The
Depository Trust Company, its
participating organizations, its
indirect participants, and some banks.
Therefore, your ability to transfer or
pledge securities issued in book-entry
form may be limited.
Delays in Distributions.............. You may experience some delay in the
receipt of distributions on book-entry
securities since the distributions will
be forwarded by the trustee to The
Depository Trust Company for it to
credit the accounts of its participants.
In turn, these participants will then
credit the distributions to your account
either directly or indirectly through
indirect participants.
Bankruptcy or Insolvency May Affect
the Timing and Amount of
Distributions on The Securities... The seller and the depositor will treat
the transfer of the loans held in the
trust fund by the seller to the
depositor as a sale for accounting
purposes. The depositor and the trust
fund will treat the transfer of the
loans from the depositor to the trust
fund as a sale for accounting purposes.
If these characterizations are correct,
then if the seller were to become
bankrupt, the loans would not be part of
the seller's bankruptcy estate and would
not be available to the seller's
creditors. On the other hand, if the
seller becomes bankrupt, its bankruptcy
trustee or one of its creditors may
attempt to recharacterize the sale of
the loans as a borrowing by the seller,
secured by a pledge of the loans.
Presenting this position to a bankruptcy
court could prevent timely payments on
the securities and even reduce the
payments on the securities. Similarly,
if the characterizations of the
transfers as sales are correct, then if
the depositor were to become bankrupt,
the loans would not be part of the
depositor's bankruptcy estate and would
not be available to the
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depositor's creditors. On the other
hand, if the depositor becomes bankrupt,
its bankruptcy trustee or one of its
creditors may attempt to recharacterize
the sale of the loans as a borrowing by
the depositor, secured by a pledge of
the loans. Presenting this position to a
bankruptcy court could prevent timely
payments on the securities and even
reduce the payments on the securities.
If the master servicer becomes bankrupt,
the bankruptcy trustee may have the
power to prevent the appointment of a
successor master servicer. The period
during which cash collections may be
commingled with the master servicer's
own funds before each distribution date
for securities will be specified in the
applicable prospectus supplement. If the
master servicer becomes bankrupt and
cash collections have been commingled
with the master servicer's own funds for
at least ten days, the trust fund will
likely not have a perfected interest in
those collections. In this case the
trust might be an unsecured creditor of
the master servicer as to the commingled
funds and could recover only its share
as a general creditor, which might be
nothing. Collections commingled less
than ten days but still in an account of
the master servicer might also be
included in the bankruptcy estate of the
master servicer even though the trust
may have a perfected security interest
in them. Their inclusion in the
bankruptcy estate of the master servicer
may result in delays in payment and
failure to pay amounts due on the
securities.
Federal and state statutory provisions
affording protection or relief to
distressed borrowers may affect the
ability of the secured mortgage lender
to realize upon its security in other
situations as well. For example, in a
proceeding under the federal Bankruptcy
Code, a lender may not foreclose on a
mortgaged property without the
permission of the bankruptcy court and
in some instances a bankruptcy court may
allow a borrower to reduce the monthly
payments, change the rate of interest,
and alter the mortgage loan repayment
schedule for under collateralized
mortgage loans. The effect of these
types of proceedings can be to cause
delays in receiving payments on the
loans underlying securities and even to
reduce the aggregate amount of payments
on the loans underlying securities.
The Principal Amount of Securities
May Exceed the Market Value of the
Trust Fund Assets................. The market value of the assets relating
to a series of securities at any time
may be less than the principal amount of
the securities of that series then
outstanding, plus accrued interest.
After an event of default and a sale of
the assets relating to a series of
securities, the trustee, the master
servicer, the credit enhancer, if any,
and any other service provider specified
in the related prospectus supplement
generally will be entitled to receive
the proceeds of that sale to the extent
of unpaid fees and other amounts owing
to them under the related transaction
document prior to distributions to
securityholders. Upon any such sale, the
proceeds may be insufficient to pay in
full the principal of and interest on
the securities of the related series.
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Some capitalized terms are used in this prospectus to assist you in
understanding the terms of the securities. The capitalized terms used in this
prospectus are defined on the pages indicated under the caption "Index of
Defined Terms" beginning on page 118.
THE TRUST FUND
General
The securities of each series will represent interests in the assets of the
related trust fund, and the notes of each series will be secured by the pledge
of the assets of the related trust fund. The trust fund for each series will be
held by the trustee for the benefit of the related securityholders. Each trust
fund will consist of the trust fund assets (the "Trust Fund Assets") consisting
of a pool comprised of loans as specified in the related prospectus supplement,
together with payments relating to those loans as specified in the related
prospectus supplement. (1) The pool will be created on the first day of the
month of the issuance of the related series of securities or another date as may
be specified in the related prospectus supplement. The securities will be
entitled to payment from the assets of the related trust fund or funds or other
assets pledged for the benefit of the securityholders, as specified in the
related prospectus supplement and will not be entitled to payments in respect of
the assets of any other trust fund established by the depositor.
The Trust Fund Assets will be acquired by the depositor, either directly or
through affiliates, from originators or sellers which may be affiliates of the
depositor (the "Sellers"), and conveyed without recourse by the depositor to the
related trust fund. Loans acquired by the depositor will have been originated in
accordance with the underwriting criteria specified below under "Loan Program --
Underwriting Standards" or as otherwise described in the related prospectus
supplement. See "Loan Program -- Underwriting Standards."
The depositor will cause the Trust Fund Assets to be assigned to the
trustee named in the related prospectus supplement for the benefit of the
holders of the securities of the related series. The master servicer named in
the related prospectus supplement will service the Trust Fund Assets, either
directly or through other servicing institutions called sub-servicers, pursuant
to a pooling and servicing agreement (each, a "Pooling and Servicing Agreement")
among the depositor, the master servicer and the trustee with respect to a
series consisting of certificates, or a sale and servicing agreement (each, a
"Sale and Servicing Agreement") among the trustee, the seller, the issuer, the
depositor and the master servicer with respect to a series consisting of
certificates and notes, and will receive a fee for those services. See "Loan
Program" and "The Agreements." With respect to loans serviced by the master
servicer through a sub-servicer, the master servicer will remain liable for its
servicing obligations under the related Agreement as if the master servicer
alone were servicing the loans.
As used in this prospectus, "Agreement" means, with respect to a series
consisting of certificates, the Pooling and Servicing Agreement, and with
respect to a series consisting of certificates and notes, the Trust Agreement,
the Indenture (as defined below) and the Sale and Servicing Agreement, as the
context requires.
If so specified in the related prospectus supplement, a trust fund relating
to a series of securities may be a statutory trust formed under the laws of the
state specified in the related prospectus supplement pursuant to a trust
agreement (each, a "Trust Agreement") between the depositor and the trustee of
the trust fund.
With respect to each trust fund, prior to the initial offering of the
related series of securities, the trust fund will have no assets or liabilities.
No trust fund is expected to engage in any activities other than acquiring,
managing and holding of the related Trust Fund Assets and other assets
contemplated in this prospectus and in the related prospectus supplement and the
proceeds thereof, issuing securities and making payments and distributions
- ----------
(1) Whenever the terms pool, certificates, notes and securities are used in this
prospectus, those terms will be considered to apply, unless the context
indicates otherwise, to one specific pool and the securities of one series
including the certificates representing undivided interests in, and/or notes
secured by the assets of, a single trust fund consisting primarily of the loans
in that pool. Similarly, the term "Pass-Through Rate" will refer to the
pass-through rate borne by the certificates and the term interest rate will
refer to the interest rate borne by the notes of one specific series, as
applicable, and the term trust fund will refer to one specific trust fund.
-16-
thereon and certain related activities. No trust fund is expected to have any
source of capital other than its assets and any related credit enhancement.
The applicable prospectus supplement may provide for additional obligations
of the depositor, but if it does not, the only obligations of the depositor with
respect to a series of securities will be to obtain certain representations and
warranties from the sellers and to assign to the trustee for that series of
securities the depositor's rights with respect to those representations and
warranties. See "The Agreements -- Assignment of the Trust Fund Assets." The
obligations of the master servicer with respect to the loans will consist
principally of its contractual servicing obligations under the related Agreement
(including its obligation to enforce the obligations of the sub-servicers or
sellers, or both, as more fully described in this prospectus under "Loan Program
- -- Representations by Sellers; Repurchases" and "The Agreements -- Sub-Servicing
By Sellers" and " -- Assignment of the Trust Fund Assets") and its obligation,
if any, to make certain cash advances in the event of delinquencies in payments
on or with respect to the loans in the amounts described in this prospectus
under "Description of the Securities -- Advances." The obligations of the master
servicer to make advances may be subject to limitations, to the extent provided
in this prospectus and in the related prospectus supplement.
The following is a brief description of the assets expected to be included
in the trust funds. If specific information respecting the Trust Fund Assets is
not known at the time the related series of securities initially is offered,
more general information of the nature described below will be provided in the
related prospectus supplement, and specific information will be set forth in a
report on Form 8-K to be filed with the Securities and Exchange Commission after
the initial issuance of the securities (the "Detailed Description"). A copy of
the Agreement with respect to each series of securities will be attached to the
Form 8-K and will be available for inspection at the corporate trust office of
the trustee specified in the related prospectus supplement. A schedule of the
loans relating to the series will be attached to the Agreement delivered to the
trustee upon delivery of the securities. No more than 5% of the loans relative
to the pool principal balance as of the related cut-off date will deviate from
the loan characteristics described in the related prospectus supplement.
The Loans
General. Loans will consist of single family mortgage loans, home equity
loans or home improvement contracts. For purposes hereof, "home equity loans"
includes "closed-end loans" and "revolving credit line loans." If so specified,
the loans may include cooperative apartment loans ("cooperative loans") secured
by security interests in shares issued by private, non-profit, cooperative
housing corporations ("cooperatives") and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling units
in the cooperatives' buildings. As more fully described in the related
prospectus supplement, the loans may be "conventional" loans or loans that are
insured or guaranteed by a governmental agency such as the Federal Housing
Administration (the "FHA") or the Department of Veterans' Affairs (the "VA"). In
addition, the loans may have been underwritten to standards that are less
stringent than the standards generally acceptable to Freddie Mac and Fannie Mae
with regard to the borrower's credit standing and repayment ability because the
standards focus more on the value of the mortgaged property.
The applicable prospectus supplement may specify the day on which monthly
payments on the loans in a pool will be due, but if it does not, all of the
mortgage loans in a pool will have monthly payments due on the first day of each
month. The payment terms of the loans to be included in a trust fund will be
described in the related prospectus supplement and may include any of the
following features or combination thereof or other features described in the
related prospectus supplement:
o Interest may be payable at a fixed rate, a rate adjustable from time
to time in relation to an index (which will be specified in the
related prospectus supplement), a rate that is fixed for a period of
time or under certain circumstances and is followed by an adjustable
rate, a rate that otherwise varies from time to time, or a rate that
is convertible from an adjustable rate to a fixed rate. Changes to an
adjustable rate may be subject to periodic limitations, maximum rates,
minimum rates or a combination of the limitations. Accrued interest
may be deferred and added to the principal of a loan for the periods
and under the circumstances as may be specified in the related
prospectus supplement. Loans may provide for the payment of interest
at a rate lower than the
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specified interest rate borne by the loan (the "Loan Rate") for a
period of time or for the life of the loan, and the amount of any
difference may be contributed from funds supplied by the seller of the
mortgaged property or another source.
o Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
assumed amortization schedule that is significantly longer than the
original term to maturity or on an interest rate that is different
from the Loan Rate or may not be amortized during all or a portion of
the original term. Payment of all or a substantial portion of the
principal may be due on maturity, called balloon payments. Principal
may include interest that has been deferred and added to the principal
balance of the loan.
o Monthly payments of principal and interest may be fixed for the life
of the loan, may increase over a specified period of time or may
change from period to period. The terms of a loan may include limits
on periodic increases or decreases in the amount of monthly payments
and may include maximum or minimum amounts of monthly payments.
o The loans generally may be prepaid at any time. Prepayments of
principal may be subject to a prepayment fee, which may be fixed for
the life of the loan or may decline over time, and may be prohibited
for the life of the loan or for certain periods, which are called
lockout periods. Some loans may permit prepayments after expiration of
the applicable lockout period and may require the payment of a
prepayment fee in connection with any subsequent prepayment. Other
loans may permit prepayments without payment of a fee unless the
prepayment occurs during specified time periods. The loans may include
"due-on-sale" clauses that permit the mortgagee to demand payment of
the entire loan in connection with the sale or certain transfers of
the related mortgaged property. Other loans may be assumable by
persons meeting the then applicable underwriting standards of the
seller.
A trust fund may contain buydown loans that include provisions whereby a
third party partially subsidizes the monthly payments of the obligors on the
loans during the early years of the loans, the difference to be made up from a
buydown fund contributed by the third party at the time of origination of the
loan. A buydown fund will be in an amount equal either to the discounted value
or full aggregate amount of future payment subsidies. Thereafter, buydown funds
are applied to the applicable loan upon receipt by the master servicer of the
mortgagor's portion of the monthly payment on the loan. The master servicer
administers the buydown fund to ensure that the monthly allocation from the
buydown fund combined with the monthly payment received from the mortgagor
equals the scheduled monthly payment on the applicable loan. The underlying
assumption of buydown plans is that the income of the mortgagor will increase
during the buydown period as a result of normal increases in compensation and
inflation, so that the mortgagor will be able to meet the full mortgage payments
at the end of the buydown period. To the extent that this assumption as to
increased income is not fulfilled, the possibility of defaults on buydown loans
is increased. The related prospectus supplement will contain information with
respect to any buydown loan concerning limitations on the interest rate paid by
the mortgagor initially, on annual increases in the interest rate and on the
length of the buydown period.
The loans will be secured by mortgages or deeds of trust or other similar
security instruments creating a lien on a mortgaged property. In the case of
home equity loans, the liens generally will be subordinated to one or more
senior liens on the related mortgaged properties as described in the related
prospectus supplement. In addition to being secured by mortgages on real estate
the home improvement contracts may also be secured by purchase money security
interests in the home improvements financed thereby. If so specified in the
related prospectus supplement, the home equity loans may include loans
(primarily for home improvement or debt consolidation purposes) that are in
amounts in excess of the value of the related mortgaged properties at the time
of origination. The mortgaged properties and the home improvements are
collectively referred to in this prospectus as the "Properties." The Properties
may be located in any one of the fifty states, the District of Columbia, Guam,
Puerto Rico or any other territory of the United States.
Loans with certain Loan-to-Value Ratios (as defined below) and/or certain
principal balances may be covered wholly or partially by primary mortgage
guaranty insurance policies (each, a "Primary Mortgage Insurance
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Policy"). The existence, extent and duration of coverage under a Primary
Mortgage Insurance Policy will be described in the applicable prospectus
supplement.
The aggregate principal balance of loans secured by Properties that are
owner-occupied will be disclosed in the related prospectus supplement. The
applicable prospectus supplement may provide for the basis for representations
relating to Single Family Properties (as defined below), but if it does not, the
sole basis for a representation that a given percentage of the loans is secured
by Single Family Properties that are owner-occupied will be either (i) the
making of a representation by the borrower at origination of the loan either
that the underlying Property will be used by the borrower for a period of at
least six months every year or that the borrower intends to use the Property as
a primary residence or (ii) a finding that the address of the underlying
Property is the borrower's mailing address.
Single Family Loans. The mortgaged properties relating to single family
loans will consist of detached or semi-detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units in
planned unit developments, manufactured housing that is permanently affixed and
treated as real property under local law, and certain other dwelling units
("Single Family Properties"). Single Family Properties may include vacation and
second homes, investment properties and leasehold interests. In the case of
leasehold interests, the applicable prospectus supplement may provide for the
leasehold term, but if it does not, the term of the leasehold will exceed the
scheduled maturity of the loan by at least five years.
Home Equity Loans. The mortgaged properties relating to home equity loans
will consist of Single Family Properties. As more fully described in the related
prospectus supplement, interest on each revolving credit line loan, excluding
introductory rates offered from time to time during promotional periods, is
computed and payable monthly on the average daily outstanding principal balance
of the loan. Principal amounts on a revolving credit line loan may be drawn down
(up to a maximum amount as set forth in the related prospectus supplement) or
repaid under each revolving credit line loan from time to time, but may be
subject to a minimum periodic payment. Except to the extent provided in the
related prospectus supplement, the trust fund will not include any amounts
borrowed under a revolving credit line loan after the cut-off date. The full
amount of a closed-end loan is advanced at the inception of the loan and
generally is repayable in equal (or substantially equal) installments of an
amount to fully amortize the loan at its stated maturity. Except to the extent
provided in the related prospectus supplement, the original terms to stated
maturity of closed-end loans will not exceed 360 months. Under some
circumstances, under either a revolving credit line loan or a closed-end loan, a
borrower may choose an interest only payment option and is obligated to pay only
the amount of interest which accrues on the loan during the billing cycle. An
interest only payment option may be available for a specified period before the
borrower must begin paying at least the minimum monthly payment of a specified
percentage of the average outstanding balance of the loan.
Home Improvement Contracts. The Trust Fund Assets for a series of
securities may consist, in whole or in part, of home improvement contracts
originated by a home improvement contractor, a thrift or a commercial mortgage
banker in the ordinary course of business. The home improvements securing the
home improvement contracts may include, but are not limited to, replacement
windows, house siding, new roofs, swimming pools, satellite dishes, kitchen and
bathroom remodeling goods and solar heating panels. The home improvement
contracts will be secured by mortgages on Single Family Properties which are
generally subordinate to other mortgages on the same Property. In general, the
home improvement contracts will be fully amortizing and may have fixed interest
rates or adjustable interest rates and may provide for other payment
characteristics as described below and in the related prospectus supplement. The
initial Loan-to-Value Ratio of a home improvement contract is computed in the
manner described in the related prospectus supplement.
Additional Information. Each prospectus supplement will contain
information, as of the date of the prospectus supplement and to the extent then
specifically known to the depositor, with respect to the loans contained in the
related pool, including:
o the aggregate outstanding principal balance and the average
outstanding principal balance of the loans as of the first day of the
month of issuance of the related series of certificates or another
date specified in the related prospectus supplement called a cut-off
date,
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o the type of property securing the loans (e.g., single-family
residences, individual units in condominium apartment buildings or in
buildings owned by cooperatives other real property or home
improvements),
o the original terms to maturity of the loans,
o the largest principal balance and the smallest principal balance of
any of the loans,
o the earliest origination date and latest maturity date of any of the
loans,
o the Loan-to-Value Ratios or Combined Loan-to-Value Ratios (as defined
hereafter), as applicable, of the loans,
o the Loan Rates or annual percentage rates ("APR") or range of Loan
Rates or APR's borne by the loans,
o the maximum and minimum per annum Loan Rates and
o the geographical distribution of the loans.
If specific information respecting the loans is not known to the depositor
at the time the related securities are initially offered, more general
information of the nature described above will be provided in the detailed
description of Trust Fund Assets.
The "Loan-to-Value Ratio" of a loan at any given time is the fraction,
expressed as a percentage, the numerator of which is the original principal
balance of the related loan and the denominator of which is the Collateral Value
of the related Property. The "Combined Loan-to-Value Ratio" of a loan at any
given time is the ratio, expressed as a percentage, of (i) the sum of (a) the
original principal balance of the loan (or, in the case of a revolving credit
line loan, the maximum amount thereof available) and (b) the outstanding
principal balance at the date of origination of the loan of any senior mortgage
loan(s) or, in the case of any open-ended senior mortgage loan, the maximum
available line of credit with respect to the mortgage loan, regardless of any
lesser amount actually outstanding at the date of origination of the loan, to
(ii) the Collateral Value of the related Property. The "Collateral Value" of the
Property, other than for loans the proceeds of which were used to refinance an
existing mortgage loan (each, a "Refinance Loan"), is the lesser of (a) the
appraised value determined in an appraisal obtained by the originator at
origination of the loan and (b) the sales price for the Property. In the case of
Refinance Loans, the "Collateral Value" of the related Property is generally the
appraised value thereof determined in an appraisal obtained at the time of
refinancing.
No assurance can be given that values of the Properties have remained or
will remain at their levels on the dates of origination of the related loans. If
the residential real estate market should experience an overall decline in
property values such that the outstanding principal balances of the loans, and
any secondary financing on the Properties, in a particular pool become equal to
or greater than the value of the Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, adverse economic conditions and
other factors (which may or may not affect real property values) may affect the
timely payment by borrowers of scheduled payments of principal and interest on
the loans and, accordingly, the actual rates of delinquencies, foreclosures and
losses with respect to any pool. To the extent that the losses are not covered
by subordination provisions or alternative arrangements, the losses will be
borne, at least in part, by the holders of the securities of the related series.
Participation Certificates
The Trust Fund Assets may include participation certificates evidencing
interests in loans or contracts, including:
o first lien mortgage loans secured by one- to four-family residential
properties,
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o private mortgage-backed securities backed by first lien mortgage loans
secured by one- to four-family residential properties,
o closed-end and/or revolving home equity loans, secured in whole or in
part by first and/or subordinate liens on one- to four-family
residential properties, or
o home improvement installment sale contracts and installment loan
agreements that are secured by first or subordinate liens on one- to
four-family residential properties.
If those participation certificates were issued by an issuer that is not
affiliated with the depositor, the depositor must have acquired them from one or
more entities unaffiliated with the depositor in one or more bona fide secondary
market transactions and they must either have been previously registered under
the Securities Act of 1933, as amended (the "Securities Act"), or have been held
for at least the holding period required to be eligible for sale under Rule
144(k) under the Securities Act. If those participation certificates were issued
by the depositor or an affiliate of the depositor, they must be registered under
the Securities Act concurrently with the offering of the securities under the
related prospectus supplement.
Agency Securities
Agency securities are mortgage pass-through securities issued or guaranteed
by Ginnie Mae, Fannie Mae or Freddie Mac. All of the agency securities will be
registered in the name of the trustee or its nominee or, in the case of agency
securities issued only in book-entry form, a financial intermediary that is a
member of the Federal Reserve System or of a clearing corporation on the books
of which the security is held. The financial intermediary may be the same entity
as the trustee for a series of certificates. Each agency security will evidence
an interest in a pool of mortgage loans or cooperative loans and in principal
distributions and interest distributions on those loans.
The descriptions of Ginnie Mae, Freddie Mac and Fannie Mae Certificates
that are set forth below are descriptions of certificates representing
proportionate interests in a pool of mortgage loans and in the payments of
principal and interest thereon. Ginnie Mae, Freddie Mac or Fannie Mae may also
issue mortgage-backed securities representing a right to receive distributions
of interest only or principal only or disproportionate distributions of
principal or interest or to receive distributions of principal or interest prior
or subsequent to distributions on other certificates representing interests in
the same pool of mortgage loans.
In addition, any of the issuers may issue certificates representing
interests in mortgage loans having characteristics that are different from the
types of mortgage loans described below. The terms of any certificates to be
included in a trust fund and of the underlying mortgage loans will be described
in the related prospectus supplement, and the descriptions that follow are
subject to modification as appropriate to reflect the terms of any certificates
that are actually included in a trust fund.
Ginnie Mae. Ginnie Mae is a wholly-owned corporate instrumentality of the
United States within HUD. Section 306(g) of the Housing Act authorizes Ginnie
Mae to guarantee the timely payment of the principal of and interest on
certificates representing interests in a pool of mortgages insured by the FHA,
under the Housing Act or under Title V of the Housing Act of 1949, or partially
guaranteed by the VA under the Servicemen's Readjustment Act of 1944, as
amended, or under Chapter 37 of Title 38, United States Code.
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 which may be
required to be paid under any guarantee under this subsection." In order to meet
its obligations under this guarantee, Ginnie Mae may, under Section 306(d) of
the Housing Act, borrow from the United States Treasury an amount that is at any
time sufficient to enable Ginnie Mae to perform its obligations under its
guarantee.
Ginnie Mae Certificates. Each Ginnie Mae Certificate relating to a series,
which may be a "Ginnie Mae I Certificate" or a "Ginnie Mae II Certificate" as
referred to by Ginnie Mae, will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by a mortgage banking company or
other financial concern approved by Ginnie Mae, except with respect to any
stripped mortgage-backed securities guaranteed by Ginnie Mae
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or any real estate mortgage investment conduit ("REMIC") securities issued by
Ginnie Mae. The characteristics of any Ginnie Mae Certificates included in the
trust fund for a series of certificates will be set forth in the related
prospectus supplement.
Freddie Mac. Freddie Mac is a corporate instrumentality of the United
States created pursuant to 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. The principal activity of Freddie Mac currently
consists of purchasing first-lien, conventional, residential mortgage loans or
participation interests in mortgage loans and reselling the mortgage loans so
purchased in the form of guaranteed mortgage securities, primarily Freddie Mac
Certificates. In 1981, Freddie Mac initiated its Home Mortgage Guaranty Program
under which it purchases mortgage loans from sellers with Freddie Mac
Certificates representing interests in the mortgage loans so purchased. All
mortgage loans purchased by Freddie Mac must meet specific standards set forth
in the Freddie Mac Act. Freddie Mac is confined to purchasing, so far as
practicable, mortgage loans that it deems to be of such quality and type as to
meet generally the purchase standards imposed by private institutional mortgage
investors. Neither the United States nor any agency thereof is obligated to
finance Freddie Mac's operations or to assist Freddie Mac in any other manner.
Freddie Mac Certificates. Each Freddie Mac Certificate relating to a series
will represent an undivided interest in a pool of mortgage loans that typically
consists of conventional loans, FHA Loans or VA Loans purchased by Freddie Mac,
except with respect to any stripped mortgage-backed securities issued by Freddie
Mac. Each pool will consist of mortgage loans, substantially all of which are
secured by one- to four-family residential properties or, if specified in the
related prospectus supplement, are secured by five or more family residential
properties. The characteristics of any Freddie Mac Certificates included in the
trust fund for a series of certificates will be set forth in the related
prospectus supplement.
Fannie Mae. Fannie Mae is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act (12 U.S.C. 'SS'1716 et. Seq.). It is the nation's
largest supplier of residential mortgage funds. 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 primarily by purchasing home mortgage
loans from local lenders, thereby replenishing their funds for additional
lending. Although the Secretary of the Treasury of the United States has
authority to lend Fannie Mae up to $2.25 billion outstanding at any time,
neither the United States nor any agency thereof is obligated to finance Fannie
Mae's operations or to assist Fannie Mae in any other manner.
Fannie Mae Certificates. Each Fannie Mae Certificate relating to a series
will represent a fractional undivided interest in a pool of mortgage loans
formed by Fannie Mae, except with respect to any stripped mortgage-backed
securities issued by Fannie Mae. Mortgage loans underlying Fannie Mae
Certificates will consist of fixed, variable or adjustable rate conventional
mortgage loans or fixed-rate FHA Loans or VA Loans. Those mortgage loans may be
secured by either one- to four-family or multi-family residential properties.
The characteristics of any Fannie Mae Certificates included in the trust fund
for a series of certificates will be set forth in the related prospectus
supplement.
Private Mortgage-Backed Securities
Private mortgage-backed securities may consist of mortgage pass-through
certificates or participation certificates evidencing an undivided interest in a
pool of mortgage loans or collateralized mortgage obligations secured by
mortgage loans. Private mortgage-backed securities may include stripped
mortgage-backed securities representing an undivided interest in all or a 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 and interest distributions (but not all the
distributions) on some mortgage loans. Private mortgage-backed securities will
have been issued pursuant to a Pooling and Servicing Agreement, an indenture or
similar agreement. The applicable prospectus supplement may provide that the
seller/servicer of the underlying mortgage loans will not have entered into a
Pooling and Servicing Agreement with a private trustee, but if it does not, the
seller/servicer of the underlying mortgage loans will have entered into the
Pooling and Servicing Agreement with a private trustee. The private trustee or
its agent, or a custodian, will possess the mortgage loans underlying the
private mortgage-
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backed security. Mortgage loans underlying a private mortgage-backed security
will be serviced by a private servicer directly or by one or more subservicers
who may be subject to the supervision of the private servicer.
The issuer of the private mortgage-backed securities will be a financial
institution or other entity engaged generally in the business of mortgage
lending, a public agency or instrumentality of a state, local or federal
government, or a limited purpose corporation organized for the purpose of
establishing trusts and acquiring and selling housing loans to the trusts and
selling beneficial interests in the trusts. If so specified in the related
prospectus supplement, the issuer of private mortgage-backed securities may be
an affiliate of the depositor. The obligations of the issuer of private
mortgage-backed securities will generally be limited to its representations and
warranties with respect to the assets conveyed by it to the related trust fund.
The issuer of private mortgage-backed securities will not have guaranteed any of
the assets conveyed to the related trust fund or any of the private
mortgage-backed securities issued under the Pooling and Servicing Agreement.
Additionally, although the mortgage loans underlying the private mortgage-backed
securities may be guaranteed by an agency or instrumentality of the United
States, the private mortgage-backed securities themselves will not be so
guaranteed.
Distributions of principal and interest will be made on the private
mortgage-backed securities on the dates specified in the related prospectus
supplement. The private mortgage-backed securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the private mortgage-backed
securities by the private trustee or the private servicer. The issuer of private
mortgage-backed securities or the private servicer may have the right to
repurchase assets underlying the private mortgage-backed securities after a
specific date or under other circumstances specified in the related prospectus
supplement.
The mortgage loans underlying the private mortgage-backed securities may
consist of fixed rate, level payment, fully amortizing loans or graduated
payment mortgage loans, buydown loans, adjustable rate mortgage loans or loans
having balloon or other special payment features. The mortgage loans may be
secured by single family property or by an assignment of the proprietary lease
or occupancy agreement relating to a specific dwelling within a cooperative and
the related shares issued by the cooperative.
The prospectus supplement for a series for which the trust fund includes
private mortgage-backed securities will specify the aggregate approximate
principal amount and type of the private mortgage-backed securities to be
included in the trust fund and specific characteristics of the mortgage loans
that comprise the underlying assets for the private mortgage-backed securities,
including:
o the payment features of the mortgage loans,
o the approximate aggregate principal balance, if known, of underlying
mortgage loans insured or guaranteed by a governmental entity,
o the servicing fee or range of servicing fees with respect to the
mortgage loans and
o the minimum and maximum stated maturities of the underlying mortgage
loans at origination;
o the maximum original term-to-stated maturity of the private
mortgage-backed securities;
o the weighted average term-to stated maturity of the private
mortgage-backed securities;
o the pass-through or certificate rate of the private mortgage-backed
securities;
o the weighted average pass-through or certificate rate of the private
mortgage-backed securities;
o the issuer, the servicer and the trustee of the private
mortgage-backed securities;
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o certain characteristics of credit support, if any, such as reserve
funds, insurance policies, surety bonds, letters of credit or
guaranties relating to the mortgage loans underlying the private
mortgage-backed securities or to the private mortgage-backed
securities themselves;
o the terms on which the underlying mortgage loans for the private
mortgage-backed securities may, or are required to, be purchased
before their stated maturity or the stated maturity of the private
mortgage-backed securities; and
o the terms on which mortgage loans may be substituted for those
originally underlying the private mortgage-backed securities.
Private mortgage-backed securities included in the trust fund for a series
of securities that were issued by an issuer of private mortgage-backed
securities that is not affiliated with the depositor must be acquired from one
or more entities unaffiliated with the depositor in one or more bona fide
secondary market transactions and they must either have been previously
registered under the Securities Act or have been held for at least the holding
period required to be eligible for sale under Rule 144(k) under the Securities
Act. Private mortgaged-backed securities included in the trust fund for a series
of securities that were issued by the depositor or an affiliate of the depositor
must be registered under the Securities Act concurrently with the offering of
the securities under the related prospectus supplement.
Substitution of Trust Fund Assets
Substitution of Trust Fund Assets will be permitted in the event of
breaches of representations and warranties with respect to any original Trust
Fund Asset or in the event the documentation with respect to any Trust Fund
Asset is determined by the trustee to be incomplete. The period during which
substitution will be permitted generally will be indicated in the related
prospectus supplement.
AVAILABLE INFORMATION
The depositor has filed with the Securities & Exchange Commission ("SEC") a
Registration Statement under the Securities Act covering the securities. This
prospectus, which forms a part of the Registration Statement, and the prospectus
supplement relating to each series of certificates contain summaries of the
material terms of the documents referred to in this prospectus and in the
prospectus supplement, but do not contain all of the information in the
Registration Statement pursuant to the rules and regulations of the SEC. For
further information, reference is made to the Registration Statement and its
exhibits. The Registration Statement and exhibits can be inspected and copied at
prescribed rates at the public reference facilities maintained by the SEC at its
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet Web site that contains
reports, information statements and other information regarding the registrants
that file electronically with the SEC, including the depositor. The address of
that Internet Web site is http://www.sec.gov.
This prospectus and any applicable prospectus supplement do not constitute
an offer to sell or a solicitation of an offer to buy any securities other than
the securities offered by this prospectus and the prospectus supplement nor an
offer of the securities to any person in any state or other jurisdiction in
which the offer would be unlawful.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed under the name of First Horizon Asset Securities Inc.
and/or the name of the trust referred to in the accompanying prospectus
supplement after the date of this prospectus and before the end of the related
offering with the SEC pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, are incorporated by reference in
this prospectus and are a part of this prospectus from the date of their filing.
Any statement contained in a document incorporated by reference in this
prospectus is modified or superseded for all purposes of this prospectus to the
extent that a statement contained in this prospectus (or in the accompanying
prospectus supplement) or in any other subsequently filed document that also is
incorporated by
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reference differs from that statement. Any statement so modified or superseded
shall not, except as so modified or superseded, constitute a part of this
prospectus.
The trustee on behalf of any trust fund will provide without charge to each
person to whom this prospectus is delivered, on the person's written or oral
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 should be directed to the corporate trust office of the
trustee specified in the accompanying prospectus supplement.
REPORTS TO SECURITYHOLDERS
Periodic and annual reports concerning the trust fund will be forwarded to
securityholders. However, these reports will neither be examined nor reported on
by an independent public accountant. See "Description of the Securities --
Reports to Securityholders."
USE OF PROCEEDS
The net proceeds to be received from the sale of the securities will be
applied by the depositor to acquire the related Trust Fund Assets and for other
general corporate purposes consistent with the limitations set forth in its
charter documents. See "The Depositor." The depositor expects to sell securities
in series from time to time, but the timing and amount of offerings of
securities will depend on a number of factors, including the volume of Trust
Fund Assets acquired by the depositor, prevailing interest rates, availability
of funds and general market conditions.
THE DEPOSITOR
First Horizon Asset Securities Inc., a Delaware corporation, the depositor,
was incorporated in March 9, 1999 for the limited purpose of acquiring, owning
and transferring mortgage collateral and selling interests in mortgage
collateral or bonds secured by mortgage collateral. The depositor is a wholly
owned limited purpose finance subsidiary of First Horizon Home Loan Corporation,
a Kansas corporation ("First Horizon"). The depositor maintains its principal
office at 4000 Horizon Way, Irving, Texas 75063. Its telephone number is (214)
441-4000.
Neither the depositor nor any of the depositor's affiliates will insure or
guarantee distributions on the securities of any series.
LOAN PROGRAM
The loans will have been purchased by the depositor, either directly or
through affiliates, from sellers. The applicable prospectus supplement may
provide for the underwriting criteria used in originating the loans, but if it
does not, the loans so acquired by the depositor will have been originated in
accordance with the underwriting criteria specified below under "Underwriting
Standards."
Underwriting Standards
General Standards for First Lien Mortgage Loans. First Horizon's
underwriting standards with respect to first lien mortgage loans will generally
conform to those published in First Horizon's guide for alternative
documentation programs for first lien mortgage loans (the "Guide"). The
underwriting standards as set forth in the Guide are continuously revised based
on opportunities and prevailing conditions in the residential mortgage market
and the market for the depositor's mortgage pass-through certificates. The
mortgage loans may be underwritten by First Horizon or by a designated third
party. See " -- Qualifications of Sellers." First Horizon may perform only
sample quality assurance reviews to determine whether the mortgage loans in any
mortgage pool were underwritten in accordance with applicable standards.
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First Horizon's underwriting standards, as well as any other underwriting
standards that may be applicable to any first lien mortgage loans, generally
include a set of specific criteria pursuant to which the underwriting evaluation
is made. However, the application of those underwriting standards does not imply
that each specific criterion was satisfied individually. Rather, a mortgage loan
will be considered to be originated in accordance with a given set of
underwriting standards if, based on an overall qualitative evaluation, the loan
substantially complies with the underwriting standards. For example, a mortgage
loan may be considered to comply with a set of underwriting standards, even if
one or more specific criteria included in the underwriting standards were not
satisfied, if other factors compensated for the criteria that were not satisfied
or if the mortgage loan is considered to be in substantial compliance with the
underwriting standards.
The level of review by First Horizon, if any, of any mortgage loan for
conformity with the applicable underwriting standards will vary depending on any
one of a number of factors, including:
o factors relating to the experience and status of the seller,
o characteristics of the specific mortgage loan, including the principal
balance, the Loan-to-Value Ratio, the loan type or loan program, and
o the applicable credit score of the related mortgagor used in
connection with the origination of the mortgage loan, as determined
based on a credit scoring model acceptable to First Horizon.
Generally, credit scoring models provide a means for evaluating the
information about a prospective borrower that is available from a credit
reporting agency. The underwriting criteria applicable to any program under
which the mortgage loans may be originated and reviewed may provide that
qualification for the loan, or the availability of specific loan features, such
as maximum loan amount, maximum Loan-to-Value Ratio, property type and use, and
documentation level, may depend on the borrower's credit score.
First Horizon's underwriting standards are intended to evaluate the
prospective mortgagor's credit standing and repayment ability, and the value and
adequacy of the proposed property as collateral. Due to the variety of
underwriting standards and review procedures that may be applicable to the
mortgage loans included in any mortgage pool, the related prospectus supplement
generally will not distinguish among the various underwriting standards
applicable to the mortgage loans nor describe any review for compliance with
applicable underwriting standards performed by First Horizon. Moreover, there
can be no assurance that every mortgage loan was originated in conformity with
the applicable underwriting standards in all material respects, or that the
quality or performance of mortgage loans underwritten pursuant to varying
standards as described above will be equivalent under all circumstances. In the
loan application process, prospective mortgagors will be required to provide
information regarding such factors as their assets, liabilities income, credit
history, employment history and other related items. Each prospective mortgagor
will also provide an authorization to apply for a credit report which summarizes
the mortgagor's credit history. With respect to establishing the prospective
mortgagor's ability to make timely payments, First Horizon will require evidence
regarding the mortgagor's employment and income, and of the amount of deposits
made to financial institutions where the mortgagor maintains demand or savings
accounts. In some instances, mortgage loans which were originated under a
limited documentation origination program may be sold to or originated by First
Horizon. For a mortgage loan originated under a limited documentation
origination program to qualify for First Horizon, the prospective mortgagor must
have a good credit history and be financially capable of making a larger cash
down payment, in a purchase, or be willing to finance less of the appraised
value, in a refinancing, than would otherwise be required by First Horizon.
Currently, First Horizon's underwriting standards provide that only mortgage
loans with certain Loan-to-Value ratios will qualify. If the mortgage loan
qualifies, First Horizon waives some of its documentation requirements and may
eliminate verification of income, employment or assets for the prospective
mortgagor.
First Horizon's underwriting standards generally follow guidelines
acceptable to Fannie Mae and Freddie Mac, except for maximum loan size. In
determining the adequacy of the property as collateral, an independent appraisal
is made of each property considered for financing. The appraiser is required to
inspect the property and verify that it is in good condition and that
construction, if new, has been completed. The appraisal is based on the
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appraiser's judgment of values, giving appropriate weight to both the market
value of comparable homes and the cost of replacing the property.
The mortgaged properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the Property for
repayment in the event of foreclosure. See "Legal Aspects of the Loans --
Anti-Deficiency Legislation and Other Limitations on Lenders." First Horizon's
underwriting standards applicable to all states, including anti-deficiency
states, require that the value of the Property being financed, as indicated by
the appraisal, currently supports and is anticipated to support in the future
the outstanding loan balance, although there can be no assurance that the value
of the Property will continue to support the loan balance in the future.
General Standards for Home Equity and Home Improvement Loans. The
applicable prospectus supplement may provide for the seller's representations
and warranties relating to the home equity/home improvement loans, but if it
does not, each seller will represent and warrant that all home equity/home
improvement loans originated and/or sold by it to the depositor or one of its
affiliates will have been underwritten in accordance with standards consistent
with those utilized by mortgage lenders generally during the period of
origination for similar types of loans.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the related Property as collateral. In general, a prospective borrower
applying for a home equity/home improvement loan is required to fill out a
detailed application designed to provide to the underwriting officer pertinent
credit information, including the principal balance and payment history with
respect to any senior mortgage, if any. The applicable prospectus supplement may
specify whether that credit information will be verified by the seller, but if
it does not, the credit information supplied by the borrower will be verified by
the related seller. As part of the description of the borrower's financial
condition, the borrower generally is required to provide a current list of
assets and liabilities and a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy. In
most cases, an employment verification is obtained from an independent source
(typically the borrower's employer) which verification reports, among other
things, the length of employment with that organization and the borrower's
current salary. If a prospective borrower is self-employed, the borrower may be
required to submit copies of signed tax returns. The borrower may also be
required to authorize verification of deposits at financial institutions where
the borrower has demand or savings accounts.
In determining the adequacy of the Property to be used as collateral, an
appraisal will generally be made of each Property considered for financing. The
appraiser is generally required to inspect the Property, issue a report on its
condition and, if applicable, verify construction, if new, has been completed.
The appraisal is generally based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the home. The value of the Property being financed, as indicated by
the appraisal, must be such that it currently supports, and is anticipated to
support in the future, the outstanding loan balance.
The maximum loan amount will vary depending upon a borrower's credit grade
and loan program but will not generally exceed $1,000,000. Variations in maximum
loan amount limits will be permitted based on compensating factors. Compensating
factors may generally include, to the extent specified in the related prospectus
supplement, low Loan-to-Value Ratio, low debt-to-income ratio, stable
employment, favorable credit history and the nature of the underlying first
mortgage loan, if applicable.
Each seller's underwriting standards will generally permit home equity/home
improvement loans with Loan-to-Value Ratios at origination of up to 125%
depending on the loan program, type and use of the Property, creditworthiness of
the borrower and debt-to-income ratio. If so specified in the related prospectus
supplement, a seller's underwriting criteria may permit home equity/home
improvement loans with Loan-to-Value Ratios at origination in excess of 125%,
such as for debt consolidation or home improvement purposes. Loan-to-Value
Ratios may not be evaluated in the case of Title I loans.
After obtaining all applicable employment, credit and Property information,
the related seller will use a debt-to-income ratio to assist in determining
whether the prospective borrower has sufficient monthly income available to
support the payments of principal and interest on the mortgage loan in addition
to other monthly credit
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obligations. The "debt-to-income ratio" is the ratio of the borrower's total
monthly payments to the borrower's gross monthly income. The maximum monthly
debt-to-income ratio will vary depending upon a borrower's credit grade and loan
program but will not generally exceed 55%. Variations in the monthly
debt-to-income ratio limit will be permitted based on compensating factors to
the extent specified in the related prospectus supplement.
In the case of a home equity/home improvement loan secured by a leasehold
interest in Property, the title to which is held by a third party lessor, the
applicable prospectus supplement may provide for the related representations and
warranties of the seller, but if it does not, the related seller will represent
and warrant, among other things, that the remaining term of the lease and any
sublease is at least five years longer than the remaining term on the home
equity/home improvement loan.
Certain of the types of home equity/home improvement loans that may be
included in a trust fund are recently developed and may involve additional
uncertainties not present in traditional types of loans. For example, certain of
the loans may provide for escalating or variable payments by the borrower. These
types of home equity/home improvement loans are underwritten on the basis of a
judgment that the borrowers have the ability to make the monthly payments
required initially. In some instances, a borrower's income may not be sufficient
to permit continued loan payments as those payments increase. These types of
loans may also be underwritten primarily upon the basis of Loan-to-Value Ratios
or other favorable credit factors.
Qualifications of Sellers
Each seller will be required to satisfy the following qualifications. Each
seller must be an institution experienced in originating and servicing loans of
the type contained in the related pool in accordance with accepted practices and
prudent guidelines, and must maintain satisfactory facilities to originate and
service those loans. Each seller must be a seller/servicer approved by either
Fannie Mae or Freddie Mac. Each seller must be a mortgagee approved by the FHA
or an institution the deposit accounts of which are insured by the FDIC.
Representations by Sellers; Repurchases
Each seller will have made representations and warranties in respect of the
loans sold by that seller and evidenced by all, or a part, of a series of
securities. These representations and warranties may include, among other
things:
o that title insurance (or in the case of Properties located in areas
where title insurance policies are generally not available, an
attorney's certificate of title) and any required hazard insurance
policy were effective at origination of each loan, other than
cooperative loans and certain home equity loans, and that each policy
(or certificate of title as applicable) remained in effect on the date
of purchase of the loan from the seller by or on behalf of the
depositor;
o that the seller had good title to each loan and the loan was subject
to no offsets, defenses, counterclaims or rights of rescission except
to the extent that any buydown agreement may forgive certain
indebtedness of a borrower;
o that each loan constituted a valid lien on, or a perfected security
interest with respect to, the Property (subject only to permissible
liens disclosed, if applicable, title insurance exceptions, if
applicable, and certain other exceptions described in the Agreement)
and that the Property was free from damage and was in acceptable
condition;
o that there were no delinquent tax or assessment liens against the
Property;
o that no required payment on a loan was delinquent more than the number
of days specified in the related prospectus supplement; and
o that each loan was made in compliance with, and is enforceable under,
all applicable local, state and federal laws and regulations in all
material respects.
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In addition, if any required payment on a mortgage loan was more than 31
days delinquent at any time during the twelve months before the cut-off date,
the related prospectus supplement shall so indicate.
As to any mortgage loan insured by the FHA or partially guaranteed by the
VA, the seller will represent that it has complied with underwriting policies of
the FHA or the VA, as the case may be.
If so specified in the related prospectus supplement, the representations
and warranties of a seller in respect of a loan will be made not as of the
cut-off date but as of the date on which the seller sold the loan to the
depositor or one of its affiliates. Under those circumstances, a substantial
period of time may have elapsed between the sale date and the date of initial
issuance of the series of securities evidencing an interest in the loan. Since
the representations and warranties of a seller do not address events that may
occur following the sale of a loan by the seller, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation with respect to a loan occurs after the date of
sale of the loan by the seller to the depositor or its affiliates or after the
origination of the mortgage loan, as the case may be. In addition, certain
representations, including the condition of the related Property, will be
limited to the extent the seller has knowledge and the seller will be under no
obligation to investigate the substance of the representation. However, the
depositor will not include any loan in the trust fund for any series of
securities if anything has come to the depositor's attention that would cause it
to believe that the representations and warranties of a seller will not be
accurate and complete in all material respects in respect of the loan as of the
date of initial issuance of the related series of securities. If the master
servicer is also a seller of loans with respect to a particular series of
securities, the representations will be in addition to the representations and
warranties made by the master servicer in its capacity as a master servicer.
The master servicer or the trustee, if the master servicer is the seller,
will promptly notify the relevant seller of any breach of any representation or
warranty made by it in respect of a loan which materially and adversely affects
the interests of the securityholders in the loan. If the seller cannot cure the
breach within 90 days following notice from the master servicer or the trustee,
as the case may be, the applicable prospectus supplement may provide for the
seller's obligations under those circumstances, but if it does not, then the
seller will be obligated either
o to repurchase the loan from the trust fund at a price (the "Purchase
Price") equal to 100% of the unpaid principal balance thereof as of
the date of the repurchase plus accrued interest thereon to the first
day of the month following the month of repurchase at the Loan Rate
(less any advances or amount payable as related servicing compensation
if the seller is the master servicer) or
o substitute for the loan a replacement loan that satisfies the criteria
specified in the related prospectus supplement.
If a REMIC election is to be made with respect to a trust fund, the
applicable prospectus supplement may provide for the obligations of the master
servicer or residual certificateholder, but if it does not, the master servicer
or a holder of the related residual certificate generally will be obligated to
pay any prohibited transaction tax which may arise in connection with any
repurchase or substitution and the trustee must have received a satisfactory
opinion of counsel that the repurchase or substitution will not cause the trust
fund to lose its status as a REMIC or otherwise subject the trust fund to a
prohibited transaction tax. The master servicer may be entitled to reimbursement
for these tax payments from the assets of the related trust fund or from any
holder of the related residual certificates. See "Description of the Securities
- -- General." Except in those cases in which the master servicer is the seller,
the master servicer will be required under the applicable Agreement to enforce
this obligation for the benefit of the trustee and the holders of the
securities, following the practices it would employ in its good faith business
judgment were it the owner of the loan. This repurchase or substitution
obligation will constitute the sole remedy available to holders of securities or
the trustee for a breach of representation by a seller.
Neither the depositor nor the master servicer (unless the master servicer
is the seller) will be obligated to purchase or substitute a loan if a seller
defaults on its obligation to do so, and no assurance can be given that sellers
will carry out their respective repurchase or substitution obligations with
respect to loans. However, to the extent that a breach of a representation and
warranty of a seller may also constitute a breach of a representation made by
the master servicer, the master servicer may have a repurchase or substitution
obligation as described below under "The Agreements -- Assignment of the Trust
Fund Assets."
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DESCRIPTION OF THE SECURITIES
Each series of certificates will be issued pursuant to separate agreements
(each, a Pooling and Servicing Agreement or a "Trust Agreement") among the
depositor, the master servicer and the trustee. A form of Pooling and Servicing
Agreement and Trust Agreement has been filed as an exhibit to the Registration
Statement of which this prospectus forms a part. Each series of notes will be
issued pursuant to an indenture (the "Indenture") between the related trust fund
and the entity named in the related prospectus supplement as trustee with
respect to the series, and the related loans will be serviced by the master
servicer pursuant to a Sale and Servicing Agreement. A form of Indenture and
Sale and Servicing Agreement has been filed as an exhibit to the Registration
Statement of which this prospectus forms a part. A series of securities may
consist of both notes and certificates. Each Agreement, dated as of the related
cut-off date, will be among the depositor, the master servicer and the trustee
for the benefit of the holders of the securities of the series. The provisions
of each Agreement will vary depending upon the nature of the securities to be
issued thereunder and the nature of the related trust fund. The following are
descriptions of the material provisions which may appear in each Agreement. The
depositor will provide a copy of the Agreement (without exhibits) relating to
any series without charge upon written request of a holder of record of a
security of the series addressed to First Horizon Asset Securities Inc., 4000
Horizon Way, Irving, Texas 75063, Attention: Secretary.
General
The securities of each series will be issued in book-entry or fully
registered form, in the authorized denominations specified in the related
prospectus supplement, will, in the case of certificates, evidence specified
beneficial ownership interests in, and in the case of notes, be secured by, the
assets of the related trust fund created pursuant to each Agreement and will not
be entitled to payments in respect of the assets included in any other trust
fund established by the depositor. The applicable prospectus supplement may
provide for guarantees or insurance obtained from a governmental entity or other
person, but if it does not, the Trust Fund Assets will not be guaranteed or
insured by any governmental entity or other person. Each trust fund will consist
of, to the extent provided in the related Agreement,
o the Trust Fund Assets, as from time to time are subject to the related
Agreement (exclusive of any amounts specified in the related
prospectus supplement ("Retained Interest")), including all payments
of interest and principal received with respect to the loans after the
cut-off date (to the extent not applied in computing the principal
balance of the loans as of the cut-off date (the "Cut-off Date
Principal Balance"));
o the assets required to be deposited in the related Security Account
from time to time;
o Property which secured a loan and which is acquired on behalf of the
securityholders by foreclosure or deed in lieu of foreclosure and any
insurance policies or other forms of credit enhancement required to be
maintained pursuant to the related Agreement.
If so specified in the related prospectus supplement, a trust fund may also
include one or more of the following: reinvestment income on payments received
on the Trust Fund Assets, a reserve fund, a mortgage pool insurance policy, a
special hazard insurance policy, a bankruptcy bond, one or more letters of
credit, a surety bond, guaranties or similar instruments.
Each series of securities will be issued in one or more classes. Each class
of certificates of a series will evidence beneficial ownership of a specified
percentage (which may be 0%) or portion of future interest payments and a
specified percentage (which may be 0%) or portion of future principal payments
on, and each class of notes of a series will be secured by, the related Trust
Fund Assets. A series of securities may include one or more classes that are
senior in right to payment to one or more other classes of securities of the
series. Certain series or classes of securities may be covered by insurance
policies, surety bonds or other forms of credit enhancement, in each case as
described under "Credit Enhancement" in this prospectus and in the related
prospectus supplement. One or more classes of securities of a series may be
entitled to receive distributions of principal, interest or any combination
thereof. Distributions on one or more classes of a series of securities may be
made prior to one or more other
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classes, after the occurrence of specified events, in accordance with a schedule
or formula or on the basis of collections from designated portions of the
related Trust Fund Assets, in each case as specified in the related prospectus
supplement. The timing and amounts of distributions may vary among classes or
over time as specified in the related prospectus supplement.
Distributions of principal and interest (or, where applicable, of principal
only or interest only) on the related securities will be made by the trustee on
each distribution date (i.e., monthly, quarterly, semi-annually or at such other
intervals and on the dates as are specified in the related prospectus
supplement) in proportion to the percentages specified in the related prospectus
supplement. Distributions will be made to the persons in whose names the
securities are registered at the close of business on the dates specified in the
related prospectus supplement (each, a "Record Date"). Distributions will be
made in the manner specified in the related prospectus supplement to the persons
entitled thereto at the address appearing in the register maintained for holders
of securities (the "Security Register"); provided, however, that the final
distribution in retirement of the securities will be made only upon presentation
and surrender of the securities at the office or agency of the trustee or other
person specified in the notice to securityholders of the final distribution.
The securities will be freely transferable and exchangeable at the
corporate trust office of the trustee as set forth in the related prospectus
supplement. No service charge will be made for any registration of exchange or
transfer of securities of any series, but the trustee may require payment of a
sum sufficient to cover any related tax or other governmental charge.
Under current law the purchase and holding of a class of securities
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of either interest or principal on the related
loans or a class of securities entitled to receive payments of interest and
principal on the loans only after payments to other classes or after the
occurrence of certain specified events by or on behalf of any employee benefit
plan or other retirement arrangement (including individual retirement accounts
and annuities, Keogh plans and collective investment funds in which the plans,
accounts or arrangements are invested) subject to provisions of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or the Internal
Revenue Code of 1986, as amended (the "Code"), may result in prohibited
transactions, within the meaning of ERISA and the Code. See "ERISA
Considerations." The applicable prospectus supplement may provide for the
conditions for transferring a security of that type of class, but if it does
not, the transfer of securities of that class will not be registered unless the
transferee (i) represents that it is not, and is not purchasing on behalf of,
any plan, account or arrangement or (ii) provides an opinion of counsel
satisfactory to the trustee and the depositor that the purchase of securities of
that class by or on behalf of a plan, account or arrangement is permissible
under applicable law and will not subject the trustee, the master servicer or
the depositor to any obligation or liability in addition to those undertaken in
the Agreements.
As to each series, an election may be made to treat the related trust fund
or designated portions thereof as a "real estate mortgage investment conduit" or
REMIC as defined in the Code. The related prospectus supplement will specify
whether a REMIC election is to be made. Alternatively, the Agreement for a
series may provide that a REMIC election may be made at the discretion of the
depositor or the master servicer and may only be made if certain conditions are
satisfied. As to any series for which a REMIC election will be made, the terms
and provisions applicable to the making of the REMIC election will be set forth
in the related prospectus supplement. If a REMIC election is made with respect
to a series, one of the classes will be designated as evidencing the sole class
of "residual interests" in the related REMIC, as defined in the Code. All other
classes of securities in the series will constitute "regular interests" in the
related REMIC, as defined in the Code. As to each series with respect to which a
REMIC election is to be made, the master servicer or a holder of the related
residual certificate will be obligated to take all actions required in order to
comply with applicable laws and regulations and will be obligated to pay any
prohibited transaction taxes. The master servicer, unless otherwise provided in
the related prospectus supplement, will be entitled to reimbursement for these
payments from the assets of the trust fund or from any holder of the related
residual certificate.
Distributions on Securities
General. In general, the method of determining the amount of distributions
on a particular series of securities will depend on the type of credit support,
if any, that is used with respect to the series. See "Credit
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Enhancement." Set forth below are descriptions of various methods that may be
used to determine the amount of distributions on the securities of a particular
series. The prospectus supplement for each series of securities will describe
the method to be used in determining the amount of distributions on the
securities of the series.
Distributions allocable to principal and interest on the securities will be
made by the trustee out of, and only to the extent of, funds in the related
Security Account, including any funds transferred from any reserve fund. As
between securities of different classes and as between distributions of
principal (and, if applicable, between distributions of Principal Prepayments,
as defined below, and scheduled payments of principal) and interest,
distributions made on any distribution date will be applied as specified in the
related prospectus supplement. The prospectus supplement will also describe the
method for allocating distributions among securities of a particular class.
Available Funds. All distributions on the securities of each series on each
distribution date will be made from the Available Funds described below, in
accordance with the terms described in the related prospectus supplement and
specified in the Agreement. "Available Funds" for each distribution date will
generally equal the amount on deposit in the related Security Account on the
distribution date (net of related fees and expenses payable by the related trust
fund) other than amounts to be held in the Security Account for distribution on
future distribution dates.
Distributions of Interest. Interest will accrue on the aggregate principal
balance of the securities (or, in the case of securities entitled only to
distributions allocable to interest, the aggregate notional amount) of each
class of securities (the "Class Security Balance") entitled to interest from the
date, at the Pass-Through Rate or interest rate, as applicable (which in either
case may be a fixed rate or rate adjustable as specified in the prospectus
supplement), and for the periods specified in the prospectus supplement. To the
extent funds are available therefor, interest accrued during each specified
period on each class of securities entitled to interest (other than a class of
securities that provides for interest that accrues, but is not currently
payable) will be distributable on the distribution dates specified in the
related prospectus supplement until the aggregate Class Security Balance of the
securities of the class has been distributed in full or, in the case of
securities entitled only to distributions allocable to interest, until the
aggregate notional amount of the securities is reduced to zero or for the period
of time designated in the related prospectus supplement. The original Class
Security Balance of each security will equal the aggregate distributions
allocable to principal to which the security is entitled. Distributions
allocable to interest on each security that is not entitled to distributions
allocable to principal will be calculated based on the notional amount of the
security. The notional amount of a security will not evidence an interest in or
entitlement to distributions allocable to principal but will be used solely for
convenience in expressing the calculation of interest and for certain other
purposes.
Interest payable on the securities of a series on a distribution date will
include all interest accrued during the period specified in the related
prospectus supplement. In the event interest accrues over a period ending two or
more days prior to a distribution date, the effective yield to securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the security were to accrue through the day immediately preceding the
distribution date, and the effective yield (at par) to securityholders will be
less than the indicated coupon rate.
With respect to any class of accrual securities, if specified in the
related prospectus supplement, any interest that has accrued but is not paid on
a given distribution date will be added to the aggregate Class Security Balance
of the class of securities on that distribution date. Distributions of interest
on any class of accrual securities will commence only after the occurrence of
the events specified in the prospectus supplement. Prior to that time, the
beneficial ownership interest in the trust fund or the principal balance, as
applicable, of the class of accrued securities, as reflected in the aggregate
Class Security Balance of the class of accrual securities, will increase on each
distribution date by the amount of interest that accrued on the class of accrual
securities during the preceding interest accrual period but that was not
required to be distributed to that class on the distribution date. The class of
accrual securities will thereafter accrue interest on its outstanding Class
Security Balance as so adjusted.
Distributions of Principal. The related prospectus supplement will specify
the method by which the amount of principal to be distributed on the securities
on each distribution date will be calculated and the manner in which the amount
will be allocated among the classes of securities entitled to distributions of
principal. The aggregate Class Security Balance of any class of securities
entitled to distributions of principal generally will be the
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aggregate original Class Security Balance of the class of securities specified
in the prospectus supplement, reduced by all distributions reported to the
holders of the securities as allocable to principal and,
o in the case of accrual securities, in general, increased by all
interest accrued but not then distributable on the accrual securities;
and
o in the case of adjustable rate securities, subject to the effect of
negative amortization, if applicable.
If so provided in the related prospectus supplement, one or more classes of
securities will be entitled to receive all or a disproportionate percentage of
the payments of principal which are received from borrowers in advance of their
scheduled due dates and are not accompanied by amounts representing scheduled
interest due after the month of the payments ("Principal Prepayments") in the
percentages and under the circumstances or for the periods specified in the
prospectus supplement. The allocation of Principal Prepayments to a class or
classes of securities will have the effect of accelerating the amortization of
those securities while increasing the interests evidenced by one or more other
classes of securities in the trust fund. Increasing the interests of the other
classes of securities relative to that of certain securities is intended to
preserve the availability of the subordination provided by the other securities.
See "Credit Enhancement -- Subordination."
Unscheduled Distributions. If specified in the related prospectus
supplement, the securities will be subject to receipt of distributions before
the next scheduled distribution date under the circumstances and in the manner
described below and in the prospectus supplement. If applicable, the trustee
will be required to make unscheduled distributions on the day and in the amount
specified in the related prospectus supplement if, due to substantial payments
of principal (including Principal Prepayments) on the Trust Fund Assets, the
trustee or the master servicer determines that the funds available or
anticipated to be available from the Security Account and, if applicable, any
reserve fund, may be insufficient to make required distributions on the
securities on that distribution date. The applicable prospectus supplement may
provide for limits on the amount of an unscheduled distribution, but if it does
not, the amount of any unscheduled distribution that is allocable to principal
will not exceed the amount that would otherwise have been required to be
distributed as principal on the securities on the next distribution date. The
applicable prospectus supplement may specify whether the unscheduled
distribution will include interest, but if it does not, the unscheduled
distributions will include interest at the applicable Pass-Through Rate (if any)
or interest rate (if any) on the amount of the unscheduled distribution
allocable to principal for the period and to the date specified in the
prospectus supplement.
Advances
To the extent provided in the related prospectus supplement, the master
servicer will be required to advance on or before each distribution date (from
its own funds, funds advanced by sub-servicers or funds held in the Security
Account for future distributions to the holders of securities of the related
series), an amount equal to the aggregate of payments of interest and/or
principal that were delinquent on the related Determination Date (as that term
is defined in the related prospectus supplement) and were not advanced by any
sub-servicer, subject to the master servicer's determination that those advances
may be recoverable out of late payments by borrowers, Liquidation Proceeds,
Insurance Proceeds (as defined below) or otherwise. In the case of cooperative
loans, the master servicer also may be required to advance any unpaid
maintenance fees and other charges under the related proprietary leases as
specified in the related prospectus supplement.
In making advances, the master servicer will endeavor to maintain a regular
flow of scheduled interest and principal payments to holders of the securities,
rather than to guarantee or insure against losses. If advances are made by the
master servicer from cash being held for future distribution to securityholders,
the master servicer will replace those funds on or before any future
distribution date to the extent that funds in the applicable Security Account on
the future distribution date would be less than the amount required to be
available for distributions to securityholders on that distribution date. Any
master servicer funds advanced will be reimbursable to the master servicer out
of recoveries on the specific loans with respect to which those advances were
made (e.g., late payments made by the related borrower, any related Insurance
Proceeds, Liquidation Proceeds or proceeds of any loan purchased by the
depositor, a sub-servicer or a seller pursuant to the related Agreement).
Advances by the master servicer (and any advances by a sub-servicer) also will
be reimbursable to the master servicer (or sub-servicer) from
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cash otherwise distributable to securityholders (including the holders of Senior
securities) to the extent that the master servicer determines that the advances
previously made are not ultimately recoverable as described above. To the extent
provided in the related prospectus supplement, the master servicer also will be
obligated to make advances, to the extent recoverable out of Insurance Proceeds,
Liquidation Proceeds or otherwise, in respect of certain taxes and insurance
premiums not paid by borrowers on a timely basis. Funds so advanced are
reimbursable to the master servicer to the extent permitted by the related
Agreement. The obligations of the master servicer to make advances may be
supported by a cash advance reserve fund, a surety bond or other arrangement of
the type described in this prospectus under "Credit Enhancement," in each case
as described in the related prospectus supplement.
In the event the master servicer or a sub-servicer fails to make a required
advance, the applicable prospectus supplement may specify whether another party
will have advancing obligations, but if it does not, the trustee will be
obligated to make the advance in its capacity as successor servicer. If the
trustee makes an advance, it will be entitled to be reimbursed for the advance
to the same extent and degree as the master servicer or a sub-servicer is
entitled to be reimbursed for advances. See "Description of the Securities --
Distributions on Securities."
Reports to Securityholders
Prior to or concurrently with each distribution on a distribution date the
master servicer or the trustee will furnish to each securityholder of record of
the related series a statement setting forth, to the extent applicable to the
related series of securities, among other things:
o the amount of the distribution allocable to principal, separately
identifying the aggregate amount of any Principal Prepayments and if
so specified in the related prospectus supplement, any applicable
prepayment penalties included in the distribution;
o the amount of the distribution allocable to interest;
o the amount of any advance;
o the aggregate amount (a) otherwise allocable to the Subordinated
Securityholders on the distribution date, and (b) withdrawn from the
reserve fund, if any, that is included in the amounts distributed to
the Senior Securityholders;
o the outstanding principal balance or notional amount of each class of
the related series after giving effect to the distribution of
principal on the distribution date;
o the percentage of principal payments on the loans (excluding
prepayments), if any, which each class will be entitled to receive on
the following distribution date;
o the percentage of Principal Prepayments on the loans, if any, which
each class will be entitled to receive on the following distribution
date;
o the related amount of the servicing compensation retained or withdrawn
from the Security Account by the master servicer, and the amount of
additional servicing compensation received by the master servicer
attributable to penalties, fees, excess Liquidation Proceeds and other
similar charges and items;
o the number and aggregate principal balances of loans (A) delinquent
(exclusive of loans in foreclosure) 1 to 30 days, 31 to 60 days, 61 to
90 days and 91 or more days and (B) in foreclosure and delinquent 1 to
30 days, 31 to 60 days, 61 to 90 days and 91 or more days, as of the
close of business on the last day of the calendar month preceding the
distribution date;
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o the book value of any real estate acquired through foreclosure or
grant of a deed in lieu of foreclosure;
o the Pass-Through Rate or interest rate, as applicable, if adjusted
from the date of the last statement, of any class expected to be
applicable to the next distribution to that class;
o if applicable, the amount remaining in any reserve fund at the close
of business on the distribution date;
o if applicable, the amount of the Pre-Funding Amount deployed by the
trustee to purchase Subsequent Loans (as defined herein) during the
preceding collection period;
o the Pass-Through Rate or interest rate, as applicable, as of the day
prior to the immediately preceding distribution date;
o any amounts remaining under letters of credit, pool policies or other
forms of credit enhancement; and
o the servicing fee payable to the master servicer and any subservicer,
if applicable.
Where applicable, any amount set forth above may be expressed as a dollar
amount per single security of the relevant class having the percentage interest
specified in the related prospectus supplement. The report to securityholders
for any series of securities may include additional or other information of a
similar nature to that specified above.
In addition, within a reasonable period of time after the end of each
calendar year, the master servicer or the trustee will mail to each
securityholder of record at any time during that calendar year a report as to
(a) the aggregate of amounts reported pursuant to (i) and (ii) above for that
calendar year or, in the event the person was a securityholder of record during
a portion of that calendar year, for the applicable portion of that calendar
year and (b) such other customary information as may be deemed necessary or
desirable for securityholders to prepare their tax returns.
Categories of Classes of Securities
The securities of any series may be comprised of one or more classes. These
classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
prospectus supplement for a series of securities may identify the classes which
comprise the series by reference to the following categories.
CATEGORIES OF CLASSES DEFINITION
- ------------------------------------- ----------------------------------------
Principal Types
Accretion Directed................... A class that receives principal payments
from the accreted interest from
specified Accrual classes. An accretion
directed class also may receive
principal payments from principal paid
on the underlying Trust Fund Assets for
the related series.
Component Securities................. 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
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CATEGORIES OF CLASSES DEFINITION
- ------------------------------------- ----------------------------------------
identified as falling into one or more
of the categories in this chart.
Notional Amount Securities........... A class having no principal balance and
bearing interest on the related notional
amount. The notional amount is used for
purposes of the determination of
interest distributions.
Planned Principal Class or PAC'S..... A class that is designed to receive
principal payments using a predetermined
principal balance schedule derived by
assuming two constant prepayment rates
for the underlying Trust Fund Assets.
These two rates are the endpoints for
the "structuring range" for the planned
principal class. The planned principal
classes in any series of certificates
may be subdivided into different
categories (e.g., primary planned
principal classes, secondary planned
principal classes and so forth) having
different effective structuring ranges
and different principal payment
priorities. The structuring range for
the secondary planned principal class of
a series of certificates will be
narrower than that for the primary
planned principal class of the series.
Scheduled Principal Class............ 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 Trust Fund Assets.
These two rates are the endpoints for
the "structuring range" for the
scheduled principal class.
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.
Strip................................ A class that receives a constant
proportion, or "strip," of the principal
payments on the underlying Trust Fund
Assets.
Support Class (also sometimes
referred to as "companion
classes")......................... 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 and/or
Scheduled Principal Classes.
Targeted Principal Class or TACs..... A class that is designed to receive
principal payments using a predetermined
principal balance schedule derived by
assuming a single constant prepayment
rate for the underlying Trust Fund
Assets.
Interest Types
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CATEGORIES OF CLASSES DEFINITION
- ------------------------------------- ----------------------------------------
Fixed Rate........................... A class with an interest rate that is
fixed throughout the life of the class.
Floating Rate........................ A class with an interest rate that
resets periodically based upon a
designated index and that varies
directly with changes in the index.
Inverse Floating Rate................ A class with an interest rate that
resets periodically based upon a
designated index and that varies
inversely with changes in the index.
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).
Interest Only........................ A class that receives some or all of the
interest payments made on the underlying
Trust Fund Assets and little or no
principal. Interest Only classes have
either a nominal principal balance or a
notional amount. A nominal principal
balance represents actual principal that
will be paid on the class. It is
referred to as nominal since it is
extremely small compared to other
classes. A notional amount is the amount
used as a reference to calculate the
amount of interest due on an Interest
Only class that is not entitled to any
distributions in respect of principal.
Principal Only....................... A class that does not bear interest and
is entitled to receive only
distributions in respect of principal.
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 that class on each
applicable distribution date, with the
remainder of the accrued interest to be
distributed currently as interest on
that class. This accretion may continue
until a specified event has occurred or
until the Partial Accrual class is
retired.
Accrual.............................. A class that accretes the amount of
accrued interest otherwise distributable
on that class, which amount will be
added as principal to the principal
balance of that class on each applicable
distribution date. The accretion may
continue until some specified event has
occurred or until the Accrual class is
retired.
Indices Applicable to Floating Rate and Inverse Floating Rate Classes
LIBOR
The applicable prospectus supplement may specify some other basis for
determining LIBOR, but if it does not, on the LIBOR determination date (as
defined in the related prospectus supplement) for each class of certificates of
a series for which the applicable interest rate is determined by reference to an
index denominated as LIBOR, the person designated in the related Pooling and
Servicing Agreement as the calculation agent will determine LIBOR in accordance
with one of the two methods described below (which method will be specified in
the related prospectus supplement):
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LIBO Method
If using this method to calculate LIBOR, the calculation agent will
determine LIBOR by reference to the quotations, as set forth on the Reuters
Screen LIBO Page, offered by the principal London office of each of the
designated reference banks meeting the criteria set forth in this prospectus for
making one-month United States dollar deposits in leading banks in the London
Interbank market, as of 11:00 a.m. (London time) on the LIBOR determination
date. In lieu of relying on the quotations for those reference banks that appear
at the time on the Reuters Screen LIBO Page, the calculation agent will request
each of the reference banks to provide the offered quotations at the time.
Under this method LIBOR will be established by the calculation agent on
each LIBOR determination date as follows:
(a) If on any LIBOR determination date two or more reference banks provide
offered quotations, LIBOR for the next interest accrual period shall be the
arithmetic mean of the offered quotations (rounded upwards if necessary to the
nearest whole multiple of 1/32%).
(b) If on any LIBOR determination date only one or none of the reference
banks provides offered quotations, LIBOR for the next interest accrual period
shall be whichever is the higher of
o LIBOR as determined on the previous LIBOR determination date, or
o the reserve interest rate.
The reserve interest rate shall be the rate per annum which the calculation
agent determines to be either
o the arithmetic mean (rounded upwards if necessary to the nearest whole
multiple of 1/32%) of the one-month United States dollar lending rates
that New York City banks selected by the calculation agent are
quoting, on the relevant LIBOR determination date, to the principal
London offices of at least two of the reference banks to which the
quotations are, in the opinion of the calculation agent being so made,
or
o if the calculation agent cannot determine the arithmetic mean, the
lowest one-month United States dollar lending rate which New York City
banks selected by the calculation agent are quoting on the LIBOR
determination date to leading European banks.
(c) If on any LIBOR determination date for a class specified in the related
prospectus supplement, the calculation agent is required but is unable to
determine the reserve interest rate in the manner provided in paragraph (b)
above, LIBOR for the next interest accrual period shall be LIBOR as determined
on the preceding LIBOR determination date, or, in the case of the first LIBOR
determination date, LIBOR shall be considered to be the per annum rate specified
as such in the related prospectus supplement.
Each reference bank shall be a leading bank engaged in transactions in
Eurodollar deposits in the international Eurocurrency market; shall not control,
be controlled by, or be under common control with the calculation agent; and
shall have an established place of business in London. If a reference bank
should be unwilling or unable to act as such or if appointment of a reference
bank is terminated, another leading bank meeting the criteria specified above
will be appointed.
BBA Method
If using this method of determining LIBOR, the calculation agent will
determine LIBOR on the basis of the British Bankers' Association "Interest
Settlement Rate" for one-month deposits in United States dollars as found on
Telerate page 3750 as of 11:00 a.m. London time on each LIBOR determination
date. Interest Settlement Rates currently are based on rates quoted by eight
British Bankers' Association designated banks as being, in the view of the
banks, the offered rate at which deposits are being quoted to prime banks in the
London interbank market. The
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Interest Settlement Rates are calculated by eliminating the two highest rates
and the two lowest rates, averaging the four remaining rates, carrying the
result (expressed as a percentage) out to six decimal places, and rounding to
five decimal places.
If on any LIBOR determination date, the calculation agent is unable to
calculate LIBOR in accordance with the method set forth in the immediately
preceding paragraph, LIBOR for the next interest accrual period shall be
calculated in accordance with the LIBOR method described under "LIBO Method."
The establishment of LIBOR on each LIBOR determination date by the
calculation agent and its calculation of the rate of interest for the applicable
classes for the related interest accrual period shall (in the absence of
manifest error) be final and binding.
COFI
The Eleventh District Cost of Funds Index is designed to represent the
monthly weighted average cost of funds for savings institutions in Arizona,
California and Nevada that are member institutions of the Eleventh Federal Home
Loan Bank District (the "Eleventh District"). The Eleventh District Cost of
Funds Index for a particular month reflects the interest costs paid on all types
of funds held by Eleventh District member institutions and is calculated by
dividing the cost of funds by the average of the total amount of those funds
outstanding at the end of that month and of the prior month and annualizing and
adjusting the result to reflect the actual number of days in the particular
month. If necessary, before these calculations are made, the component figures
are adjusted by the Federal Home Loan Bank of San Francisco ("FHLBSF") to
neutralize the effect of events such as member institutions leaving the Eleventh
District or acquiring institutions outside the Eleventh District. The Eleventh
District Cost of Funds Index is weighted to reflect the relative amount of each
type of funds held at the end of the relevant month. The major components of
funds of Eleventh District member institutions are: savings deposits, time
deposits, FHLBSF advances, repurchase agreements and all other borrowings.
Because the component funds represent a variety of maturities whose costs may
react in different ways to changing conditions, the Eleventh District Cost of
Funds Index does not necessarily reflect current market rates.
A number of factors affect the performance of the Eleventh District Cost of
Funds Index, which may cause it to move in a manner different from indices tied
to specific interest rates, such as United States Treasury bills or LIBOR.
Because the liabilities upon which the Eleventh District Cost of Funds Index is
based were issued at various times under various market conditions and with
various maturities, the Eleventh District Cost of Funds Index may not
necessarily reflect the prevailing market interest rates on new liabilities of
similar maturities. Moreover, as stated above, the Eleventh District Cost of
Funds Index is designed to represent the average cost of funds for Eleventh
District savings institutions for the month prior to the month in which it its
due to be published. Additionally, the Eleventh District Cost of Funds Index may
not necessarily move in the same direction as market interest rates at all
times, since as longer term deposits or borrowings mature and are renewed at
prevailing market interest rates, the Eleventh District Cost of Funds Index is
influenced by the differential between the prior and the new rates on those
deposits or borrowings. In addition, movements of the Eleventh District Cost of
Funds Index, as compared to other indices tied to specific interest rates, may
be affected by changes instituted by the FHLBSF in the method used to calculate
the Eleventh District Cost of Funds Index.
The FHLBSF publishes the Eleventh District Cost of Funds Index in its
monthly Information Bulletin. Any individual may request regular receipt by mail
of Information Bulletins by writing the Federal Home Loan Bank of San Francisco,
P.O. Box 7948, 600 California Street, San Francisco, California 94120, or by
calling (415) 616-1000. The Eleventh District Cost of Funds Index may also be
obtained by calling the FHLBSF at (415) 616-2600.
The FHLBSF has stated in its Information Bulletin that the Eleventh
District Cost of Funds Index for a month "will be announced on or near the last
working day" of the following month and also has stated that it "cannot
guarantee the announcement" of the index on an exact date. So long as the index
for a month is announced on or before the tenth day of the second following
month, the interest rate for each class of securities of a series as to which
the applicable interest rate is determined by reference to an index denominated
as COFI (each, a class of "COFI securities") for the Interest Accrual Period
commencing in the second following month will be based on the Eleventh District
Cost of Funds Index for the second preceding month. If publication is delayed
beyond the tenth day, the interest rate will be based on the Eleventh District
Cost of Funds Index for the third preceding month.
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The applicable prospectus supplement may specify some other basis for
determining COFI, but if it does not, then if on the tenth day of the month in
which any interest accrual period commences for a class of COFI certificates the
most recently published Eleventh District Cost of Funds Index relates to a month
before the third preceding month, the index for the current interest accrual
period and for each succeeding interest accrual period will, except as described
in the next to last sentence of this paragraph, be based on the National Monthly
Median Cost of Funds Ratio to SAIF-Insured Institutions (the "National Cost of
Funds Index") published by the Office of Thrift Supervision (the "OTS") for the
third preceding month (or the fourth preceding month if the National Cost of
Funds Index for the third preceding month has not been published on the tenth
day of an interest accrual period). Information on the National Cost of Funds
Index may be obtained by writing the OTS at 1700 G Street, N.W., Washington,
D.C. 20552 or calling (202) 906-6677, and the current National Cost of Funds
Index may be obtained by calling (202) 906-6988. If on the tenth day of the
month in which an interest accrual period commences the most recently published
National Cost of Funds Index relates to a month before the fourth preceding
month, the applicable index for the interest accrual period and each succeeding
interest accrual period will be based on LIBOR, as determined by the calculation
agent in accordance with the Agreement relating to the series of certificates. A
change of index from the Eleventh District Cost of Funds Index to an alternative
index will result in a change in the index level and could increase its
volatility, particularly if LIBOR is the alternative index.
The establishment of COFI by the calculation agent and its calculation of
the rates of interest for the applicable classes for the related interest
accrual period shall (in the absence of manifest error) be final and binding.
Treasury Index
The applicable prospectus supplement may specify some other basis for
determining and defining the Treasury index, but if it does not, on the Treasury
index determination date for each class of securities of a series for which the
applicable interest rate is determined by reference to an index denominated as a
Treasury index, the calculation agent will ascertain the Treasury index for
Treasury securities of the maturity and for the period (or, if applicable, date)
specified in the related prospectus supplement. The Treasury index for any
period means the average of the yield for each business day during the specified
period (and for any date means the yield for the date), expressed as a per annum
percentage rate, on U.S. Treasury securities adjusted to the "constant maturity"
specified in the prospectus supplement or if no "constant maturity" is so
specified, U.S. Treasury securities trading on the secondary market having the
maturity specified in the prospectus supplement, in each case as published by
the Federal Reserve Board in its Statistical Release No. H.15 (519). Statistical
Release No. H.15 (519) is published on Monday or Tuesday of each week and may be
obtained by writing or calling the Publications Department at the Board of
Governors of the Federal Reserve System, 21st and C Streets, Washington, D.C.
20551 (202) 452-3244. If the calculation agent has not yet received Statistical
Release No. H.15 (519) for a week, then it will use the Statistical Release from
the preceding week.
Yields on U.S. Treasury securities at "constant maturity" are derived from
the U.S. Treasury's daily yield curve. This curve, which relates the yield on a
security to its time to maturity, is based on the closing market bid yields on
actively traded Treasury securities in the over-the-counter market. These market
yields are calculated from composites of quotations reported by five leading
U.S. Government securities dealers to the Federal Reserve Bank of New York. This
method provides a yield for a given maturity even if no security with that exact
maturity is outstanding. In the event that the Treasury Index is no longer
published, a new index based upon comparable data and methodology will be
designated in accordance with the Agreement relating to the particular series of
securities. The Calculation Agent's determination of the Treasury Index, and its
calculation of the rates of interest for the applicable classes for the related
Interest Accrual Period shall (in the absence of manifest error) be final and
binding.
Prime Rate
The applicable prospectus supplement may specify the party responsible for
determining the Prime Rate, but if it does not, on the Prime Rate Determination
Date (as that term is defined in the related prospectus supplement) for each
class of securities of a series as to which the applicable interest rate is
determined by reference to an index denominated as the Prime Rate, the
calculation agent will ascertain the Prime Rate for the related interest accrual
period. The applicable prospectus supplement may provide for the means of
determining the Prime Rate, but if it does not, the Prime Rate for an interest
accrual period will be the "Prime Rate" as published in the "Money Rates"
section of The Wall Street Journal (or if not so published, the "Prime Rate" as
published in a newspaper of
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general circulation selected by the calculation agent in its sole discretion) on
the related Prime Rate Determination Date. If a prime rate range is given, then
the average of the range will be used. In the event that the Prime Rate is no
longer published, a new index based upon comparable data and methodology will be
designated in accordance with the Agreement relating to the particular series of
securities. The calculation agent's determination of the Prime Rate and its
calculation of the rates of interest for the related interest accrual period
shall (in the absence of manifest error) be final and binding.
Book-entry Registration of Securities
As described in the related prospectus supplement, if not issued in fully
registered form, each class of securities will be registered as book-entry
securities. Persons acquiring beneficial ownership interests in the securities
("Security Owners") will hold their securities through the Depository Trust
Company ("DTC") in the United States, or Clearstream, Luxembourg or Euroclear
(in Europe) if they are participants of those systems, or indirectly through
organizations which are participants in those systems. The book-entry securities
will be issued in one or more certificates which equal the aggregate principal
balance of the securities and will initially be registered in the name of Cede &
Co., the nominee of DTC. 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 depositories which in turn will hold those positions in customers'
securities accounts in the depositories' names on the books of DTC. Citibank,
N.A., will act as depositary for Clearstream, Luxembourg and JP Morgan Chase
Bank will act as depositary for Euroclear (in those capacities, individually the
"Relevant Depositary" and collectively the "European Depositories"). Except as
described below, no person acquiring a book-entry security (each, a "beneficial
owner") will be entitled to receive a physical certificate representing the
security (a "Definitive Security"). Unless and until Definitive Securities are
issued, it is anticipated that the only "securityholders" of the securities will
be Cede & Co., as nominee of DTC. Security Owners are only permitted to exercise
their rights indirectly through the participating organizations that use the
services of DTC, including securities brokers and dealers, banks and trust
companies and clearing corporations and certain other organizations and DTC.
A Security 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 the book-entry security 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, Luxembourg or Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and
interest on, the securities from the applicable trustee through DTC and DTC
participants. While the securities are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC must make
book-entry transfers among participants on whose behalf it acts with respect to
the securities and is required to receive and transmit distributions of
principal of, and interest on, the securities. Participants and organizations
that have indirect access to the DTC system, such as banks, brokers, dealers,
trust companies and other indirect participants that clear through or maintain a
custodial relationship with a participant, with whom Security Owners have
accounts for securities are similarly required to make book-entry transfers and
receive and transmit those distributions on behalf of their respective Security
Owners. Accordingly, although Security Owners will not possess physical
certificates, the Rules provide a mechanism by which Security Owners will
receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the book-entry securities, except
under the limited circumstances described below. Unless and until Definitive
Securities are issued, Security Owners who are not participants may transfer
ownership of securities only through participants and indirect participants by
instructing them to transfer securities, by book-entry transfer, through DTC for
the account of the purchasers of the securities, which account is maintained
with their respective participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of securities will be executed through
DTC and the accounts of the respective Participants at DTC will be debited and
credited.
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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 Security Owners.
Because of time zone differences, 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. Those credits or any
transactions in those securities will be reported to the relevant Euroclear or
Clearstream, Luxembourg participants on the business day following the DTC
settlement date. Cash received in Clearstream, Luxembourg or Euroclear as a
result of sales of securities by or through a Clearstream, Luxembourg
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, 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, see "Material Federal Income Tax Consequences
- -- Tax Treatment of Foreign Investors" and " -- Tax Consequences to Holders of
the Notes -- Backup Withholding" in this prospectus and "Global Clearance,
Settlement and Tax Documentation Procedures -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I attached to this prospectus.
Transfers between participants will occur in accordance with DTC rules.
Transfers between Clearstream, Luxembourg 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,
Luxembourg 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 Depositary. However, these
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. Clearstream, Luxembourg 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 participants, some of which (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 securities, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of book-entry securities will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
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 merged
its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG. The merger involved the transfer by Cedel International of
substantially all of its assets and liabilities to a new Luxembourg company, New
Cedel International, societe anonyme, which is 50% owned by Cedel International
and 50% owned by Deutsche Borse Clearing AG'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 re-name the companies in the group to give them a cohesive brand
name. The new brand name that was chosen is "Clearstream." With effect from
January 14, 2000 New Cedel International 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."
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On January 17, 2000 Deutsche Borse Clearing AG was renamed "Clearstream
Banking AG." This means that there are now two entities in the corporate group
headed by Clearstream International which share the name "Clearstream Banking,"
the entity previously named "Cedelbank" and the entity previously named
"Deutsche Borse Clearing AG."
Clearstream, Luxembourg holds securities for its customers and facilitates
the clearance and settlement of securities transactions between Clearstream,
Luxembourg participants through electronic book-entry changes in accounts of
Clearstream, Luxembourg participants, thereby eliminating the need for physical
movement of securities. Transactions may be settled in Clearstream, Luxembourg
in any of 36 currencies, including United States dollars. Clearstream,
Luxembourg provides to its participants, 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, which supervises Luxembourg banks.
Clearstream, Luxembourg's participants are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. participants are
limited to securities brokers and dealers and banks. Currently, Clearstream,
Luxembourg has approximately 2,000 customers located in over 80 countries,
including all major European countries, Canada and the United States. Indirect
access to Clearstream, Luxembourg is also 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 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 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 deals
with domestic securities markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by MGT/EOC under contract with Euroclear Clearance Systems S.C., a
Belgian cooperative corporation. All operations are conducted by MGT/EOC, and
all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator, not Euroclear Clearance Systems, S.C.
Euroclear Clearance Systems S.C. 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.
MGT/EOC is the Belgian branch of a New York banking corporation which is a
member bank of the Federal Reserve System. As such, it is regulated and examined
by the Board of Governors of the Federal Reserve System and the New York State
Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with MGT/EOC 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. MGT/EOC 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.
Under a book-entry format, beneficial owners of the book-entry securities
may experience some delay in their receipt of payments, since those payments
will be forwarded by the trustee to Cede & Co., as nominee of DTC. Distributions
with respect to securities held through Clearstream, Luxembourg or Euroclear
will be credited to the cash accounts of Clearstream, Luxembourg participants or
Euroclear participants in accordance with the relevant system's rules and
procedures, to the extent received by the Relevant Depositary. Those
distributions will be subject
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to tax reporting in accordance with relevant United States tax laws and
regulations. See "Material Federal Income Tax Consequences -- Tax Treatment of
Foreign Investors" and " -- Tax Consequences to Holders of the Notes -- Backup
Withholding" in this prospectus and "Global Clearance, Settlement and Tax
Documentation Procedures -- Certain U.S. Federal Income Tax Documentation
Requirements" in Annex I attached to this prospectus. Because DTC can only act
on behalf of Financial Intermediaries, the ability of a Security Owner to pledge
book-entry securities to persons or entities that do not participate in the
depository system may be limited due to the lack of physical certificates for
the book-entry securities. In addition, issuance of the book-entry securities in
book-entry form may reduce the liquidity of those securities in the secondary
market since certain potential investors may be unwilling to purchase securities
for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to Security Owners upon
request, in accordance with the Rules, and to the Financial Intermediaries to
whose DTC accounts the book-entry securities of those Security Owners are
credited.
DTC has advised the depositor and the trustee that, unless and until
Definitive Securities are issued, DTC will take any action permitted to be taken
by the holders of the book-entry securities under the applicable Agreement only
at the direction of one or more Financial Intermediaries to whose DTC accounts
the book-entry securities are credited, to the extent that the actions are taken
on behalf of Financial Intermediaries whose holdings include the book-entry
securities. Clearstream, Luxembourg or MGT/EOC, as the case may be, will take
any other action permitted to be taken by a securityholder under the Agreement
on behalf of a Clearstream, Luxembourg participant or Euroclear participant only
in accordance with its relevant rules and procedures and subject to the ability
of the Relevant Depositary to effect the actions on its behalf through DTC. DTC
may take actions, at the direction of the related participants, with respect to
some securities which conflict with actions taken with respect to other
securities.
The applicable prospectus supplement may specify when and for what reasons
Definitive Securities may be issued, but if it does not, Definitive Securities
will be issued to Security Owners or their nominees, rather than to DTC, only if
o DTC or the depositor advises the trustee in writing that DTC is no
longer willing, qualified or able to discharge properly its
responsibilities as nominee and depository with respect to the
book-entry securities and the depositor or the trustee is unable to
locate a qualified successor;
o the depositor, at its sole option, elects to terminate the book-entry
system through DTC; or
o after the occurrence of an event of default under the applicable
Agreement, beneficial owners of securities representing not less than
51% of the aggregate percentage interests evidenced by each class of
securities of the related series issued as book-entry securities
advise the trustee and the DTC through the financial intermediaries in
writing that the continuation of a book-entry system through DTC, or a
successor to it, is no longer in the best interests of the beneficial
owners.
Upon the availability of Definitive Securities, the applicable trustee will
be required to notify all Security Owners of the occurrence of the event
resulting in their availability and the availability through DTC of Definitive
Securities. Upon surrender by DTC of the global certificate or certificates
representing the book-entry securities and instructions for re-registration, the
applicable trustee will issue Definitive Securities, and thereafter the
applicable trustee will recognize the holders of Definitive Securities as
securityholders under the applicable Agreement.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of securities among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform those procedures and those
procedures may be discontinued at any time.
The foregoing information with respect to DTC, Clearstream, Luxembourg and
Euroclear has been provided for informational purposes only and is not a
representation, warranty or contract modification of any kind by DTC,
Clearstream, Luxembourg or Euroclear.
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None of the master servicer, the depositor 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 securities held by
Cede & Co., as nominee of DTC, or for maintaining, supervising or reviewing any
records relating to the beneficial ownership interests.
CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or more classes of a
series of securities or with respect to the related Trust Fund Assets. Credit
enhancement may be in the form of a limited financial guaranty policy issued by
an entity named in the related prospectus supplement, the subordination of one
or more classes of the securities of the series, the establishment of one or
more reserve funds, the use of a cross-collateralization feature, use of a
mortgage pool insurance policy, FHA Insurance, VA Guarantee, bankruptcy bond,
special hazard insurance policy, surety bond, letter of credit, guaranteed
investment contract, overcollateralization, or another method of credit
enhancement contemplated in this prospectus or described in the related
prospectus supplement, or any combination of the foregoing. See "The Agreements
- -- Realization upon Defaulted Loans -- FHA Insurance; VA Guaranties" for a
description of FHA Insurance and VA Guaranties and "-- Insurance Policies,
Surety Bonds and Guaranties" for a description of guaranteed investment
contracts. The applicable prospectus supplement may provide for credit
enhancement which covers all the classes of securities, but if it does not,
credit enhancement will not provide protection against all risks of loss and
will not guarantee repayment of the entire principal balance of the securities
and interest thereon. If losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement, securityholders
will bear their allocable share of any deficiencies.
Subordination
If so specified in the related prospectus supplement, protection afforded
to holders of one or more classes of securities of a series by means of the
subordination feature may be accomplished by the preferential right of holders
of one or more other classes of the series (the "Senior Securities") to
distributions in respect of scheduled principal, Principal Prepayments, interest
or any combination thereof that otherwise would have been payable to holders of
subordinated securities under the circumstances and to the extent specified in
the related prospectus supplement. Protection may also be afforded to the
holders of Senior Securities of a series by: (i) reducing the ownership interest
(if applicable) of the related subordinated securities; (ii) a combination of
the immediately preceding sentence and clause (i) above; or (iii) as otherwise
described in the related prospectus supplement. If so specified in the related
prospectus supplement, delays in receipt of scheduled payments on the loans and
losses on defaulted loans may be borne first by the various classes of
subordinated securities and thereafter by the various classes of Senior
Securities, in each case under the circumstances and subject to the limitations
specified in the prospectus supplement. The aggregate distributions in respect
of delinquent payments on the loans over the lives of the securities or at any
time, the aggregate losses in respect of defaulted loans which must be borne by
the Subordinated Securities by virtue of subordination and the amount of the
distributions otherwise distributable to the Subordinated Securityholders that
will be distributable to Senior Securityholders on any distribution date may be
limited as specified in the related prospectus supplement. If aggregate
distributions in respect of delinquent payments on the loans or aggregate losses
in respect of the loans were to exceed an amount specified in the related
prospectus supplement, holders of Senior Securities would experience losses on
the securities.
In addition to or in lieu of the foregoing, if so specified in the related
prospectus supplement, all or any portion of distributions otherwise payable to
holders of Subordinated Securities on any distribution date may instead be
deposited into one or more reserve funds established with the trustee or
distributed to holders of Senior Securities. Those deposits may be made on each
distribution date, for specified periods or until the balance in the reserve
fund has reached a specified amount and, following payments from the reserve
fund to holders of Senior Securities or otherwise, thereafter to the extent
necessary to restore the balance in the reserve fund to required levels, in each
case as specified in the related prospectus supplement. Amounts on deposit in
the reserve fund may be released to the holders of certain classes of securities
at the times and under the circumstances specified in the prospectus supplement.
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If specified in the related prospectus supplement, various classes of
Senior Securities and Subordinated Securities may themselves be subordinate in
their right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-collateralization
mechanism or otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among those classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the related prospectus supplement.
As between classes of Subordinated Securities, payments to holders of Senior
Securities on account of delinquencies or losses and payments to any reserve
fund will be allocated as specified in the related prospectus supplement.
Letter of Credit
The letter of credit, if any, with respect to a series of securities will
be issued by the bank or financial institution specified in the related
prospectus supplement (the "L/C Bank"). Under the letter of credit, the L/C Bank
will be obligated to honor drawings thereunder in an aggregate fixed dollar
amount, net of unreimbursed payments thereunder, equal to the percentage
specified in the related prospectus supplement of the aggregate principal
balance of the loans on the related cut-off date or of one or more classes of
securities (the "L/C Percentage"). If so specified in the related prospectus
supplement, the letter of credit may permit drawings in the event of losses not
covered by insurance policies or other credit support, such as losses arising
from damage not covered by standard hazard insurance policies, losses resulting
from the bankruptcy of a borrower and the application of certain provisions of
the federal Bankruptcy Code, or losses resulting from denial of insurance
coverage due to misrepresentations in connection with the origination of a loan.
The amount available under the letter of credit will, in all cases, be reduced
to the extent of the unreimbursed payments thereunder. The obligations of the
L/C Bank under the letter of credit for each series of securities will expire at
the earlier of the date specified in the related prospectus supplement or the
termination of the trust fund. See "The Agreements -- Termination; Optional
Termination." A copy of the letter of credit for a series, if any, will be filed
with the Securities and Exchange Commission (the "SEC") as an exhibit to a
Current Report on Form 8-K to be filed after the issuance of the securities of
the related series.
Insurance Policies, Surety Bonds and Guaranties
If so provided in the prospectus supplement for a series of securities,
deficiencies in amounts otherwise payable on the securities or certain classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Those instruments may cover, with
respect to one or more classes of securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related prospectus supplement. In addition, if specified in the
related prospectus supplement, a trust fund may also include bankruptcy bonds,
special hazard insurance policies, other insurance or guaranties (including
guaranteed investment contracts) for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in the trust fund, (ii) paying administrative expenses or (iii)
establishing a minimum reinvestment rate on the payments made in respect of
those assets or a principal payment rate on those assets. These arrangements may
include agreements under which securityholders are entitled to receive amounts
deposited in various accounts held by the trustee upon the terms specified in
the prospectus supplement. A copy of any related instrument for a series will be
filed with the SEC as an exhibit to a Current Report on Form 8-K to be filed
with the SEC after the issuance of the securities of the related series.
Over-collateralization
If so provided in the prospectus supplement for a series of securities, a
portion of the interest payment on each loan may be applied as an additional
distribution in respect of principal to reduce the principal balance of a
certain class or classes of securities and, thus, accelerate the rate of payment
of principal on that class or those classes of securities. Reducing the
principal balance of the securities without a corresponding reduction in the
principal balance of the underlying Trust Fund Assets will result in
over-collateralization.
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Reserve Accounts
If specified in the related prospectus supplement, credit support with
respect to a series of securities will be provided by the establishment and
maintenance with the trustee for the series of securities, in trust, of one or
more reserve funds for the series. The related prospectus supplement will
specify whether or not any reserve funds will be included in the trust fund for
a series.
The reserve fund for a series will be funded (i) by the deposit of cash,
United States Treasury securities, instruments evidencing ownership of principal
or interest payments thereon, letters of credit, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
related prospectus supplement, (ii) by the deposit from time to time of certain
amounts, as specified in the related prospectus supplement to which the
Subordinate Securityholders, if any, would otherwise be entitled or (iii) in
such other manner as may be specified in the related prospectus supplement.
Any amounts on deposit in the reserve fund and the proceeds of any other
instrument upon maturity will be held in cash or will be invested in "Permitted
Investments" which may include
(i) obligations of the United States or any agency thereof, provided those
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 (as defined herein) rating
the related series of securities;
(iii) commercial or finance company paper which is then receiving the
highest commercial or finance company paper rating of each Rating
Agency;
(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, provided that the commercial paper and/or
long term unsecured debt obligations of the depository institution or
trust company (or in the case of the principal depository institution
in a holding company system, the commercial paper or long-term
unsecured debt obligations of such holding company, but only if
Moody's Investors Service, Inc. ("Moody's") is not a Rating Agency)
are then rated one of the two highest long-term and the highest
short-term ratings of each Rating Agency for the securities;
(v) demand or time deposits or certificates of deposit issued by any bank
or trust company or savings institution to the extent that the
deposits are fully insured by the FDIC and receiving the highest
short-term debt rating of each Rating Agency;
(vi) guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation receiving the highest short-term debt
rating of each Rating Agency and containing, at the time of the
issuance of the agreements, terms and conditions that will not result
in the downgrading or withdrawal of the rating then assigned to the
securities by any Rating Agency;
(vii) 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 (iv) above;
(viii) 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 the investment, have one of the
two highest ratings of each Rating Agency (except if the Rating
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Agency is Moody's or S&P (as defined herein), such rating shall be the
highest commercial paper rating of Moody's or S&P, as applicable, for
any such securities);
(ix) units of a taxable money-market portfolio having the highest rating
assigned by each Rating Agency (except if Fitch is a Rating Agency and
has not rated the portfolio, the highest rating assigned by Moody's)
and restricted to obligations issued or guaranteed by the United
States of America or entities whose obligations are backed by the full
faith and credit of the United States of America and repurchase
agreements collateralized by such obligations; and
(x) such other investments bearing interest or sold at a discount
acceptable to each Rating Agency as will not result in the downgrading
or withdrawal of the rating then assigned to the securities by either
Rating Agency, as evidenced by a signed writing delivered by each
Rating Agency.
If a letter of credit is deposited with the trustee, that letter of credit
will be irrevocable and will name the trustee, in its capacity as trustee for
the holders of the securities, as beneficiary and will be issued by an entity
acceptable to each Rating Agency that rates the securities of the related
series. Additional information with respect to the instruments deposited in the
reserve funds will be set forth in the related prospectus supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the reserve fund for distribution to the holders
of securities of the related series for the purposes, in the manner and at the
times specified in the related prospectus supplement.
Pool Insurance Policies
If specified in the related prospectus supplement, a separate pool
insurance policy ("Pool Insurance Policy") will be obtained for the pool and
issued by the insurer (the "Pool Insurer") named in the prospectus supplement.
Each Pool Insurance Policy will, subject to the limitations described below,
cover loss by reason of default in payment on loans in the pool in an amount
equal to a percentage specified in the prospectus supplement of the aggregate
principal balance of the loans on the cut-off date which are not covered as to
their entire outstanding principal balances by Primary Mortgage Insurance
Policies. As more fully described below, the master servicer will present claims
thereunder to the Pool Insurer on behalf of itself, the trustee and the holders
of the securities of the related series. The Pool Insurance Policies, however,
are not blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted loans and only upon satisfaction of certain
conditions precedent described below. The applicable prospectus supplement may
provide for the extent of coverage provided by the related Pool Insurance
Policy, but if it does not, the Pool Insurance Policies will not cover losses
due to a failure to pay or denial of a claim under a Primary Mortgage Insurance
Policy.
The applicable prospectus supplement may provide for the conditions for the
presentation of claims under a Pool Insurance Policy, but if it does not, the
Pool Insurance Policy will provide that no claims may be validly presented
unless (i) any required Primary Mortgage Insurance Policy is in effect for the
defaulted loan and a claim thereunder has been submitted and settled; (ii)
hazard insurance on the related Property has been kept in force and real estate
taxes and other protection and preservation expenses have been paid; (iii) if
there has been physical loss or damage to the Property, it has been restored to
its physical condition (reasonable wear and tear excepted) at the time of
issuance of the policy; and (iv) the insured has acquired good and merchantable
title to the Property free and clear of liens except certain permitted
encumbrances. Upon satisfaction of these conditions, the Pool Insurer will have
the option either (a) to purchase the Property securing the defaulted loan at a
price equal to the principal balance thereof plus accrued and unpaid interest at
the Loan Rate to the date of purchase and certain expenses incurred by the
master servicer on behalf of the trustee and securityholders, or (b) to pay the
amount by which the sum of the principal balance of the defaulted loan plus
accrued and unpaid interest at the Loan Rate to the date of payment of the claim
and the aforementioned expenses exceeds the proceeds received from an approved
sale of the Property, in either case net of certain amounts paid or assumed to
have been paid under the related Primary Mortgage Insurance Policy. If any
Property securing a defaulted loan is damaged and proceeds, if any, from the
related hazard insurance policy or the applicable special hazard insurance
policy are insufficient to restore the damaged Property to a condition
sufficient to permit recovery under the Pool Insurance Policy, the master
servicer will not be required to expend its own funds to restore the damaged
Property unless it determines that (i) the
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restoration will increase the proceeds to securityholders on liquidation of the
loan after reimbursement of the master servicer for its expenses and (ii) the
expenses will be recoverable by it through proceeds of the sale of the Property
or proceeds of the related Pool Insurance Policy or any related Primary Mortgage
Insurance Policy.
The applicable prospectus supplement may provide for a Pool Insurance
Policy covering losses resulting from defaults, but if it does not, the Pool
Insurance Policy will not insure (and many Primary Mortgage Insurance Policies
do not insure) against loss sustained by reason of a default arising from, among
other things,
o fraud or negligence in the origination or servicing of a loan,
including misrepresentation by the borrower, the originator or persons
involved in the origination thereof, or
o failure to construct a Property in accordance with plans and
specifications.
A failure of coverage attributable to one of the foregoing events might
result in a breach of the related seller's representations described above and
might give rise to an obligation on the part of the related seller to repurchase
the defaulted loan if the breach cannot be cured by the related seller. No Pool
Insurance Policy will cover (and many Primary Mortgage Insurance Policies do not
cover) a claim in respect of a defaulted loan occurring when the servicer of the
loan, at the time of default or thereafter, was not approved by the applicable
insurer.
The applicable prospectus supplement may provide for a Pool Insurance
Policy featuring a fixed amount of coverage over the life of the policy, but if
it does not, the original amount of coverage under each Pool Insurance Policy
will be reduced over the life of the related securities by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all foreclosed properties. The applicable prospectus
supplement may provide for the exclusion of specified expenses from the coverage
of the Pool Insurance Policy, but if it does not, the amount of claims paid will
include certain expenses incurred by the master servicer as well as accrued
interest on delinquent loans to the date of payment of the claim. Accordingly,
if aggregate net claims paid under any Pool Insurance Policy reach the original
policy limit, coverage under that Pool Insurance Policy will be exhausted and
any further losses will be borne by the related securityholders.
Special Hazard Insurance Policies
If specified in the related prospectus supplement, a separate special
hazard insurance policy will be obtained for the mortgage pool and will be
issued by the insurer named in the prospectus supplement. Each special hazard
insurance policy will, subject to policy limitations, protect holders of the
related securities from loss caused by the application of the coinsurance clause
contained in hazard insurance policies and loss from damage to mortgaged
properties caused by certain hazards not insured against under the standard form
of hazard insurance policy in the states where the mortgaged properties are
located or under a flood insurance policy if the Property is located in a
federally designated flood area. Some of the losses covered include earthquakes
and, to a limited extent, tidal waves and related water damage and other losses
that may be specified in the related prospectus supplement. See "The Agreements
- -- Hazard Insurance." No special hazard insurance policy will cover losses from
fraud or conversion by the trustee or master servicer, war, insurrection, civil
war, certain governmental action, errors in design, faulty workmanship or
materials (except under certain circumstances), nuclear or chemical reaction,
flood (if the Property is located in a federally designated flood area), nuclear
or chemical contamination and certain other risks. The amount of coverage under
any special hazard insurance policy will be specified in the related prospectus
supplement. Each special hazard insurance policy will provide that no claim may
be paid unless hazard and, if applicable, flood insurance on the Property
securing the mortgage loan have been kept in force and other protection and
preservation expenses have been paid.
The applicable prospectus supplement may provide for other payment
coverage, but if it does not, each special hazard policy will insure against
damage to mortgaged properties caused by special hazard losses in an amount
equal to the lesser of:
o the cost of repair to or replacement of the damaged Property, or
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o upon transfer of the Property to the special hazard insurer, the
unpaid principal balance of the mortgage loan at the time of
acquisition of the Property by foreclosure or deed in lieu of
foreclosure, plus accrued interest to the date of claim settlement and
certain expenses incurred by the master servicer with respect to the
Property.
If the unpaid principal balance of a mortgage loan, plus accrued interest
and expenses, is paid by the special hazard insurer, the amount of further
coverage under the related special hazard insurance policy will be reduced by
that amount less any net proceeds from the sale of the Property. In addition,
any amount paid to repair or replace the Property will further reduce special
hazard coverage by that amount.
No special hazard policy will insure against damage that is covered by a
hazard insurance policy or flood insurance policy, if any, maintained by the
mortgagor or the master servicer.
So long as a mortgage pool insurance policy remains in effect, the payment
by the special hazard insurer of the cost of repair or of the unpaid principal
balance of the related mortgage loan plus accrued interest and certain expenses
will not affect the total insurance proceeds paid to certificateholders, but
will affect the relative amounts of coverage remaining under the related special
hazard insurance policy and mortgage pool insurance policy.
To the extent specified in the prospectus supplement, the master servicer
may deposit cash, an irrevocable letter of credit, or any other instrument
acceptable to each rating agency rating the securities of the related series at
the request of the depositor in a special trust account to provide protection in
lieu of or in addition to that provided by a special hazard insurance policy.
The amount of any special hazard insurance policy or of the deposit to the
special trust account relating to the securities may be reduced so long as the
reduction will not result in a downgrading of the rating of the securities by a
rating agency rating securities at the request of the depositor.
Bankruptcy Bonds
If specified in the related prospectus supplement, a bankruptcy bond to
cover losses resulting from proceedings under the federal Bankruptcy Code with
respect to a mortgage loan will be issued by an insurer named in the prospectus
supplement. Each bankruptcy bond will cover, to the extent specified in the
related prospectus supplement, certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal and interest on a mortgage
loan or a reduction by the court of the principal amount of a mortgage loan and
will cover certain unpaid interest on the amount of a principal reduction from
the date of the filing of a bankruptcy petition. The required amount of coverage
under each bankruptcy bond will be set forth in the related prospectus
supplement. Coverage under a bankruptcy bond may be canceled or reduced by the
master servicer if the cancellation or reduction would not adversely affect the
then current rating or ratings of the related securities. See "Legal Aspects of
the Loans -- Anti-deficiency Legislation and Other Limitations on Lenders."
To the extent specified in the prospectus supplement, the master servicer
may deposit cash, an irrevocable letter of credit or any other instrument
acceptable to each nationally recognized rating agency rating the certificates
of the related series at the request of the depositor in a special trust account
to provide protection in lieu of or in addition to that provided by a bankruptcy
bond. The amount of any bankruptcy bond or of the deposit to the special trust
account relating to the certificates may be reduced so long as the reduction
will not result in a downgrading of the rating of the certificates by a rating
agency rating certificates at the request of the depositor.
Cross Support
If specified in the related prospectus supplement, the beneficial ownership
of separate groups of assets included in a trust fund may be evidenced by
separate classes of the related series of securities. In that case, credit
support may be provided by a cross support feature that requires that
distributions be made on securities evidencing a beneficial ownership interest
in other asset groups within the same trust fund. The related prospectus
supplement for a series that includes a cross support feature will describe the
manner and conditions for applying the cross support feature.
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If specified in the related prospectus supplement, the coverage provided by
one or more forms of credit support may apply concurrently to two or more
related trust funds. If applicable, the related prospectus supplement will
identify the trust funds to which the credit support relates and the manner of
determining the amount of the coverage provided by it and of the application of
the coverage to the identified trust funds.
Financial Instruments
If specified in the related prospectus supplement, the trust fund may
include one or more swap arrangements or other financial instruments that are
intended to meet the following goals:
o to convert the payments on some or all of the mortgage loans from
fixed to floating payments, or from floating to fixed, or from
floating based on a particular index to floating based on another
index;
o to provide payments in the event that any index rises above or falls
below specified levels; or
o to provide protection against interest rate changes, certain type of
losses, including reduced market value, or other payment shortfalls to
one or more classes of the related series.
If a trust fund includes financial instruments of this type, the
instruments may be structured to be exempt from the registration requirements of
the Securities Act.
YIELD AND PREPAYMENT CONSIDERATIONS
The yields to maturity and weighted average lives of the securities will be
affected primarily by the amount and timing of principal payments received on or
in respect of the Trust Fund Assets included in the related trust fund. The
original terms to maturity of the loans in a given pool will vary depending upon
the type of loans included the pool. Each prospectus supplement will contain
information with respect to the type and maturities of the loans in the related
pool. The related prospectus supplement will specify the circumstances, if any,
under which the related loans will be subject to prepayment penalties. The
prepayment experience on the loans in a pool will affect the weighted average
life of the related series of securities.
The rate of prepayment on the loans cannot be predicted. Home equity loans
and home improvement contracts have been originated in significant volume only
during the past few years and the depositor is not aware of any publicly
available studies or statistics on the rate of prepayment of these types of
loans. Generally, home equity loans and home improvement contracts are not
viewed by borrowers as permanent financing. Accordingly, home equity loans and
home improvement loans may experience a higher rate of prepayment than
traditional first mortgage loans. On the other hand, because home equity loans
such as the revolving credit line loans generally are not fully amortizing, the
absence of voluntary borrower prepayments could cause rates of principal
payments lower than, or similar to, those of traditional fully-amortizing first
mortgage loans. The prepayment experience of the related trust fund may be
affected by a wide variety of factors, including general economic conditions,
prevailing interest rate levels, the availability of alternative financing,
homeowner mobility and the frequency and amount of any future draws on any
revolving credit line loans. Other factors that might be expected to affect the
prepayment rate of a pool of home equity mortgage loans or home improvement
contracts include the amounts of, and interest rates on, the underlying senior
mortgage loans, and the use of first mortgage loans as long-term financing for
home purchase and subordinate mortgage loans as shorter-term financing for a
variety of purposes, including home improvement, education expenses and
purchases of consumer durables such as automobiles. Accordingly, these loans may
experience a higher rate of prepayment than traditional fixed-rate mortgage
loans. In addition, any future limitations on the right of borrowers to deduct
interest payments on home equity loans for federal income tax purposes may
further increase the rate of prepayments of the loans. The enforcement of a
"due-on-sale" provision (as described below) will have the same effect as a
prepayment of the related loan. See "Legal Aspects of the Loans -- Due-on-Sale
Clauses." The yield to an investor who purchases securities in the secondary
market at a price other
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than par will vary from the anticipated yield if the rate of prepayment on the
loans is actually different than the rate anticipated by the investor at the
time the securities were purchased.
Collections on revolving credit line loans may vary because, among other
things, borrowers may (i) make payments during any month as low as the minimum
monthly payment for that month or, during the interest-only period for certain
revolving credit line loans and, in more limited circumstances, closed-end
loans, with respect to which an interest-only payment option has been selected,
the interest and the fees and charges for that month or (ii) make payments as
high as the entire outstanding principal balance plus accrued interest and the
fees and charges thereon. It is possible that borrowers may fail to make the
required periodic payments. In addition, collections on the loans may vary due
to seasonal purchasing and the payment habits of borrowers.
Generally, all conventional loans will contain due-on-sale provisions
permitting the mortgagee to accelerate the maturity of the loan upon sale or
certain transfers by the borrower of the related Property. Loans insured by the
FHA, and single family loans partially guaranteed by the VA, are assumable with
the consent of the FHA and the VA, respectively. Thus, the rate of prepayments
on those types of loans may be lower than that of conventional loans bearing
comparable interest rates. The master servicer generally will enforce any
due-on-sale or due-on-encumbrance clause, to the extent it has knowledge of the
conveyance or further encumbrance or the proposed conveyance or proposed further
encumbrance of the Property and reasonably believes that it is entitled to do so
under applicable law; provided, however, that the master servicer will not take
any enforcement action that would impair or threaten to impair any recovery
under any related insurance policy. See "The Agreements -- Collection
Procedures" and "Legal Aspects of the Loans" for a description of certain
provisions of each Agreement and certain legal developments that may affect the
prepayment experience on the loans.
The rate of prepayments with respect to conventional mortgage loans has
fluctuated significantly in recent years. In general, if prevailing rates fall
significantly below the Loan Rates borne by the loans, the loans are more likely
to be subject to higher prepayment rates than if prevailing interest rates
remain at or above the Loan Rates. Conversely, if prevailing interest rates rise
appreciably above the Loan Rates borne by the loans, the loans are more likely
to experience a lower prepayment rate than if prevailing rates remain at or
below the Loan Rates. However, there can be no assurance that this will be the
case.
When a full prepayment is made on a loan, the borrower is charged interest
on the principal amount of the loan so prepaid only for the number of days in
the month actually elapsed up to the date of the prepayment, rather than for a
full month. The effect of prepayments in full will be to reduce the amount of
interest passed through or paid in the following month to holders of securities
because interest on the principal amount of any loan so prepaid will generally
be paid only to the date of prepayment. Partial prepayments in a given month may
be applied to the outstanding principal balances of the loans so prepaid on the
first day of the month of receipt or in the month following receipt. In the
latter case, partial prepayments will not reduce the amount of interest passed
through or paid in the month of receipt. The applicable prospectus supplement
may specify when prepayments are passed through to securityholders, but if it
does not, neither full nor partial prepayments will be passed through or paid
until the month following receipt.
Even assuming that the Properties provide adequate security for the loans,
substantial delays could be encountered in connection with the liquidation of
defaulted loans and corresponding delays in the receipt of related proceeds by
securityholders could occur. An action to foreclose on a Property securing a
loan is regulated by state statutes and rules and is subject to many of the
delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete. Furthermore, in some
states an action to obtain a deficiency judgment is not permitted following a
nonjudicial sale of a Property. In the event of a default by a borrower, these
restrictions among other things, may impede the ability of the master servicer
to foreclose on or sell the Property or to obtain liquidation proceeds
sufficient to repay all amounts due on the related loan. In addition, the master
servicer will be entitled to deduct from related liquidation proceeds all
expenses reasonably incurred in attempting to recover amounts due on defaulted
loans and not yet repaid, including payments to senior lienholders, legal fees
and costs of legal action, real estate taxes and maintenance and preservation
expenses.
Liquidation expenses with respect to defaulted mortgage loans generally do
not vary directly with the outstanding principal balance of the loan at the time
of default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case
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of a defaulted mortgage loan having a large remaining principal balance, the
amount realized after expenses of liquidation would be smaller as a percentage
of the remaining principal balance of the small mortgage loan than would be the
case with the other defaulted mortgage loan having a large remaining principal
balance.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of certain originators and
servicers of loans. In addition, most have other laws, public policy and general
principles of equity relating to the protection of consumers, unfair and
deceptive practices and practices which may apply to the origination, servicing
and collection of the loans. Depending on the provisions of the applicable law
and the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the master servicer to collect
all or part of the principal of or interest on the loans, may entitle the
borrower to a refund of amounts previously paid and, in addition, could subject
the master servicer to damages and administrative sanctions.
If the rate at which interest is passed through or paid to the holders of
securities of a series is calculated on a loan-by-loan basis, disproportionate
principal prepayments among loans with different Loan Rates will affect the
yield on those securities. In most cases, the effective yield to securityholders
will be lower than the yield otherwise produced by the applicable Pass-Through
Rate or interest rate and purchase price, because while interest will generally
accrue on each loan from the first day of the month, the distribution of the
interest will not be made earlier than the month following the month of accrual.
Under certain circumstances, the master servicer, the holders of the
residual interests in a REMIC or any person specified in the related prospectus
supplement may have the option to purchase the assets of a trust fund thereby
effecting earlier retirement of the related series of securities. See "The
Agreements -- Termination; Optional Termination."
The relative contribution of the various factors affecting prepayment may
vary from time to time. There can be no assurance as to the rate of payment of
principal of the Trust Fund Assets at any time or over the lives of the
securities.
The prospectus supplement relating to a series of securities will discuss
in greater detail the effect of the rate and timing of principal payments
(including prepayments), delinquencies and losses on the yield, weighted average
lives and maturities of the securities.
THE AGREEMENTS
Set forth below is a description of the material provisions of each
Agreement which are not described elsewhere in this prospectus. Where particular
provisions or terms used in the Agreements are referred to, the provisions or
terms are as specified in the Agreements.
Assignment of the Trust Fund Assets
Assignment of the Loans. At the time of issuance of the securities of a
series, the depositor will cause the loans comprising the related trust fund to
be assigned to the trustee, without recourse, together with all principal and
interest received by or on behalf of the depositor on or with respect to the
loans after the cut-off date, other than principal and interest due on or before
the cut-off date and other than any Retained Interest specified in the related
prospectus supplement. The trustee will, concurrently with the assignment,
deliver the securities to the depositor in exchange for the loans. Each loan
will be identified in a schedule appearing as an exhibit to the related
Agreement. This schedule will include information as to the outstanding
principal balance of each loan after application of payments due on or before
the cut-off date, as well as information regarding the Loan Rate or APR, the
maturity of the loan, the Loan-to-Value Ratios or Combined Loan-to-Value Ratios,
as applicable, at origination and certain other information.
In addition, the depositor will also deliver or cause to be delivered to
the trustee (or to the custodian) for each single family loan or home equity
loan,
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o the mortgage note or contract endorsed without recourse in blank or to
the order of the trustee, except that the depositor may deliver or
cause to be delivered a lost note affidavit in lieu of any original
mortgage note that has been lost,
o the mortgage, deed of trust or similar instrument (a "Mortgage") with
evidence of recording indicated thereon (except for any Mortgage not
returned from the public recording office, in which case the depositor
will deliver or cause to be delivered a copy of the Mortgage together
with a certificate that the original of the Mortgage was delivered to
the recording office),
o an assignment of the Mortgage in blank, which assignment will be in
recordable form in the case of a Mortgage assignment, and any other
security documents, including those relating to any senior interests
in the Property, as may be specified in the related prospectus
supplement or the related Agreement.
The applicable prospectus supplement may provide other arrangements for
assuring the priority of assignments, but if it does not, the depositor will
promptly cause the assignments of the related loans to be recorded in the
appropriate public office for real property records, except in those states
designated by the Rating Agencies where recording is not required to protect the
trustee's interest in those loans against the claim of any subsequent transferee
or any successor to or creditor of the depositor or the originator of the
related loans.
If so specified in the related prospectus supplement, and in accordance
with the rules of membership of Mortgage Electronic Registration Systems, Inc.
or, MERS, assignments of the Mortgages for the mortgage loans in the related
trust will be registered electronically through Mortgage Electronic Registration
Systems, Inc., or MERS 'r' System. For any Mortgage held through the MERS 'r'
System, the Mortgage is recorded in the name of Mortgage Electronic Registration
Systems, Inc., or MERS, as nominee for the owner of the mortgage loan, and
subsequent assignments of the Mortgage were, or in the future may be, at the
discretion of the master servicer, registered electronically through the MERS
'r' System. For each of these mortgage loans, MERS serves as mortgagee of record
on the Mortgage solely as a nominee in an administrative capacity on behalf of
the trustee, and does not have any interest in the mortgage loan.
With respect to any loans that are cooperative loans, the depositor will
cause to be delivered to the trustee (or to the custodian) for each cooperative
loan,
o the related original cooperative note endorsed without recourse in
blank or to the order of the trustee or, to the extent the related
Agreement so provides, a lost note affidavit,
o the original security agreement,
o the proprietary lease or occupancy agreement,
o the recognition agreement,
o an executed financing agreement and the relevant stock certificate,
together with the related blank stock powers, and
o any other document specified in the related prospectus supplement.
The depositor will cause to be filed in the appropriate office an
assignment and a financing statement evidencing the trustee's security interest
in each cooperative loan.
The applicable prospectus supplement may provide for the depositor's
delivery obligations in connection with home improvement contracts, but if it
does not, the depositor will as to each home improvement contract, deliver or
cause to be delivered to the trustee (or to the custodian) the original home
improvement contract and copies of documents and instruments related to each
home improvement contract and the security interest in the Property securing the
home improvement contract. In general, it is expected that the home improvement
contracts
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will not be stamped or otherwise marked to reflect their assignment to the
trustee. Therefore, if, through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the home improvement
contracts without notice of the assignment, the interest of securityholders in
the home improvement contracts could be defeated. See "Legal Aspects of the
Loans -- Home Improvement Contracts."
The trustee (or the custodian) will review the loan documents within the
time period specified in the related prospectus supplement after receipt
thereof, and the trustee will hold the loan documents in trust for the benefit
of the related securityholders. Generally, if the document is found to be
missing or defective in any material respect, the trustee (or the custodian)
will notify the master servicer and the depositor, and the master servicer will
notify the related seller. If the seller cannot cure the omission or defect
within the time period specified in the related prospectus supplement after
receipt of notice, the seller will be obligated to either purchase the related
loan from the trust fund at the Purchase Price or if so specified in the related
prospectus supplement, remove the loan from the trust fund and substitute in its
place one or more other loans that meets certain requirements set forth in the
related prospectus supplement. There can be no assurance that a seller will
fulfill this purchase or substitution obligation. Although the master servicer
may be obligated to enforce the obligation to the extent described above under
"Loan Program -- Representations by Sellers; Repurchases," neither the master
servicer nor the depositor will be obligated to purchase or replace a loan if
the seller defaults on its obligation, unless the breach also constitutes a
breach of the representations or warranties of the master servicer or the
depositor, as the case may be. The applicable prospectus supplement may provide
other remedies, but if it does not, this obligation to cure, purchase or
substitute constitutes the sole remedy available to the securityholders or the
trustee for omission of, or a material defect in, a constituent document.
The trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and, if applicable, to review the
documents relating to the loans as agent of the trustee.
The master servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the Agreement. Upon a breach of a representation of the
master servicer which materially and adversely affects the interests of the
securityholders in a loan, the master servicer will be obligated either to cure
the breach in all material respects or to purchase (at the Purchase Price) or if
so specified in the related prospectus supplement, replace the loan. The
applicable prospectus supplement may provide other remedies, but if it does not,
this obligation to cure, purchase or substitute constitutes the sole remedy
available to the securityholders or the trustee for a breach of representation
by the master servicer.
Assignment of Agency Securities. The depositor will cause the agency
securities to be registered in the name of the trustee or its nominee, and the
trustee concurrently will execute, countersign and deliver the certificates.
Each agency security will be identified in a schedule appearing as an exhibit to
the Pooling and Servicing Agreement, which will specify as to each agency
security the original principal amount and outstanding principal balance as of
the cut-off date, the annual pass-through rate and the maturity date.
Assignment of Private Mortgage-Backed Securities. The depositor will cause
the private mortgage-backed securities to be registered in the name of the
trustee. The trustee or the custodian will have possession of any certificated
private mortgage-backed securities. Generally, the trustee will not be in
possession of or be assignee of record of any underlying assets for a private
mortgage-backed security. See "The Trust Fund -- Private Mortgage-Backed
Securities." Each private mortgage-backed security will be identified in a
schedule appearing as an exhibit to the related Pooling and Servicing Agreement
which will specify the original principal amount, outstanding principal balance
as of the cut-off date, annual pass-through rate or interest rate and maturity
date and other specified pertinent information for each private mortgage-backed
security conveyed to the trustee.
Conveyance of Subsequent Loans. With respect to a series of securities for
which a Pre-Funding Arrangement is provided, in connection with any conveyance
of Subsequent Loans to the trust fund after the issuance of the related
securities, the related Agreement will require the seller and the depositor to
satisfy the following conditions, among others:
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o each Subsequent loan purchased after the applicable closing date must
satisfy the representations and warranties contained in the subsequent
transfer agreement to be entered into by the depositor, the seller and
the trustee and in the related Agreement;
o the seller will not select the Subsequent Loans in a manner that it
believes is adverse to the interests of the securityholders;
o as of the related cut-off date, all of the loans in the loan pool at
that time, including the Subsequent Loans purchased after the closing
date, will satisfy the criteria set forth in the related Agreement;
o the Subsequent Loans will have been approved by any third party
provider of credit enhancement, if applicable; and
o before the purchase of each Subsequent loan the trustee will perform
an initial review of certain related loan file documentation for the
loan and issue an initial certification for which the required
documentation in the loan file has been received with respect to each
Subsequent loan.
The Subsequent loans, on an aggregate basis, will have characteristics
similar to the characteristics of the initial pool of loans as described in the
related prospectus supplement. Each acquisition of any Subsequent Loans will be
subject to the review by any third party provider of credit enhancement, if
applicable, the rating agencies and the seller's accountants of the aggregate
statistical characteristics of the related loan pool for compliance with the
applicable statistical criteria set forth in the related Agreement.
Notwithstanding the foregoing provisions, with respect to a trust fund for
which a REMIC election is to be made, no purchase or substitution of a loan will
be made if the purchase or substitution would result in a prohibited transaction
tax under the Code.
Payments on Loans; Deposits to Security Account
The master servicer will establish and maintain or cause to be established
and maintained with respect to the related trust fund a separate account or
accounts for the collection of payments on the related Trust Fund Assets in the
trust fund (the "Security Account"). The applicable prospectus supplement may
provide for other requirements for the Security Account, but if it does not, the
Security Account must be either (i) maintained with a depository institution the
debt obligations of which (or in the case of a depository institution that is
the principal subsidiary of a holding company, the obligations of which) are
rated in one of the two highest rating categories by the Rating Agency or Rating
Agencies that rated one or more classes of the related series of securities,
(ii) an account or accounts the deposits in which are fully insured by either
the Bank Insurance Fund (the "BIF") of the FDIC or the Savings Association
Insurance Fund (as successor to the Federal Savings and Loan Insurance
Corporation ("SAIF")), (iii) an account or accounts the deposits in which are
insured by the BIF or SAIF (to the limits established by the FDIC), and the
uninsured deposits in which are otherwise secured such that, as evidenced by an
opinion of counsel, the securityholders have a claim with respect to the funds
in the security 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 depository institution with which the
Security Account is maintained, or (iv) an account or accounts otherwise
acceptable to each Rating Agency. The collateral eligible to secure amounts in
the Security Account is limited to Permitted Investments. A Security Account may
be maintained as an interest bearing account or the funds held in a Security
Account may be invested pending each succeeding distribution date in Permitted
Investments. To the extent provided in the related prospectus supplement, the
master servicer or its designee will be entitled to receive any interest or
other income earned on funds in the Security Account as additional compensation
and will be obligated to deposit in the Security Account the amount of any loss
immediately as realized. The Security Account may be maintained with the master
servicer or with a depository institution that is an affiliate of the master
servicer, provided it meets the standards set forth above.
The master servicer will deposit or cause to be deposited in the Security
Account for each trust fund, to the extent applicable and unless otherwise
specified in the Agreement, the following payments and collections received
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or advances made by or on behalf of it subsequent to the cut-off date (other
than payments due on or before the cut-off date and exclusive of any amounts
representing Retained Interest):
o all payments on account of principal, including Principal Prepayments
and, if specified in the related prospectus supplement, any applicable
prepayment penalties, on the loans;
o all payments on account of interest on the loans, net of applicable
servicing compensation;
o all proceeds (net of unreimbursed payments of property taxes,
insurance premiums and similar items ("Insured Expenses") incurred,
and unreimbursed advances made, by the master servicer, if any) of the
hazard insurance policies and any Primary Mortgage Insurance Policies,
to the extent those proceeds are not applied to the restoration of the
Property or released to the Mortgagor in accordance with the master
servicer's normal servicing procedures (collectively, "Insurance
Proceeds") and all other cash amounts (net of unreimbursed expenses
incurred in connection with liquidation or foreclosure ("Liquidation
Expenses") and unreimbursed advances made, by the master servicer, if
any) received and retained in connection with the liquidation of
defaulted loans, by foreclosure or otherwise ("Liquidation Proceeds"),
together with any net proceeds received on a monthly basis with
respect to any properties acquired on behalf of the securityholders by
foreclosure or deed in lieu of foreclosure;
o all proceeds of any loan or Property in respect thereof purchased by
the master servicer, the depositor or any seller as described under
"Loan Program -- Representations by Sellers; Repurchases" or " --
Assignment of Trust Fund Assets" above and all proceeds of any loan
repurchased as described under " -- Termination; Optional Termination"
below;
o all payments required to be deposited in the Security Account with
respect to any deductible clause in any blanket insurance policy
described under "-- Hazard Insurance" below;
o any amount required to be deposited by the master servicer in
connection with losses realized on investments for the benefit of the
master servicer of funds held in the Security Account and, to the
extent specified in the related prospectus supplement, any payments
required to be made by the master servicer in connection with
prepayment interest shortfalls; and
o all other amounts required to be deposited in the Security Account
pursuant to the Agreement.
The master servicer (or the depositor, as applicable) may from time to time
direct the institution that maintains the Security Account to withdraw funds
from the Security Account for the following purposes:
o to pay to the master servicer the servicing fees described in the
related prospectus supplement, the master servicing fees (subject to
reduction) and, as additional servicing compensation, earnings on or
investment income with respect to funds in the amounts in the Security
Account credited thereto;
o to reimburse the master servicer for advances, this right of
reimbursement with respect to any loan being limited to amounts
received that represent late recoveries of payments of principal
and/or interest on the loan (or Insurance Proceeds or Liquidation
Proceeds with respect thereto) with respect to which the advance was
made;
o to reimburse the master servicer for any advances previously made
which the master servicer has determined to be nonrecoverable;
o to reimburse the master servicer from Insurance Proceeds for expenses
incurred by the master servicer and covered by the related insurance
policies;
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o to reimburse the master servicer for unpaid master servicing fees and
unreimbursed out-of-pocket costs and expenses incurred by the master
servicer in the performance of its servicing obligations, this right
of reimbursement being limited to amounts received representing late
recoveries of the payments for which the advances were made;
o to pay to the master servicer, with respect to each loan or Property
acquired in respect thereof that has been purchased by the master
servicer pursuant to the Agreement, all amounts received thereon and
not taken into account in determining the principal balance of the
repurchased loan;
o to reimburse the master servicer or the depositor for expenses
incurred and reimbursable pursuant to the Agreement;
o to withdraw any amount deposited in the Security Account and not
required to be deposited therein; and
o to clear and terminate the Security Account upon termination of the
Agreement.
In addition, the Agreement will generally provide that, on or prior to the
business day immediately preceding each distribution date, the master servicer
shall withdraw from the Security Account the amount of Available Funds, to the
extent on deposit, for deposit in an account maintained by the trustee for the
related series of securities.
Pre-Funding Account
If so provided in the related prospectus supplement, the master servicer
will establish and maintain an account (the "Pre-Funding Account"), in the name
of the related trustee on behalf of the related securityholders, into which the
depositor will deposit cash in an amount specified in the prospectus supplement
(the "Pre-Funded Amount") on the related closing date. The Pre-Funding Account
will be maintained with the trustee for the related series of securities and is
designed solely to hold funds to be applied by the trustee during the period
from the closing date to a date not more than a year after the closing date (the
"Funding Period") to pay to the depositor the purchase price for loans purchased
during the Funding Period (the "Subsequent Loans"). Monies on deposit in the
Pre-Funding Account will not be available to cover losses on or in respect of
the related loans. The Pre-Funded Amount will not exceed 50% of the initial
aggregate principal amount of the certificates and notes of the related series.
The Pre-Funded Amount will be used by the related trustee to purchase Subsequent
Loans from the depositor from time to time during the Funding Period. The
Funding Period, if any, for a trust fund will begin on the related closing date
and will end on the date specified in the related prospectus supplement, which
in no event will be later than the date that is one year after the related
closing date. Monies on deposit in the Pre-Funding Account may be invested in
Permitted Investments under the circumstances and in the manner described in the
related Agreement. See "Credit Enhancement -- Reserve Accounts" for a
description of the types of investments which may constitute "Permitted
Investments." Earnings on investment of funds in the Pre-Funding Account will be
deposited into the related Security Account or such other trust account as is
specified in the related prospectus supplement and losses will be charged
against the funds on deposit in the Pre-Funding Account. Any amounts remaining
in the Pre-Funding Account at the end of the Funding Period will be distributed
to the related securityholders in the manner and priority specified in the
related prospectus supplement, as a prepayment of principal of the related
securities. Prior to or concurrently with each distribution on a distribution
date within the Funding Period, the master servicer or the trustee will furnish
to each securityholder of record of the related series of securities a statement
setting forth the amounts of the Pre-Funding Amount deployed by the trustee to
purchase Subsequent Loans during the preceding collection period. The depositor
will file or cause such statement to be filed with the SEC as an exhibit to a
Current Report on Form 8-K within 15 days after the related distribution date.
See "Description of the Securities -- Reports to Securityholders." The
underwriting standards for the Subsequent Loans will not materially differ from
the underwriting standards for the mortgage loans initially included in the
trust fund.
In addition, if so provided in the related prospectus supplement, on the
related closing date the depositor will deposit in an account (the "Capitalized
Interest Account") cash in such amount as is necessary to cover shortfalls in
interest on the related series of securities that may arise as a result of
utilization of the Pre-Funding
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Account as described above. The Capitalized Interest Account shall be maintained
with the trustee for the related series of securities and is designed solely to
cover the above-mentioned interest shortfalls. Monies on deposit in the
Capitalized Interest Account will not be available to cover losses on or in
respect of the related loans. To the extent that the entire amount on deposit in
the Capitalized Interest Account has not been applied to cover shortfalls in
interest on the related series of securities by the end of the Funding Period,
any amounts remaining in the Capitalized Interest Account will be paid to the
depositor.
Sub-servicing by Sellers
Each seller of a loan or any other servicing entity may act as the
sub-servicer for the loan pursuant to a sub-servicing agreement, which will not
contain any terms inconsistent with the related Agreement. While each
sub-servicing agreement will be a contract solely between the master servicer
and the sub-servicer, the Agreement pursuant to which a series of securities is
issued will provide that, if for any reason the master servicer for the series
of securities is no longer the master servicer of the related loans, the trustee
or any successor master servicer must recognize the sub-servicer's rights and
obligations under the sub-servicing agreement. Notwithstanding any subservicing
arrangement, unless otherwise provided in the related prospectus supplement, the
master servicer will remain liable for its servicing duties and obligations
under the Sale and Servicing Agreement as if the master servicer alone were
servicing the loans.
Collection Procedures
The master servicer, directly or through one or more sub-servicers, will
make reasonable efforts to collect all payments called for under the loans and
will, consistent with each Agreement and any Pool Insurance Policy, Primary
Mortgage Insurance Policy, FHA Insurance, VA Guaranty (as defined herein),
bankruptcy bond or alternative arrangements, follow those collection procedures
as are customary with respect to loans that are comparable to the loans.
Consistent with the above, the master servicer may, in its discretion, waive any
assumption fee, late payment or other charge in connection with a loan and to
the extent not inconsistent with the coverage of the loan by a Pool Insurance
Policy, Primary Mortgage Insurance Policy, FHA Insurance, VA Guaranty,
bankruptcy bond or alternative arrangements, if applicable, arrange with a
borrower a schedule for the liquidation of delinquencies running for no more
than 125 days after the applicable due date for each payment.
In any case in which Property securing a loan has been, or is about to be,
conveyed by the mortgagor or obligor, the master servicer will, to the extent it
has knowledge of the conveyance or proposed conveyance, exercise or cause to be
exercised its rights to accelerate the maturity of the loan under any
due-on-sale clause applicable thereto, but only if the exercise of those rights
is permitted by applicable law and will not impair or threaten to impair any
recovery under any Primary Mortgage Insurance Policy. If these conditions are
not met or if the master servicer reasonably believes it is unable under
applicable law to enforce the due-on-sale clause or if the loan is a mortgage
loan insured by the FHA or partially guaranteed by the VA, the master servicer
will enter into or cause to be entered into an assumption and modification
agreement with the person to whom the Property has been or is about to be
conveyed, pursuant to which the person becomes liable for repayment of the loan
and, to the extent permitted by applicable law, the mortgagor remains liable
thereon. Any fee collected by or on behalf of the master servicer for entering
into an assumption agreement will be retained by or on behalf of the master
servicer as additional servicing compensation. See "Legal Aspects of the Loans
- -- Due-on-Sale Clauses." In connection with the assumption of any loan, the
terms of the related loan may not be changed.
With respect to cooperative loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Legal Aspects of the Loans." This
approval is usually based on the purchaser's income and net worth and numerous
other factors. Although the cooperative's approval is unlikely to be
unreasonably withheld or delayed, the necessity of acquiring the approval could
limit the number of potential purchasers for those shares and otherwise limit
the trust fund's ability to sell and realize the value of those shares.
In general a "tenant-stockholder" (as defined in Code Section 216(b)(2)) of
a corporation that qualifies as a "cooperative housing corporation" within the
meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain
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interest expenses and certain real estate taxes allowable as a deduction under
Code Section 216(a) to the corporation under Code Sections 163 and 164. In order
for a corporation to qualify under Code Section 216(b)(1) for its taxable year
in which those items are allowable as a deduction to the corporation, that
Section requires, among other things, that at least 80% of the gross income of
the corporation be derived from its tenant-stockholders (as defined in Code
Section 216(b)(2)). By virtue of this requirement, the status of a corporation
for purposes of Code Section 216(b)(1) must be determined on a year-to-year
basis. Consequently, there can be no assurance that cooperatives relating to the
cooperative loans will qualify under that Section for any particular year. In
the event that a cooperative fails to qualify for one or more years, the value
of the collateral securing any related cooperative loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Code Section 216(a) with respect to those years. In view of the significance of
the tax benefits accorded tenant-stockholders of a corporation that qualifies
under Code Section 216(b)(1), the likelihood that a failure would be permitted
to continue over a period of years appears remote.
Hazard Insurance
In general, the master servicer will require the mortgagor or obligor on
each loan to maintain a hazard insurance policy providing for no less than the
coverage of the standard form of fire insurance policy with extended coverage
customary for the type of Property in the state in which the Property is
located. This coverage will be in an amount that is at least equal to the lesser
of
o the maximum insurable value of the improvements securing the loan or
the greater of
(1) the outstanding principal balance of the loan, and
(2) an amount such that the proceeds of the policy shall be sufficient to
prevent the mortgagor and/or the mortgagee from becoming a co-insurer.
All amounts collected by the master servicer under any hazard policy
(except for amounts to be applied to the restoration or repair of the Property
or released to the mortgagor or obligor in accordance with the master servicer's
normal servicing procedures) will be deposited in the related Security Account.
In the event that the master servicer maintains a blanket policy insuring
against hazard losses on all the loans comprising part of a trust fund, it will
conclusively be deemed to have satisfied its obligation relating to the
maintenance of hazard insurance. This blanket policy may contain a deductible
clause, in which case the master servicer will be required to deposit from its
own funds into the related Security Account the amounts which would have been
deposited in the Security 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 securing a loan by fire,
lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the loans may have been underwritten
by different insurers under different state laws in accordance with different
applicable forms and therefore may not contain identical terms and conditions,
the basic terms thereof are dictated by respective state laws, and most of those
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flows),
nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic animals,
theft and, in certain cases, vandalism and hurricanes. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. If the Property securing a loan is located in a federally
designated special flood area at the time of origination, the master servicer
will require the mortgagor or obligor to obtain and maintain flood insurance.
The hazard insurance policies covering properties securing the loans
typically contain a clause which in effect requires the insured at all time to
carry insurance of a specified percentage of a specified percentage (generally
80% to 90%) of the full replacement value of the insured Property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, then the insurer's liability in the event of
partial loss will not exceed the larger of
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o the actual cash value (generally defined as replacement cost at the
time and place of loss, less physical depreciation) of the
improvements damaged or destroyed or
o such proportion of the loss as the amount of insurance carried bears
to the specified percentage of the full replacement cost of the
improvements.
Since the amount of hazard insurance the master servicer may cause to be
maintained on the improvements securing the loans declines as the principal
balances owing thereon decrease, and since improved real estate generally has
appreciated in value over time in the past, the effect of this requirement in
the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damaged Property. If specified in the related
prospectus supplement, a special hazard insurance policy will be obtained to
insure against certain of the uninsured risks described above. See "Credit
Enhancement."
The master servicer will not require that a standard hazard or flood
insurance policy be maintained on the cooperative dwelling relating to any
cooperative loan. Generally, the cooperative itself is responsible for
maintenance of hazard insurance for the Property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a cooperative and the related
borrower on a cooperative loan do not maintain hazard insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged Property, any damage to the borrower's cooperative
dwelling or the cooperative's building could significantly reduce the value of
the collateral securing the related cooperative loan to the extent not covered
by other credit support.
If the Property securing a defaulted loan is damaged and proceeds, if any,
from the related hazard insurance policy are insufficient to restore the damaged
Property, the master servicer is not required to expend its own funds to restore
the damaged Property unless it determines (i) that restoration will increase the
proceeds to securityholders on liquidation of the loan after reimbursement of
the master servicer for its expenses and (ii) that the related expenses will be
recoverable by it from related Insurance Proceeds or Liquidation Proceeds.
If recovery on a defaulted loan under any related Insurance Policy is not
available for the reasons set forth in the preceding paragraph, or if the
defaulted loan is not covered by an Insurance Policy, the master servicer 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
loan. If the proceeds of any liquidation of the Property securing the defaulted
loan are less than the principal balance of the related loan plus interest
accrued thereon that is payable to securityholders, the trust fund will realize
a loss in the amount of the difference plus the aggregate of expenses incurred
by the master servicer in connection with the liquidation proceedings and which
are reimbursable under the Agreement. In the unlikely event that any liquidation
proceedings result in a total recovery which is, after reimbursement to the
master servicer of its expenses, in excess of the principal balance of the loan
plus interest accrued thereon that is payable to securityholders, the master
servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to the loan
and amounts representing the balance of the excess, exclusive of any amount
required by law to be forwarded to the related borrower, as additional servicing
compensation.
If the master servicer or its designee recovers Insurance Proceeds which,
when added to any related Liquidation Proceeds and after deduction of certain
expenses reimbursable to the master servicer, exceed the principal balance of
the loan plus interest accrued thereon that is payable to securityholders, the
master servicer will be entitled to withdraw or retain from the Security Account
amounts representing its normal servicing compensation with respect to the loan.
In the event that the master servicer has expended its own funds to restore the
damaged Property and those funds have not been reimbursed under the related
hazard insurance policy, it will be entitled to withdraw from the Security
Account out of related Liquidation Proceeds or Insurance Proceeds an amount
equal to those expenses incurred by it, in which event the trust fund may
realize a loss up to the amount so charged. Since Insurance Proceeds cannot
exceed deficiency claims and certain expenses incurred by the master servicer,
no such payment or recovery will result in a recovery to the trust fund which
exceeds the principal balance of the defaulted loan together with accrued
interest thereon. See "Credit Enhancement."
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The proceeds from any liquidation of a loan will be applied in the
following order of priority: first, to reimburse the master servicer for any
unreimbursed expenses incurred by it to restore the related Property and any
unreimbursed servicing compensation payable to the master servicer with respect
to the loan; second, to reimburse the master servicer for any unreimbursed
advances with respect to the loan; third, to accrued and unpaid interest (to the
extent no advance has been made for that amount) on the loan; and fourth, as a
recovery of principal of the loan.
Realization upon Defaulted Loans
Primary Mortgage Insurance Policies. If so specified in the related
prospectus supplement, the master servicer will maintain or cause to be
maintained, as the case may be, in full force and effect, a Primary Mortgage
Insurance Policy with regard to each loan for which this type of coverage is
required. Primary Mortgage Insurance Policies reimburse certain losses sustained
by reason of defaults in payments by borrowers. The master servicer will not
cancel or refuse to renew any Primary Mortgage Insurance Policy in effect at the
time of the initial issuance of a series of securities that is required to be
kept in force under the applicable Agreement unless the replacement Primary
Mortgage Insurance Policy for the cancelled or nonrenewed policy is maintained
with an insurer whose claims-paying ability is sufficient to maintain the
current rating of the classes of securities of the series that have been rated.
FHA Insurance; VA Guaranties. Loans designated in the related prospectus
supplement as insured by the FHA will be insured by the FHA as authorized under
the United States Housing Act of 1937, as amended. In addition to the Title I
Program of the FHA, see "Legal Aspects of the Loans -- The Title I Program,"
certain 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 and the FHA 245 graduated payment mortgage program. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Loans insured by FHA generally require a minimum down payment of
approximately 5% of the original principal amount of the loan. No FHA-insured
loans relating to a series may have an interest rate or original principal
amount exceeding the applicable FHA limits at the time of origination of the
loan.
Loans designated in the related prospectus supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended (a "VA Guaranty"). The Serviceman's Readjustment Act of
1944, as amended, permits a veteran (or in certain instances the spouse of a
veteran) to obtain a mortgage loan guaranty 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 purchaser and permits the guaranty of mortgage loans of up
to 30 years' duration. However, no loan guaranteed by the VA will have an
original principal amount greater than five times the partial VA Guaranty for
the loan. The maximum guaranty that may be issued by the VA under a VA
guaranteed mortgage loan depends upon the original principal amount of the
mortgage loan, as further described in 38 United States Code Section 1803(a), as
amended.
Servicing and Other Compensation and Payment of Expenses
The principal servicing compensation to be paid to the master servicer in
respect of its master servicing activities for each series of securities will be
equal to the percentage per annum described in the related prospectus supplement
(which may vary under certain circumstances) of the outstanding principal
balance of each loan, and this compensation will be retained by it from
collections of interest on the loan in the related trust fund (the "Master
Servicing Fee"). As compensation for its servicing duties, a sub-servicer or, if
there is no sub-servicer, the master servicer will be entitled to a monthly
servicing fee as described in the related prospectus supplement. In addition,
generally, the master servicer or sub-servicer will retain all prepayment
charges, assumption fees and late payment charges, to the extent collected from
borrowers, and any benefit that may accrue as a result of the investment of
funds in the applicable Security Account.
The master servicer will pay or cause to be paid certain ongoing expenses
associated with each trust fund and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any credit enhancement
arrangements, payment of the fees and disbursements of the trustee, any
custodian appointed by the trustee, the certificate registrar and any paying
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agent, and payment of expenses incurred in enforcing the obligations of
sub-servicers and sellers. The master servicer will be entitled to reimbursement
of expenses incurred in enforcing the obligations of sub-servicers and sellers
under certain limited circumstances. In addition, the master servicer will be
entitled to reimbursement for certain expenses incurred by it in connection with
any defaulted mortgage loan as to which it has determined that all recoverable
liquidation proceeds and insurance proceeds have been received, and in
connection with the restoration of mortgaged properties, the right of
reimbursement being before the rights of certificateholders to receive any
related liquidation proceeds, including insurance proceeds.
Evidence as to Compliance
Each Agreement will provide that on or before a specified date in each
year, a firm of independent public accountants will furnish a statement to the
trustee to the effect that, on the basis of the examination by that firm
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC, the servicing by or on behalf of the master servicer of mortgage loans or
private asset backed securities, or under pooling and servicing agreements
substantially similar to each other (including the related Agreement) was
conducted in compliance with those agreements except for any significant
exceptions or errors in records that, in the opinion of the firm, the Audit
Program for Mortgages serviced for FHLMC, or the Uniform Single Attestation
Program for Mortgage Bankers, it is required to report. In rendering its
statement the firm may rely, as to matters relating to the direct servicing of
loans by sub-servicers, upon comparable statements for examinations conducted
substantially in compliance with the Uniform Single Attestation Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC (rendered
within one year of the statement) of firms of independent public accountants
with respect to the related sub-servicer.
Each Agreement will also provide for delivery to the trustee, on or before
a specified date in each year, of an annual statement signed by two officers of
the master servicer to the effect that the master servicer has fulfilled its
obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of the master servicer may be obtained by securityholders of the related series
without charge upon written request to the master servicer at the address set
forth in the related prospectus supplement.
Certain Matters Regarding the Master Servicer and the Depositor
The applicable prospectus supplement may provide that another entity will
act as the master servicer under a Pooling and Servicing Agreement or Sale and
Servicing Agreement, as applicable, but if it does not, the master servicer will
be First Horizon. First Horizon is an indirect wholly owned subsidiary of First
Tennessee National Corporation, a Tennessee corporation incorporated in 1968 and
registered as a bank holding company under the Bank Holding Company Act of 1956,
as amended. First Horizon is not a party to any legal proceedings that could
have a material impact on its ability to service the mortgage loans under the
applicable Agreement. First Horizon maintains its principal office at 4000
Horizon Way, Dallas, Texas 75063. Its telephone number is (214) 441-4000.
First Horizon or any other entity acting as master servicer under a Pooling
and Servicing Agreement or Sale and Servicing Agreement, as applicable, may have
normal business relationships with the depositor or the depositor's affiliates.
Each Agreement will provide that the master servicer may not resign from
its obligations and duties under the Agreement except upon a determination that
its duties thereunder are no longer permissible under applicable law. The master
servicer may, however, be removed from its obligations and duties as set forth
in the Agreement. No resignation by the master servicer will become effective
until the trustee or a successor servicer has assumed the master servicer's
obligations and duties under the Agreement.
Each Agreement will further provide that neither the master servicer, the
depositor nor any director, officer, employee or agent of the master servicer or
the depositor will be under any liability to the related trust fund or
securityholders for any action taken or for refraining from the taking of any
action in good faith pursuant to the Agreement, or for errors in judgment;
provided, however, that neither the master servicer, the depositor nor any
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director, officer, employee or agent of the master servicer or the depositor
will be protected against any liability which would otherwise be imposed by
reason of wilful misfeasance, bad faith or gross negligence in the performance
of duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. Each Agreement will further provide that the master servicer,
the depositor and any director, officer, employee or agent of the master
servicer or the depositor will be entitled to indemnification by the related
trust fund and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the Agreement or the
securities, other than any loss, liability or expense related to any specific
loan or loans (except for any loss, liability or expense otherwise reimbursable
pursuant to the Agreement) and any loss, liability or expense incurred by reason
of willful misfeasance, bad faith or gross negligence in the performance of
duties thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Agreement will provide that neither the master
servicer nor the depositor will be under any obligation to appear in, prosecute
or defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may involve it in
any expense or liability. The master 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 thereto
and the interests of the securityholders thereunder. In this event, the legal
expenses and costs of the action and any liability resulting therefrom will be
expenses, costs and liabilities of the trust fund and the master servicer or the
depositor, as the case may be, will be entitled to be reimbursed therefor out of
funds otherwise distributable to securityholders.
In general, any person into which the master servicer may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the master servicer is a party, or any person succeeding to the business of the
master servicer, will be the successor of the master servicer under each
Agreement, provided that
o that person is qualified to sell mortgage loans to, and service
mortgage loans on behalf of, Fannie Mae or Freddie Mac and
o the related merger, consolidation or succession does not adversely
affect the then current rating or ratings of the class or classes of
securities of the related series that have been rated.
Events of Default; Rights upon Event of Default
Pooling and Servicing Agreement; Sale and Servicing Agreement. The
applicable prospectus supplement may provide for other "Events of Default" under
any Pooling and Servicing Agreement or Sale and Servicing Agreement, but if it
does not, the Events of Default will consist of
o any failure by the master servicer to distribute or cause to be
distributed to securityholders of any class any required payment
(other than an advance) which continues unremedied for five days after
the giving of written notice of the failure to the master servicer by
the trustee or the depositor, or to the master servicer, the depositor
and the trustee by the holders of securities of the class evidencing
not less than 25% of the total distributions allocated to the class
("percentage interests");
o any failure by the master servicer to make an advance as required
under the Agreement, unless cured as specified in the Agreement;
o any failure by the master servicer duly to observe or perform in any
material respect any of its other covenants or agreements in the
Agreement which continues unremedied for thirty days after the giving
of written notice of the failure to the master servicer by the trustee
or the depositor, or to the master servicer, the depositor and the
trustee by the holders of securities of any class evidencing not less
than 25% of the aggregate percentage interests constituting the class;
and
o certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceeding and certain actions by or
on behalf of the master servicer indicating its insolvency,
reorganization or inability to pay its obligations.
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If specified in the related Prospectus Supplement, the Agreement will
permit the trustee to sell the Trust Fund Assets and the other assets of the
trust fund described under "Credit Enhancement" in this prospectus in the event
that payments in respect thereto are insufficient to make payments required in
the Agreement. The assets of the trust fund will be sold only under the
circumstances and in the manner specified in the related prospectus supplement.
The applicable prospectus supplement may provide for steps required to be
taken if an Event of Default remains unremedied, but if it does not, so long as
an Event of Default under an Agreement remains unremedied, the depositor or the
trustee may, and at the direction of holders of securities of any class
evidencing not less than 25% of the aggregate percentage interests constituting
the class and under such other circumstances as may be specified in the
Agreement, the trustee shall terminate all of the rights and obligations of the
master servicer under the Agreement relating to the trust fund and in and to the
related Trust Fund Assets, whereupon the trustee will succeed to all of the
responsibilities, duties and liabilities of the master servicer under the
Agreement, including, if specified in the related prospectus supplement, the
obligation to make advances, and will be entitled to similar compensation
arrangements. In the event that the trustee is unwilling or unable so to act, it
may appoint, or petition a court of competent jurisdiction for the appointment
of, a mortgage loan servicing institution with a net worth of at least
$10,000,000 to act as successor to the master servicer under the Agreement.
Pending that appointment, the trustee is obligated to act in that capacity. The
trustee and any successor to the master servicer may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the master servicer under the Agreement.
Unless otherwise provided in the related prospectus supplement, no
securityholder, solely by virtue of the holder's status as a securityholder,
will have any right under any Agreement to institute any proceeding with respect
to the Agreement, unless the holder previously has given to the trustee written
notice of default and unless the holders of securities of any class of the
series evidencing not less than 25% of the aggregate percentage interests
constituting the class have made written request upon the trustee to institute
the proceeding in its own name as trustee thereunder and have offered to the
trustee reasonable indemnity, and the trustee for 60 days has neglected or
refused to institute the proceeding.
Indenture. The applicable prospectus supplement may provide for other
Events of Default, but if it does not, the Events of Default under each
Indenture will consist of:
o a default in the payment of any principal of or interest on any note
of the series which continues unremedied for five days after the
giving of written notice of the default is given as specified in the
related prospectus supplement;
o failure to perform in any material respect any other covenant of the
depositor or the trust fund in the Indenture which continues for a
period of thirty (30) days after notice thereof is given in accordance
with the procedures described in the related prospectus supplement;
o certain events of bankruptcy, insolvency, receivership or liquidation
of the depositor or the trust fund; or
o any other Event of Default provided with respect to notes of that
series including but not limited to certain defaults on the part of
the issuer, if any, of a credit enhancement instrument supporting the
notes.
If an Event of Default with respect to the notes of any series at the time
outstanding occurs and is continuing, either the trustee or the holders of a
majority of the then aggregate outstanding amount of the notes of the series may
declare the principal amount (or, if the notes of the series have an interest
rate of 0%, that portion of the principal amount as may be specified in the
terms of the series, as provided in the related prospectus supplement) of all
the notes of the series to be due and payable immediately. This declaration may,
under certain circumstances, be rescinded and annulled by the holders of more
than 50% of the percentage interests of the notes of the series.
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If, following an Event of Default with respect to any series of notes, the
notes of the series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding the acceleration, elect to maintain
possession of the collateral securing the notes of the series and to continue to
apply distributions on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of the series as they would
have become due if there had not been a declaration of acceleration. In
addition, the 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 the series
for five days or more, unless
o the holders of 100% of the percentage interests of the notes of the
series consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the
outstanding notes of the series at the date of the sale or
o the trustee determines that the collateral would not be sufficient on
an ongoing basis to make all payments on the notes as the payments
would have become due if the notes had not been declared due and
payable, and the trustee obtains the consent of the holders of 66 2/3%
of the percentage interests of the notes of the series.
In the event that the trustee liquidates the collateral in connection with
an Event of Default involving a default for five days or more in the payment of
principal of or interest on the notes of a series, the Indenture provides that
the trustee will have a prior lien on the related liquidation proceeds for
unpaid fees and expenses. As a result, upon the occurrence of such an Event of
Default, the amount available for distribution to the noteholders would be less
than would otherwise be the case. However, the trustee may not institute a
proceeding for the enforcement of its lien except in connection with a
proceeding for the enforcement of the lien of the Indenture for the benefit of
the noteholders after the occurrence of such an Event of Default.
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 thereof less the amount of the discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
trustee, in case an Event of Default shall occur and be continuing with respect
to a series of notes, the trustee shall be under no obligation to exercise any
of the rights or powers under the Indenture at the request or direction of any
of the holders of notes of the series, unless the holders offered to the trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with the request or
direction. Subject to the provisions for indemnification and certain limitations
contained in the Indenture, the holders of a majority of the then aggregate
outstanding amount of the notes of the series shall have the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the trustee or exercising any trust or power conferred on the trustee with
respect to the notes of the series, and the holders of a majority of the then
aggregate outstanding amount of the notes of the series may, in certain cases,
waive any default with respect thereto, except a default in the payment of
principal or interest or a default in respect of a covenant or provision of the
Indenture that cannot be modified without the waiver or consent of all the
holders of the outstanding notes of the series affected thereby.
Amendment
The applicable prospectus supplement may specify other amendment
provisions, but if it does not, each Agreement may be amended by the depositor,
the master servicer and the trustee, without the consent of any of the
securityholders,
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(a) to cure any ambiguity;
(b) to correct any defective provision in the Agreement or to supplement
any provision in the Agreement that may be inconsistent with any other provision
in it; or
(c) to make any other revisions with respect to matters or questions
arising under the Agreement which are not inconsistent with the provisions in
it,
provided that the action will not adversely affect in any material respect the
interests of any securityholder. An amendment will be deemed not to adversely
affect in any material respect the interests of the securityholders if the
person requesting the amendment obtains a letter from each Rating Agency
requested to rate the class or classes of securities of the series stating that
the amendment will not result in the downgrading or withdrawal of the respective
ratings then assigned to the securities.
In addition, to the extent provided in the related Agreement, an Agreement
may be amended without the consent of any of the securityholders, to change the
manner in which the Security Account is maintained, provided that any change
does not adversely affect the then current rating on the class or classes of
securities of the series that have been rated. Moreover, the related Agreement
may be amended to modify, eliminate or add to any of its provisions to the
extent necessary to maintain the qualification of the related trust fund as a
REMIC or to avoid or minimize the risk of imposition of any tax on the REMIC, if
a REMIC election is made with respect to the trust fund, or to comply with any
other requirements of the Code, if the trustee has received an opinion of
counsel to the effect that the action is necessary or helpful to maintain the
qualification, avoid or minimize that risk or comply with those requirements, as
applicable.
The applicable prospectus supplement may specify other amendment
provisions, but if it does not, each Agreement may also be amended by the
depositor, the master servicer and the trustee with consent of holders of
securities of the series evidencing not less than 66% of the aggregate
percentage interests of each class affected thereby for the purpose of adding
any provisions to or changing in an manner or eliminating any of the provisions
of the Agreement or of modifying in any manner the rights of the holders of the
related securities; provided, however, that no amendment may
o reduce in any manner the amount of or delay the timing of, payments
received on loans which are required to be distributed on any security
without the consent of the holder of the security, or
o reduce the aforesaid percentage of securities of any class the holders
of which are required to consent to any such amendment,
in each case without the consent of the holders of all securities of the class
covered by the Agreement then outstanding.
If a REMIC election is made with respect to a trust fund, the trustee will
not be entitled to consent to an amendment to the related Agreement without
having first received an opinion of counsel to the effect that the amendment
will not cause the trust fund to fail to qualify as a REMIC.
Termination; Optional Termination
Pooling and Servicing Agreement; Trust Agreement. The applicable prospectus
supplement may provide for the timing by which the Agreement terminates, but if
it does not, the obligations created by each Pooling and Servicing Agreement and
Trust Agreement for each series of securities will terminate upon the payment to
the related securityholders of all amounts held in the Security Account or by
the master servicer and required to be paid to them pursuant to the Agreement
following the later of
(i) the final payment of or other liquidation of the last of the Trust
Fund Assets subject thereto or the disposition of all Property
acquired upon foreclosure of any Trust Fund Assets remaining in the
trust fund, and
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(ii) the purchase by the master servicer or, if REMIC treatment has been
elected and if specified in the related prospectus supplement, by the
holder of the residual interest in the REMIC (see "Material Federal
Income Tax Consequences" below), from the related trust fund of all of
the remaining Trust Fund Assets and all Property acquired in respect
of the Trust Fund Assets.
Any purchase of Trust Fund Assets and Property acquired in respect of Trust
Fund Assets evidenced by a series of securities will be made at the option of
the master servicer, or the party specified in the related prospectus
supplement, including the holder of the REMIC residual interest, at a price
specified in the related prospectus supplement. The exercise of this right will
effect early retirement of the securities of that series, but the right of the
master servicer, or the other party or, if applicable, the holder of the REMIC
residual interest, to so purchase is subject to the principal balance of the
related Trust Fund Assets being less than the percentage specified in the
related prospectus supplement of the aggregate principal balance of the Trust
Fund Assets at the cut-off date for the series. The foregoing is subject to the
provision that if a REMIC election is made with respect to a trust fund, any
repurchase pursuant to clause (ii) above will be made only in connection with a
"qualified liquidation" of the REMIC within the meaning of Section 860F(g)(4) of
the Code.
Indenture. The Indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the trustee for cancellation of all the notes of
the series or, with certain limitations, upon deposit with the trustee of funds
sufficient for the payment in full of all of the notes of the series.
In addition to the discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the notes of any series, the
related trust fund will be discharged from any and all obligations in respect of
the notes of the series (except for certain obligations relating to temporary
notes and exchange of notes, to register the transfer of or exchange notes of
the series, to replace stolen, lost or mutilated notes of the series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the payment
of interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of and each
installment of interest on the notes of the series on the last scheduled
distribution date for the notes and any installment of interest on the notes in
accordance with the terms of the Indenture and the notes of the series. In the
event of any defeasance and discharge of notes of a series, holders of notes of
the series would be able to look only to this money and/or direct obligations
for payment of principal and interest, if any, on their notes until maturity.
The Trustee
The trustee under each Agreement will be named in the applicable prospectus
supplement. The commercial bank or trust company serving as trustee may have
normal banking relationships with the depositor, the master servicer and any of
their respective affiliates.
LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the loans. Because the legal aspects are
governed primarily by applicable state law (which laws may differ
substantially), the descriptions do not, except as expressly provided below,
reflect the laws of any particular state, nor encompass the laws of all states
in which the security for the loans is situated. The descriptions are qualified
in their entirety by reference to the applicable federal laws and the
appropriate laws of the states in which loans may be originated.
General
The loans for a series may be secured by deeds of trust, mortgages,
security deeds or deeds to secure debt, depending upon the prevailing practice
in the state in which the Property subject to the loan is located. Deeds of
trust are used almost exclusively in California instead of mortgages. A mortgage
creates a lien upon the Property encumbered by the mortgage, which lien is
generally not prior to the lien for real estate taxes and assessments.
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Priority between mortgages depends on their terms and generally on the order of
recording with a state or county office. There are two parties to a mortgage,
the mortgagor, who is the borrower and owner of the Property, and the mortgagee,
who is the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. Although a deed of trust is similar
to a mortgage, a deed of trust formally has three parties, the borrower-property
owner called the trustor (similar to a mortgagor), a lender (similar to a
mortgagee) called the beneficiary, and a third-party grantee called the trustee.
Under a deed of trust, the borrower grants the Property, irrevocably until the
debt is paid, in trust, generally with a power of sale, to the trustee to secure
payment of the obligation. A security deed and a deed to secure debt are special
types of deeds which indicate on their face that they are granted to secure an
underlying debt. By executing a security deed or 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. The trustee's
authority under a deed of trust, the mortgagee's authority under a mortgage and
the grantee's authority under a security deed or deed to secure debt are
governed by law and, with respect to some deeds of trust, the directions of the
beneficiary.
Cooperatives. Certain of the loans may be cooperative loans. The
cooperative owns all the Property that comprises the project, including the
land, separate dwelling units and all common areas. The cooperative is directly
responsible for project management and, in most cases, payment of real estate
taxes and hazard and liability insurance. If there is a blanket mortgage on the
cooperative and/or underlying land, as is generally the case, the cooperative,
as project mortgagor, is also responsible for meeting these mortgage
obligations. A blanket mortgage is ordinarily incurred by the cooperative in
connection with the construction or purchase of the cooperative's apartment
building. The interest of the occupant under proprietary leases or occupancy
agreements to which that cooperative is a party are generally subordinate to the
interest of the holder of the blanket mortgage in that building. If the
cooperative is unable to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could foreclose on that
mortgage and terminate all subordinate proprietary leases and occupancy
agreements. In addition, the 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 lump sum at final maturity.
The inability of the cooperative to refinance this mortgage and its consequent
inability to make the final payment could lead to foreclosure by the mortgagee
providing the financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the value of any
collateral held by the lender who financed the purchase by an individual
tenant-stockholder of cooperative shares or, in the case of a trust fund
including cooperative loans, the collateral securing the cooperative loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make a monthly
payment to the cooperative representing the 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 rights is financed through a
cooperative share loan evidenced by a promissory note and secured by a security
interest in the occupancy agreement or proprietary lease and in the related
cooperative shares. The lender 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.
Foreclosure
Deed of Trust. Foreclosure of a deed of trust is generally accomplished by
a non-judicial sale under a specific provision in the deed of trust which
authorizes the trustee to sell the Property at public auction upon any material
default by the borrower under the terms of the note or deed of trust. In certain
states, the foreclosure also may be accomplished by judicial action in the
manner provided for foreclosure of mortgages. In addition to any notice
requirements contained in a deed of trust, in some states (including
California), the trustee must record a notice of default and send a copy to the
borrower-trustor and to any person who has recorded a request for a copy of
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any notice of default and notice of sale. In addition, the trustee must provide
notice in some states to any other individual having an interest of record in
the Property, including any junior lienholders. In some states (including
California), the borrower-trustor has the right to reinstate the loan at any
time following default until shortly before the trustee's sale. In general, the
borrower, or any other person having a junior encumbrance on the real estate,
may, during a reinstatement period, cure the default by paying the entire amount
in arrears plus the costs and expenses incurred in enforcing the obligation.
Certain state laws control the amount of foreclosure expenses and costs,
including attorney's fees, which may be recoverable by a lender. If the deed of
trust is not reinstated within any applicable cure period, a notice of sale must
be posted in a public place and, in most states (including California),
published for a specified period of time in one or more newspapers. These notice
provisions require that a copy of the notice of sale be posted on the Property
and sent to all parties having an interest of record in the Property. In
California, the entire process from recording a notice of default to a
non-judicial sale usually takes four to five months.
Mortgages. Foreclosure of a mortgage is generally accomplished by judicial
action. The action is initiated by the service of legal pleadings upon all
parties having an interest in the Property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
parties. Judicial foreclosure proceedings are often not contested by any of the
parties. When the mortgagee's right to foreclosure is contested, the legal
proceedings necessary to resolve the issue can be time consuming. After the
completion of a judicial foreclosure proceeding, the court generally issues a
judgment of foreclosure and appoints a referee or other court officer to conduct
the sale of the Property. In some states, mortgages may also be foreclosed by
advertisement, pursuant to a power of sale provided in the mortgage. Foreclosure
of a mortgage by advertisement is essentially similar to foreclosure of a deed
of trust by nonjudicial power of sale. In general, the borrower, or any other
person having a junior encumbrance on the real estate, may, during a statutorily
prescribed reinstatement period, cure a monetary default by paying the entire
amount in arrears plus other designated costs and expenses incurred in enforcing
the obligation. Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a lender. After
the reinstatement period has expired without the default having been cured, the
borrower or junior lienholders no longer has the right to reinstate the loan and
must pay the loan in full to prevent the scheduled foreclosure sale. If the deed
of trust is not reinstated, a notice of a sale must be posted in a public place
and, in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest in the
real property.
Although foreclosure sales are typically public sales, frequently no third
party purchaser bids in excess of the lender's lien because of the difficulty of
determining the exact status of title to the Property, the possible
deterioration of the Property during the foreclosure proceedings and a
requirement that the purchaser pay for the Property in cash or by cashier's
check. Thus the foreclosing lender often purchases the Property from the trustee
or referee for an amount equal to the principal amount outstanding under the
loan, accrued and unpaid interest and the expenses of foreclosure in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where the judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burden of ownership,
including obtaining hazard insurance and making the repairs at its own expense
as are necessary to render the Property suitable for sale. The lender will
commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the Property. Depending upon market
conditions, the ultimate proceeds of the sale of the Property may not equal the
lender's investment in the Property. Any loss may be reduced by the receipt of
any mortgage guaranty insurance proceeds.
Courts have imposed general equitable principles upon foreclosure, which
are generally designed to mitigate the legal consequences to the borrower of the
borrower's defaults under the loan documents. Some courts have been faced with
the issue of whether federal or state constitutional provisions reflecting due
process concerns for fair notice require that borrowers under deeds of trust
receive notice longer than that prescribed by statute. For the most part, these
cases have upheld the notice provisions as being reasonable or have found that
the sale by a trustee under a deed of trust does not involve sufficient state
action to afford constitutional protection to the borrower.
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When the beneficiary under a junior mortgage or deed of trust cures the
default and reinstates or redeems by paying the full amount of the senior
mortgage or deed of trust, the amount paid by the beneficiary so to cure or
redeem becomes a part of the indebtedness secured by the junior mortgage or deed
of trust. See "Junior Mortgages and Rights of Senior Mortgagees" below.
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
cancelled by the cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owed by the tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by the
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate the lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate the 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 form the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under the proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the cooperative 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. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a cooperative under a non-eviction plan, some
states require that a purchaser at a foreclosure sale take the Property subject
to rent control and rent stabilization laws which apply to certain tenants who
elected to remain in the building but who did not purchase shares in the
cooperative when the building was so converted.
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Environmental Risks
Property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of certain states, contamination of a
Property may give rise to a lien on the Property to assure the payment of the
costs of clean-up. In several states this type of lien has priority over the
lien of an existing mortgage against the Property. In addition, under the
federal Comprehensive Environmental Response, Compensation and Liability Act, as
amended ("CERCLA"), the EPA may impose a lien on Property where EPA has incurred
clean-up costs. However, a CERCLA lien is subordinate to pre-existing, perfected
security interests.
Under the laws of some states, and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
Property, even though the environmental damage or threat was caused by a prior
or current owner or operator. CERCLA imposes liability for those costs on any
and all "responsible parties," including owners or operators. However, CERCLA
excludes from the definition of "owner or operator" a secured creditor who holds
indicia of ownership primarily to protect its security interest (the "secured
creditor exclusion") but without "participating in the management" of the
Property. Thus, if a lender's activities begin to encroach on the actual
management of a contaminated facility or Property, the lender may incur
liability as an "owner or operator" under CERCLA. Similarly, if a lender
forecloses and takes title to a contaminated facility or Property, the lender
may incur CERCLA liability in various circumstances, including, but not limited
to, when it holds the facility or Property as an investment (including leasing
the facility or Property to third party), or fails to market the Property in a
timely fashion.
Whether actions taken by a lender would constitute participation in the
management of a Property, or the business of a borrower, so as to render the
secured creditor exemption unavailable to a lender has been a matter of judicial
interpretation of the statutory language, and court decisions have been
inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit suggested
that the mere capacity of the lender to influence a borrower's decisions
regarding disposal of hazardous substances was sufficient participation in the
management of the borrower's business to deny the protection of the secured
creditor exemption to the lender.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which was signed into law by President Clinton on September 30, 1996. This
legislation provides that in order to be deemed to have participated in the
management of a Property, a lender must actually participate in the operational
affairs of the Property or the borrower. The legislation also provides that
participation in the management of the Property does not include "merely having
the capacity to influence, or unexercised right to control" operations. Rather,
a lender will lose the protection of the secured creditor exemption only if it
exercises decision-making control over the borrower's environmental compliance
and hazardous substance handling and disposal practices, or assumes day-to-day
management of all operational functions of the Property.
If a lender is or becomes liable, it can bring an action for contribution
against any other "responsible parties," including a previous owner or operator,
who created the environmental hazard, but those persons or entities may be
bankrupt or otherwise judgment proof. The costs associated with environmental
cleanup may be substantial. It is conceivable that the costs arising from the
circumstances set forth above would result in a loss to certificateholders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks
(except heating oil tanks). The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under that rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. Moreover, under the Asset Conservation Act, the protections accorded
to lenders under CERCLA are also accorded to holders of security interests in
underground petroleum storage tanks. It should be noted, however, that liability
for cleanup of petroleum contamination may be governed
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by state law, which may not provide for any specific protection for secured
creditors or, alternatively, may not impose liability on secured creditors at
all.
In general, at the time the loans were originated no environmental
assessment, or a very limited environmental assessment, of the Properties was
conducted.
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 certain
other states (including California), this right of redemption applies only to
sales following judicial foreclosure, and not to sales pursuant to a
non-judicial power of sale. In most states where the right of redemption is
available, statutory redemption may occur upon payment of the foreclosure
purchase price, accrued interest and taxes. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed Property. The exercise of a right of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the Property and pay the
expenses of ownership until the redemption period has run. In some states, there
is no right to redeem Property after a trustee's sale under a deed of trust.
Anti-deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory and judicial restrictions that limit
the remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage. In some states (including California) statutes and case law limit the
right of the beneficiary or mortgagee to obtain a deficiency judgment against
borrowers financing the purchase of their residence or following sale under a
deed of trust or certain other foreclosure proceedings. A deficiency judgment is
a personal judgment against the borrower equal in most cases to the difference
between the amount due to the lender and the fair market value of the Property
at the time of the foreclosure sale. In certain states, including California, if
a lender simultaneously originates a loan secured by a senior lien on a
particular Property and a loan secured by a junior lien on the same Property,
the lender, as the holder of the junior lien, may be precluded from obtaining a
deficiency judgment with respect to the excess of the aggregate amount owed
under both loans over the proceeds of any sale under a deed of trust or other
foreclosure proceedings. As a result of these prohibitions, it is anticipated
that in most instances the master servicer will utilize the non-judicial
foreclosure remedy and will not seek deficiency judgments against defaulting
borrowers.
Some state statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
In certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting the 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. Consequently, the practical effect of the
election requirement, when applicable, is that lenders will usually proceed
first against the security rather than bringing a personal action against the
borrower. In some states, exceptions to the anti-deficiency statutes are
provided for in certain instances where the value of the lender's security has
been impaired by acts or omissions of the borrower, for example, in the event of
waste of the Property. Finally, other statutory provisions limit any deficiency
judgment against the former borrower following a foreclosure sale to the excess
of the outstanding debt over the fair market value of the Property at the time
of the public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the foreclosure sale.
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.
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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 the secured mortgage lender to realize upon its security. For
example, in a proceeding under the federal Bankruptcy Code, a lender may not
foreclose on a Property without the permission of the bankruptcy court. The
rehabilitation plan proposed by the debtor may provide, if the Property is not
the debtor's principal residence and the court determines that the value of the
Property is less than the principal balance of the mortgage loan, for the
reduction of the secured indebtedness to the value of the Property as of the
date of the commencement of the bankruptcy, rendering the lender a general
unsecured creditor for the difference, and also may reduce the monthly payments
due under the mortgage loan, change the rate of interest and alter the mortgage
loan repayment schedule. The effect of these types of proceedings under the
federal Bankruptcy Code, including but not limited to any automatic stay, could
result in delays in receiving payments on the loans underlying a series of
securities and possible reductions in the aggregate amount of the payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party. Numerous federal and state consumer protection laws
impose substantive requirements upon mortgage lenders in connection with the
origination, servicing and enforcement of mortgage loans. 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 and regulations. These federal and state laws impose specific
statutory liabilities on lenders who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the loans or
contracts.
Due-on-Sale Clauses
Generally, each conventional loan will contain a due-on-sale clause which
will generally provide that if the mortgagor or obligor sells, transfers or
conveys the Property, the loan or contract may be accelerated by the mortgagee
or secured party. Court decisions and legislative actions have placed
substantial restriction on the right of lenders to enforce due-on-sale clauses
in many states. For instance, the California Supreme Court in August 1978 held
that due-on-sale clauses were generally unenforceable. However, the Garn-St
Germain Depository Institutions Act of 1982 (the "Garn-St Germain Act"), subject
to certain exceptions, preempts state constitutional, statutory and case law
prohibiting the enforcement of due-on-sale clauses. As a result, due-on-sale
clauses have become generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of those
clauses with respect to mortgage loans that were (i) originated or assumed
during the "window period" under the Garn-St Germain Act which ended in all
cases not later than October 15, 1982, and (ii) originated by lenders other than
national banks, federal savings institutions and federal credit unions. FHLMC
has taken the position in its published mortgage servicing standards that, out
of a total of eleven "window period states," five states (Arizona, Michigan,
Minnesota, New Mexico and Utah) have enacted statutes extending, on various
terms and for varying periods, the prohibition on enforcement of due-on-sale
clauses with respect to certain categories of widow period loans. Also, the
Garn-St Germain Act does "encourage" lenders to permit assumption of loans at
the original rate of interest or at some other rate less than the average of the
original rate and the market rate.
As to loans secured by an owner-occupied residence, the Garn-St Germain Act
sets forth nine specific instances in which a mortgagee covered by the Act may
not exercise its rights under a due-on-sale clause, notwithstanding the fact
that a transfer of the Property may have occurred. The inability to enforce a
due-on-sale clause may result in transfer of the related Property to an
uncreditworthy person, which could increase the likelihood of default or may
result in a mortgage bearing an interest rate below the current market rate
being assumed by a new home buyer, which may affect the average life of the
loans and the number of loans which may extend to maturity.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from the bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for
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prepayment fees or penalties if the obligation is paid prior to maturity. In
certain states, there are or may be specific limitations upon the late charges
which a lender may collect from a borrower for delinquent payments. Certain
states also limit the amounts that a lender may collect from a borrower as an
additional charge if the loan is prepaid. Under certain state laws, prepayment
charges may not be imposed after a certain period of time following the
origination of mortgage loans with respect to prepayments on loans secured by
liens encumbering owner-occupied residential properties. Since many of the
Properties will be owner-occupied, it is anticipated that prepayment charges may
not be imposed with respect to many of the loans. The absence of a prepayment
penalty, particularly with respect to fixed rate loans having higher Loan Rates,
may increase the likelihood of refinancing or other early retirement of the
those loans or contracts. Late charges and prepayment penalties are typically
retained by servicers as additional servicing compensation.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V") provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V. The statute authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision which expressly rejects an application of the federal law. Fifteen
states adopted these laws prior to the April 1, 1983 deadline. In addition, even
where Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered by
Title V. Certain states have taken action to reimpose interest rate limits
and/or to limit discount points or other charges.
Home Improvement Contracts
General. Some home improvement contracts may in addition to being secured
by mortgages on real estate, also be secured by purchase money security
interests in home improvements financed thereby (these home improvement
contracts are referred to in this section as "contracts"). These contracts
generally are "chattel paper" or constitute "purchase money security interests"
each as defined in the UCC. 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 related Agreement, the depositor will transfer physical
possession of the contracts to the trustee or a designated custodian or may
retain possession of the contracts as custodian for the trustee. In addition,
the depositor will make an appropriate filing of a UCC-1 financing statement in
the appropriate states to, among other things, give notice of the trust fund's
ownership of the contracts. In general, the contracts will not be stamped or
otherwise marked to reflect their assignment from the depositor to the trustee.
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 trust fund's interest in the contracts could be defeated.
Security Interests in Home Improvements. The contracts that are secured by
the home improvements financed thereby grant to the originator of the contracts
a purchase money security interest in the home improvements to secure all or
part of the purchase price of the home improvements and related services. A
financing statement generally is not required to be filed to perfect a purchase
money security interest in consumer goods. These purchase money security
interests are assignable. In general, a purchase money security interest grants
to the holder a security interest that has priority over a conflicting security
interest in the same collateral and the proceeds of the collateral. However, to
the extent that the collateral subject to a purchase money security interest
becomes a fixture, in order for the related purchase money security interest to
take priority over a conflicting interest in the fixture, the holder's interest
in the home improvement must generally be perfected by a timely fixture filing.
In general, a security interest does not exist under the UCC in ordinary
building material incorporated into an improvement on land. Home improvement
contracts that finance lumber, bricks, other types of ordinary building material
or other goods that are deemed to lose this characterization upon incorporation
of the materials into the related Property, will not be secured by a purchase
money security interest in the home improvement being financed.
Enforcement of Security Interest in Home Improvements. So long as the home
improvement has not become subject to the real estate law, a creditor can
repossess a home improvement securing a contract by voluntary
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surrender, by "self-help" repossession that is "peaceful" (i.e., without breach
of the peace) or, in the absence of voluntary surrender and the ability to
repossess without breach of the peace, by judicial process. The holder of a
contract must give the debtor a number of days' notice, which varies from 10 to
30 days depending on the state, prior to commencement of any repossession. The
UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor and
commercial reasonableness in effecting a repossession sale. The law in most
states also requires that the debtor be given notice of any sale prior to resale
of the unit that the debtor may redeem at or before the resale.
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 Property 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.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws. The so-called holder in due course rule of the
Federal Trade Commission is intended to defeat the ability of the transferor of
a consumer credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer the contract
free of notice of claims by the debtor thereunder. The effect of this rule is to
subject the assignee of a contract to all claims and defenses which the debtor
could assert against the seller of goods. Liability under this rule is limited
to amounts paid under a contract; however, the obligor also may be able to
assert the rule to set off remaining amounts due as a defense against a claim
brought by the trustee against the obligor. Numerous other federal and state
consumer protection laws impose requirements applicable to the origination and
lending pursuant to the contracts, including the Truth in Lending Act, the
Federal Trade Commission Act, the Fair Credit Billing Act, the Fair Credit
Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection
Practices Act and the Uniform Consumer Credit Code. In the case of some of these
laws, the failure to comply with their provisions may affect the enforceability
of the related contract.
Applicability of Usury Laws. Title V, provides that, subject to the
following conditions, state usury limitations shall not apply to any contract
which is secured by a first lien on certain kinds of consumer goods. The
contracts would be covered if they satisfy certain conditions governing, among
other things, the terms of any prepayments, late charges and deferral fees and
requiring a 30-day notice period prior to instituting any action leading to
repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted this type of law prior to the April 1, 1983 deadline. In addition, even
where Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
Installment Contracts
The loans may also consist of installment contracts. Under an installment
contract the seller (referred to in this section as the "lender") retains legal
title to the Property and enters into an agreement with the purchaser (referred
to in this section as the "borrower") for the payment of the purchase price,
plus interest, over the term of the contract. Only after full performance by the
borrower of the contract is the lender obligated to convey title to the Property
to the purchaser. As with mortgage or deed of trust financing, during the
effective period of the installment contract, the borrower is generally
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 lender under an installment
contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of installment contracts
generally provide that upon a default by
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the 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 lender in this type of situation does not have to
foreclose in order to obtain title to the Property, although in some cases a
quiet title action is in order if the borrower has filed the installment
contract in local land records and an ejectment action may be necessary to
recover possession. In a few states, particularly in cases of borrower default
during the early years of an installment 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 installment contracts from the harsh consequences
of forfeiture. Under these statutes, a judicial or nonjudicial foreclosure may
be required, the lender may be required to give notice of default and the
borrower may be granted some grace period during which the installment 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 borrower with significant investment in the Property under
an installment contract for the sale of real estate to share in 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 lender's
procedures for obtaining possession and clear title under an installment
contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a Property
subject to one or more liens.
Servicemembers Civil Relief Act
Generally, under the terms of the Servicemembers Civil Relief Act (the
"Relief Act"), a borrower who enters military service after the origination of
the borrower's loan (including a borrower who is in reserve status at the time
of the origination of the loan and is later called to active duty) may not be
charged interest 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 California Military and Veterans Code (the "California Military
Code") provides protection equivalent to that provided by the Relief Act to
California National Guard members called up to active service by the Governor of
California, California National Guard members called up to active service by the
President of the United States and reservists called to active duty. Because the
Relief Act and the California Military Code apply to borrowers who enter
military service, no information can be provided as to the number of mortgage
loans that may be affected by the Relief Act or the California Military Code. It
is possible that the interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the master servicer to collect
full amounts of interest on certain of the loans. Unless otherwise provided in
the related prospectus supplement, any shortfall in interest collections
resulting from the application of the Relief Act and the California Military
Code could result in losses to securityholders. The Relief Act and the
California Military Code also impose limitations which would impair the ability
of the master servicer to foreclose on an affected loan or enforce rights under
a home improvement contract during the borrower's period of active duty status
and, under certain circumstances, during an additional three month period after
that period. Moreover, the Relief Act and the California Military Code permit
the extension of a loan's maturity and the re-adjustment of its payment schedule
beyond the completion of military service. Thus, in the event that a loan that
is subject to the Relief Act or the California Military Code goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Property in a timely fashion.
Junior Mortgages and Rights of Senior Mortgagees
To the extent that the loans comprising the trust fund for a series are
secured by mortgages which are junior to other mortgages held by other lenders
or institutional investors, the rights of the trust fund (and therefore the
securityholders), as mortgagee under the junior mortgage, are subordinate to
those of any mortgagee under any senior mortgage. The senior mortgagee has the
right to receive hazard insurance and condemnation proceeds and to cause the
Property securing the loan to be sold upon default of the mortgagor, thereby
extinguishing the junior mortgagee's lien unless the junior mortgagee asserts
its subordinate interest in the Property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure a default
and bring the senior loan current, in either event adding the amounts expended
to the balance due on the junior loan. In most states, absent a provision in the
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with
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condemnation proceedings, and to apply these proceeds and awards to any
indebtedness secured by the mortgage, in the order determined by the mortgagee.
Thus, in the event improvements on the Property are damaged or destroyed by fire
or other casualty, or in the event the Property is taken by condemnation, the
mortgagee or beneficiary under senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the Property and, when due, all
encumbrances, charges and liens on the Property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
Property, to maintain and repair the Property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the Property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage generally used by most
institutional lenders which make revolving credit line loans typically contains
a "future advance" clause, which provides, in essence, that additional amounts
advanced to or on behalf of the borrower by the beneficiary or lender are to be
secured by the deed of trust or mortgage. Any amounts so advanced after the
cut-off date with respect to any Mortgage will not be included in the trust
fund. The priority of the lien securing any advance made under the clause may
depend in most states on whether the deed of trust or mortgage is called and
recorded as a credit line deed of trust or mortgage. If the beneficiary or
lender advances additional amounts, the advance is entitled to receive the same
priority as amounts initially advanced under the trust deed or mortgage,
notwithstanding the fact that there may be junior trust deeds or mortgages and
other liens which intervene between the date of recording of the trust deed or
mortgage and the date of the future advance, and notwithstanding that the
beneficiary or lender had actual knowledge of the intervening junior trust deeds
or mortgages and other liens at the time of the advance. In most states, the
trust deed or mortgage lien securing mortgage loans of the type which includes
home equity credit lines applies retroactively to the date of the original
recording of the trust deed or mortgage, provided that the total amount of
advances under the home equity credit line does not exceed the maximum specified
principal amount of the recorded trust deed or mortgage, except as to advances
made after receipt by the lender of a written notice of lien from a judgment
lien creditor of the trustor.
The Title I Program
General. Certain of the loans contained in a trust fund may be loans
insured under the FHA Title I Credit Insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I Program").
Under the Title I Program, the FHA is authorized and empowered to insure
qualified lending institutions against losses on eligible loans. The Title I
Program operates as a coinsurance program in which the FHA insures up to 90% of
certain losses incurred on an individual insured loan, including the unpaid
principal balance of the loan, but only to the extent of the insurance coverage
available in the lender's FHA insurance coverage reserve account. The owner of
the loan bears the uninsured loss on each loan.
The types of loans which are eligible for insurance by the FHA under the
Title I Program include property improvement loans ("Property Improvement Loans"
or "Title I Loans"). A Property Improvement Loan or Title I Loan means a loan
made to finance actions or items that substantially protect or improve the basic
livability or utility of a Property and includes single family improvement
loans.
There are two basic methods of lending or originating these loans which
include a "direct loan" or a "dealer loan." With respect to a direct loan, the
borrower makes application directly to a lender without any assistance from a
dealer, which application may be filled out by the borrower or by a person
acting at the direction of the borrower who does not have a financial interest
in the loan transaction, and the lender may disburse the loan proceeds solely to
the borrower or jointly to the borrower and other parties to the transaction.
With respect to a dealer loan, the
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dealer, who has a direct or indirect financial interest in the loan transaction,
assists the borrower in preparing the loan application or otherwise assists the
borrower in obtaining the loan from lender and the lender may distribute
proceeds solely to the dealer or the borrower or jointly to the borrower and the
dealer or other parties. With respect to a dealer Title I Loan, a dealer may
include a seller, a contractor or supplier of goods or services.
Loans insured under the Title I Program are required to have fixed interest
rates and, generally, provide for equal installment payments due weekly,
biweekly, semi-monthly or monthly, except that a loan may be payable quarterly
or semi-annually in order to correspond with the borrower's irregular flow of
income. The first or last payments (or both) may vary in amount but may not
exceed 150% of the regular installment payment, and the first scheduled payment
may be due no later than two months from the date of the loan. The note must
contain a provision permitting full or partial prepayment of the loan. The
interest rate may be established by the lender and must be fixed for the term of
the loan and recited in the note. Interest on an insured loan must accrue from
the date of the loan and be calculated on a simple interest basis. The lender
must assure that the note and all other documents evidencing the loan are in
compliance with applicable federal, state and local laws.
Each insured lender is required to use prudent lending standards in
underwriting individual loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan and
disbursement of loan proceeds. Generally, the lender must exercise prudence and
diligence to determine whether the borrower and any co-maker is solvent and an
acceptable credit risk, with a reasonable ability to make payments on the loan
obligation. The lender's credit application and review must determine whether
the borrower's income will be adequate to meet the periodic payments required by
the loan, as well as the borrower's other housing and recurring expenses, which
determination must be made in accordance with the expense-to-income ratios
published by the Secretary of HUD.
Under the Title I Program, the FHA does not review or approve for
qualification for insurance the individual loans insured thereunder at the time
of approval by the lending institution (as is typically the case with other
federal loan programs). If, after a loan has been made and reported for
insurance under the Title I Program, the lender discovers any material
misstatement of fact or that the loan proceeds have been misused by the
borrower, dealer or any other party, it shall promptly report this to the FHA.
In this case, provided that the validity of any lien on the Property has not
been impaired, the insurance of the loan under the Title I Program will not be
affected unless the material misstatements of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
Requirements for Title I Loans. The maximum principal amount for Title I
Loans must not exceed the actual cost of the project plus any applicable fees
and charges allowed under the Title I Program; provided that the maximum amount
does not exceed $25,000 (or the current applicable amount) for a single family
property improvement loan. Generally, the term of a Title I Loan may not be less
than six months nor greater than 20 years and 32 days. A borrower may obtain
multiple Title I Loans with respect to multiple properties, and a borrower may
obtain more than one Title I Loan with respect to a single Property, in each
case as long as the total outstanding balance of all Title I Loans in the same
Property does not exceed the maximum loan amount for the type of Title I Loan
thereon having the highest permissible loan amount.
Borrower eligibility for a Title I Loan requires that the borrower have at
least a one-half interest in either fee simple title to the real property, a
lease thereof for a term expiring at least six months after the final maturity
of the Title I Loan or a recorded land installment contract for the purchase of
the real property, and that the borrower have equity in the property being
improved at least equal to the amount of the Title I Loan if the loan amount
exceeds $15,000. Any Title I Loan in excess of $7,500 must be secured by a
recorded lien on the improved property which is evidenced by a mortgage or deed
of trust executed by the borrower and all other owners in fee simple.
The proceeds from a Title I Loan may be used only to finance property
improvements which substantially protect or improve the basic livability or
utility of the Property as disclosed in the loan application. The Secretary of
HUD has published a list of items and activities which cannot be financed with
proceeds from any Title I Loan and from time to time the Secretary of HUD may
amend the list of items and activities. With respect to any dealer Title I Loan,
before the lender may disburse funds, the lender must have in its possession a
completion certificate on a HUD approved form, signed by the borrower and the
dealer. With respect to any direct Title I Loan, the borrower is required to
submit to the lender, promptly upon completion of the improvements but not later
than six months after
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disbursement of the loan proceeds with one six month extension if necessary, a
completion certificate, signed by the borrower. The lender or its agent is
required to conduct an on-site inspection on any Title I Loan where the
principal obligation is $7,500 or more, and on any direct Title I Loan where the
borrower fails to submit a completion certificate.
FHA Insurance Coverage. Under the Title I Program the FHA establishes an
insurance coverage reserve account for each lender which has been granted a
Title I insurance contract. The amount of insurance coverage in this account is
10% of the amount disbursed, advanced or expended by the lender in originating
or purchasing eligible loans registered with FHA for Title I insurance, with
certain adjustments. The balance in the insurance coverage reserve account is
the maximum amount of insurance claims the FHA is required to pay. Loans to be
insured under the Title I Program will be registered for insurance by the FHA
and the insurance coverage attributable to the loans will be included in the
insurance coverage reserve account for the originating or purchasing lender
following the receipt and acknowledgment by the FHA of a loan report on the
prescribed form pursuant to the Title I regulations. The FHA charges a fee of
0.50% per annum of the net proceeds (the original balance) of any eligible loan
so reported and acknowledged for insurance by the originating lender. The FHA
bills the lender for the insurance premium on each insured loan annually, on
approximately the anniversary date of the loan's origination. If an insured loan
is prepaid during the year, FHA will not refund the insurance premium, but will
abate any insurance charges falling due after the prepayment.
Under the Title I Program the FHA will reduce the insurance coverage
available in the lender's FHA insurance coverage reserve account with respect to
loans insured under the lender's contract of insurance by (i) the amount of the
FHA insurance claims approved for payment relating to the insured loans and (ii)
the amount of insurance coverage attributable to insured loans sold by the
lender. The balance of the lender's FHA insurance coverage reserve account will
be further adjusted as required under Title I or by the FHA, and the insurance
coverage in the lender's FHA insurance coverage reserve account may be earmarked
with respect to each or any eligible loans insured thereunder, if a
determination is made by the Secretary of HUD that it is in its interest to do
so. Originations and acquisitions of new eligible loans will continue to
increase a lender's insurance coverage reserve account balance by 10% of the
amount disbursed, advanced or expended in originating or acquiring the eligible
loans registered with the FHA for insurance under the Title I Program. The
Secretary of HUD may transfer insurance coverage between insurance coverage
reserve accounts with earmarking with respect to a particular insured loan or
group of insured loans when a determination is made that it is in the
Secretary's interest to do so.
The lender may transfer (except as collateral in a bona fide loan
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an insured
loan is transferred with recourse or with a guaranty or repurchase agreement,
the FHA, upon receipt of written notification of the transfer of the loan in
accordance with the Title I regulations, will transfer from the transferor's
insurance coverage reserve account to the transferee's insurance coverage
reserve account an amount, if available, equal to 10% of the actual purchase
price or the net unpaid principal balance of the loan (whichever is less).
However, under the Title I Program not more than $5,000 in insurance coverage
shall be transferred to or from a lender's insurance coverage reserve account
during any October 1 to September 30 period without the prior approval of the
Secretary of HUD.
Claims Procedures Under Title I. Under the Title I Program the lender may
accelerate an insured loan following a default on the loan only after the lender
or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and that, if the
default persists, the lender will report the default to an appropriate credit
agency. The lender may rescind the acceleration of maturity after full payment
is due and reinstate the loan only if the borrower brings the loan current,
executes a modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the lender
may either (a) proceed against the Property under any security instrument, or
(b) make a claim under the lender's contract of insurance. If the lender chooses
to proceed against the Property under a security instrument (or if it accepts a
voluntary conveyance or surrender of the Property), the lender may file an
insurance claim only with the prior approval of the Secretary of HUD.
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When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file and documentation of
the lender's efforts to obtain recourse against any dealer who has agreed
thereto, certification of compliance with applicable state and local laws in
carrying out any foreclosure or repossession, and evidence that the lender has
properly filed proofs of claims, where the borrower is bankrupt or deceased.
Generally, a claim for reimbursement for loss on any Title I Loan must be filed
with the FHA no later than nine months after the date of default of the loan.
Concurrently with filing the insurance claim, the lender shall assign to the
United States of America the lender's entire interest in the loan note (or a
judgment in lieu of the note), in any security held and in any claim filed in
any legal proceedings. If, at the time the note is assigned to the United
States, the Secretary has reason to believe that the note is not valid or
enforceable against the borrower, the FHA may deny the claim and reassign the
note to the lender. If a defect is discovered after the FHA has paid a claim,
the FHA may require the lender to repurchase the paid claim and to accept a
reassignment of the loan note. If the lender subsequently obtains a valid and
enforceable judgment against the borrower, the lender may resubmit a new
insurance claim with an assignment of the judgment. The FHA may contest any
insurance claim and make a demand for repurchase of the loan at any time up to
two years from the date the claim was certified for payment and may do so
thereafter in the event of fraud or misrepresentation on the part of the lender.
Under the Title I Program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the lender's insurance coverage reserve account. For the purposes
hereof, the "Claimable Amount" means an amount equal to 90% of the sum of: (a)
the unpaid loan obligation (net unpaid principal and the uncollected interest
earned to the date of default) with adjustments thereto if the lender has
proceeded against Property securing the loan; (b) the interest on the unpaid
amount of the loan obligation from the date of default to the date of the
claim's initial submission for payment plus 15 calendar days (but not to exceed
9 months from the date of default), calculated at the rate of 7% per annum; (c)
the uncollected court costs; (d) the attorney's fees not to exceed $500; and (e)
the expenses for recording the assignment of the security to the United States.
Consumer Protection Laws
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the origination, servicing
and enforcement of loans secured by Single Family Properties. These laws include
the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, Real
Estate Settlement Procedures Act and Regulation B promulgated thereunder, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, the
Home Equity Loan Consumer Protection Act of 1988 and related statutes and
regulations. In particular, Regulation Z, requires certain disclosures to the
borrowers regarding the terms of the loans; the Equal Credit Opportunity Act and
Regulation B promulgated thereunder 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; the Fair Credit Reporting Act regulates the use
and reporting of information related to the borrower's credit experience.
Certain provisions of these laws impose specific statutory liabilities upon
lenders who fail to comply therewith. In addition, violations of these laws may
limit the ability of the sellers to collect all or part of the principal of or
interest on the loans and could subject the sellers and in some cases their
assignees to damages and administrative enforcement.
Home Ownership and Equity Protection Act of 1994 and Similar State Laws
Some loans and contracts, known as "High Cost Loans," may be subject to
special rules, disclosure requirements and other provisions that were added to
the federal Truth-in-Lending Act by the Home Ownership and Equity Protection Act
of 1994, or "Homeownership Act," if such trust assets were originated on or
after October 1, 1995, are not loans made to finance the purchase of the
mortgaged property and have interest rates or origination costs in excess of
certain prescribed levels. The Homeownership Act requires certain additional
disclosures, specifies the timing of those disclosures and limits or prohibits
inclusion of certain provisions in mortgages subject to the Homeownership Act.
Purchasers or assignees of any High Cost Loan, including any trust fund, could
be liable under federal law for all claims and subject to all defenses that the
borrower could assert against the originator of the High Cost Loan, under the
federal Truth-in-Lending Act or any other law, unless the purchaser or assignee
did not know and could not with reasonable diligence have determined that the
loan was subject to the provisions of the Homeownership Act. Remedies available
to the borrower include monetary penalties, as well as recision rights if
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appropriate disclosures were not given as required or if the particular mortgage
includes provisions prohibited by law. The maximum damages that may be recovered
under these provisions from an assignee, including the trust fund, is the
remaining amount of indebtedness plus the total amount paid by the borrower in
connection with the home loan.
In addition to the Homeownership Act, a number of legislative proposals
have been introduced at both the federal and state level that are designed to
discourage predatory lending practices. Some states have enacted, or may enact,
laws or regulations that prohibit inclusion of some provisions in home loans
that have interest rates or origination costs in excess of consummation of the
home loans. In some cases, state law may impose requirements and restrictions
greater than those in the Homeownership Act. An originators' failure to comply
with these laws could subject the trust fund, and other assignees of the home
loans, to monetary penalties and could result in the borrowers rescinding the
home loans against either the trust fund or subsequent holders of the home
loans.
Some of the mortgage loans in a mortgage pool that were originated between
October 1, 2002 and March 6, 2003 may be "home loans" and also may be "covered
home loans" under the Georgia Fair Lending Act, or "Georgia Act." The Georgia
Act applies to any mortgage loan that is secured by a property located in the
State of Georgia that is the mortgagor's principal residence and has a principal
amount not in excess of the conforming loan balance limit established by Fannie
Mae. These loans are referred to under the Georgia Act as "home loans." Certain
home loans, which are referred to as "covered home loans," have met certain fee
and finance-charge criteria. Certain covered home loans, which are referred to
as "Georgia high-cost home loans," have met higher limits regarding fees and
finance charges. The Georgia Act prohibits certain activities and charges in
connection with home loans. Additional prohibitions apply to covered home loans
and further prohibitions apply to Georgia high-cost home loans. Except in the
case of a transaction in which the mortgage loans are provided by an
unaffiliated seller or unless otherwise specified in the accompanying prospectus
supplement, First Horizon will represent and warrant that all of the mortgage
loans in the mortgage pool complied in all materials respects with all
applicable local, state and federal laws at the time of origination.
Purchasers or assignees of a Georgia high-cost home loan, including the
related trust, could be exposed to all claims and defenses that the mortgagor
could assert against the originator of the home loan. Purchasers or assignees of
a covered home loan, including the related trust, could be subject to defenses
to foreclosure or an action to collect or to counterclaims by a mortgagor if the
loan is in violation of the Georgia Act. Remedies available to a mortgagor
include actual, statutory and punitive damages, costs and attorneys fees,
rescission rights and other, unspecified equitable remedies. No maximum penalty
has been set with respect to violations of the Georgia Act, and courts have been
given discretion under the statute to fashion equitable remedies as they deem
appropriate.
With respect to loans originated during the period between October 1, 2002
and March 6, 2003, there are some uncertainties in making a determination as to
whether a particular Georgia loan is a covered home loan or a Georgia high-cost
home loan, and in determining whether a loan complies with all of the provisions
of the Georgia Act. Although First Horizon will be obligated to repurchase any
mortgage loan as to which a breach of its representation and warranty has
occurred if that breach is material and adverse to the interests of the
certificateholders, the repurchase price of those mortgage loans could be less
than the damages and/or equitable remedies imposed pursuant to the Georgia Act.
The Georgia Act was amended on March 7, 2003. Mortgage loans originated on
or after that date are subject to a less stringent version of the Georgia Act.
Lawsuits have been brought in various states making claims against
assignees of High Cost Loans for violations of state law allegedly committed by
the originator. Named defendants in these cases include numerous participants
within the secondary mortgage market, including some securitization trusts.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
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General
The following discussion is the opinion of Andrews Kurth LLP, counsel to
the depositor, as to the material federal income tax consequences of the
purchase, ownership, and disposition of the securities and is based upon the
provisions of the Code, the regulations promulgated thereunder, including, where
applicable, proposed regulations, and the judicial and administrative rulings
and decisions now in effect, all of which are subject to change or possible
differing interpretations. The statutory provisions, regulations, and
interpretations on which this interpretation is based are subject to change, and
such a change could apply retroactively.
The discussion does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special treatment
under the federal income tax laws including, for example, financial
institutions, broker-dealers, insurance companies, tax-exempt organizations,
U.S. expatriates and persons in special situations, such as those who hold
securities as part of a straddle, hedge, conversion transaction, or other
integrated investment. This discussion focuses primarily upon investors who will
hold securities as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Code, but much of the discussion is
applicable to other investors as well. If a partnership holds securities, the
tax treatment of a partner will generally depend on the status of the partner
and on the activities of the partnership. Partners of partnerships holding
securities should consult their tax advisors. Prospective investors are
encouraged to consult their own tax advisers concerning the particular federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the securities.
The federal income tax consequences to holders will vary depending on
whether
o the securities of a series are classified as indebtedness;
o an election is made to treat the trust fund relating to a particular
series of securities, or a portion of the trust fund, as a REMIC under
the Code;
o the securities represent an ownership interest in some or all of the
assets included in the trust fund for a series; or
o an election is made to treat the trust fund relating to a particular
series of certificates as a partnership.
The prospectus supplement for each series of securities will specify how
the securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to the series. Prior
to issuance of each series of securities, the depositor shall file with the SEC
a Form 8-K on behalf of the related trust fund containing an opinion of Andrews
Kurth LLP adopting the discussion set forth under "Material Federal Income Tax
Consequences" in this prospectus and in the related prospectus supplement.
For purposes of this discussion, the term "U.S. Person" means a citizen or
resident of the United States, a corporation, partnership or other entity
treated as a corporation or partnership for federal income tax purposes created
or organized in or under the laws of the United States, any state thereof or the
District of Columbia (other than a partnership that is not treated as a United
States person under any applicable Treasury regulations), or an estate whose
income is subject to U.S. federal income tax regardless of its source of income,
or a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in regulations,
certain trusts in existence on August 20, 1996 and treated as United States
persons prior to that date that elect to continue to be so treated also shall be
considered U.S. Persons.
A "Non-U.S. Person" is any person that is not a U.S. Person.
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Taxation of Debt Securities
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount or "OID") on securities (other than Regular Interest Securities) that
are characterized as indebtedness for federal income tax purposes will be
includible in income by holders thereof in accordance with their usual methods
of accounting. Securities characterized as debt for federal income tax purposes
and Regular Interest Securities will be referred to collectively as "Debt
securities" in this section.
Debt securities that are Compound Interest securities will, and certain of
the other Debt securities may, be issued with OID. The following discussion is
based in part on the rules governing OID which are set forth in Sections
1271-1275 of the Code and the related Treasury regulations (the "OID
Regulations"). A Holder should be aware, however, that the OID Regulations do
not adequately address certain issues relevant to prepayable securities, such as
the Debt securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt security and its issue price. A holder of
a Debt security must include the OID in gross income as ordinary interest income
as it accrues under a method taking into account an economic accrual of the
discount. In general, OID must be included in income in advance of the receipt
of the cash representing that income. The amount of OID on a Debt security will
be considered to be zero if it is less than a de minimis amount determined under
the Code or OID Regulations.
The issue price of a Debt security is the first price at which a
substantial amount of Debt securities of that class is sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt securities is sold for cash on
or prior to the related closing date, the issue price for the class will be
treated as the fair market value of the class on the closing date. The issue
price of a Debt security also includes the amount paid by an initial Debt
security holder for accrued interest that relates to a period prior to the issue
date of the Debt security. The stated redemption price at maturity of a Debt
security includes the original principal amount of the Debt security, but
generally will not include distributions of interest if the distributions
constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or 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 Debt security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
the Debt securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where Debt securities do not provide for default remedies, the interest payments
may be included in the Debt security's stated redemption price at maturity and
taxed as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt securities with respect to which deferred
interest will accrue, will not constitute qualified stated interest payments, in
which case the stated redemption price at maturity of those Debt securities will
include all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first distribution date on a Debt
security is either longer or shorter than the interval between subsequent
distribution dates, all or part of any interest foregone, in the case of the
longer interval, and all of any additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and tested
under the de minimis rule described below. In the case of a Debt security with a
long first period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price at maturity. Holders of Debt
securities are encouraged to consult their own tax advisors to determine the
issue price and stated redemption price at maturity of a Debt security.
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Under the de minimis rule, OID on a Debt security will be considered to be
zero if the OID is less than 0.25% of the stated redemption price at maturity of
the Debt security multiplied by the weighted average maturity of the Debt
security. For this purpose, the weighted average maturity of the Debt 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 Debt security and the
denominator of which is the stated redemption price at maturity of the Debt
security. Although it is not entirely free from doubt, in the case of a
pre-payable Debt security, the weighted average maturity of the Debt security
should be determined with reference to the Prepayment Assumption (as defined
below). Holders generally must report de minimis OID pro rata as principal
payments are received, and the income will be capital gain if the Debt security
is held as a capital asset. However, holders may elect to accrue all de minimis
OID as well as market discount under a constant interest method.
Debt securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally,
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments by more than a specified amount and
o interest is based on a "qualified floating rate," an "objective rate,"
or a combination of "qualified floating rates" that do not operate in
a manner that significantly accelerates or defers interest payments on
the Debt security.
In the case of Compound Interest securities, certain Interest Weighted
Securities (as defined below), and certain of the other Debt securities, none of
the payments under the instrument will be considered qualified stated interest,
and thus the aggregate amount of all payments will be included in the stated
redemption price.
Treasury regulations governing the calculation of OID on instruments having
contingent interest payments (the "Contingent Regulations") specifically do not
apply for purposes of calculating OID on debt instruments that are REMIC regular
interests or that may be accelerated by reason of prepayments of other debt
instruments securing them, and thus are subject to Code Section 1272(a)(6), such
as the Debt securities. Additionally, the OID Regulations do not contain
provisions specifically interpreting Code Section 1272(a)(6). Until the Treasury
issues guidance to the contrary, the trustee intends to base its computation on
Code Section 1272(a)(6) and the OID Regulations as described in the following
paragraphs of this prospectus. However, because no regulatory guidance currently
exists under Code Section 1272(a)(6), there can be no assurance that this
methodology represents the correct manner of calculating OID.
The holder of a Debt security issued with OID must include in gross income,
for all days during its taxable year on which it holds the Debt security, the
sum of the "daily portions" of the original issue discount. The amount of OID
includible in income by a holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a Debt security that
is not a Regular Interest Security and the principal payments on which are not
subject to acceleration resulting from prepayments on the loans, the amount of
OID includible in income of a holder for an accrual period (generally the period
over which interest accrues on the debt instrument) will equal the product of
the yield to maturity of the Debt security and the adjusted issue price of the
Debt security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals of OID,
reduced by the total payments made with respect to the Debt security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain classes of the Debt securities, that is subject to
acceleration due to prepayments on other debt obligations securing those
instruments (a "Pay-Through Security"), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
"Prepayment Assumption"). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments
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remaining to be made on the Pay-Through Security as of the close of the accrual
period and (b) the payments during the accrual period of amounts included in the
stated redemption price of the Pay-Through Security, over the adjusted issue
price of the Pay-Through Security at the beginning of the accrual period. The
present value of the remaining payments is to be determined on the basis of
three factors: (i) the original yield to maturity of the Pay-Through Security
(determined on the basis of compounding at the end of each accrual period and
properly adjusted for the length of the accrual period), (ii) events which have
occurred before the end of the accrual period and (iii) the assumption that the
remaining payments will be made in accordance with the original Prepayment
Assumption. The effect of this method is to increase the portions of OID
required to be included in income by a holder to take into account prepayments
with respect to the loans at a rate that exceeds the Prepayment Assumption, and
to decrease (but not below zero for any period) the portions of OID required to
be included in income by a holder of a Pay-Through Security to take into account
prepayments with respect to the loans at a rate that is slower than the
Prepayment Assumption. Although OID will be reported to holders of Pay-Through
Securities based on the Prepayment Assumption, no representation is made to
holders that loans will be prepaid at that rate or at any other rate.
The depositor may adjust the accrual of OID on a class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the loans, although the
OID Regulations do not provide for these adjustments. If the IRS were to require
that OID be accrued without these adjustments, the rate of accrual of OID for a
class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless otherwise provided in the related
prospectus supplement, the trustee intends, based on the OID Regulations, to
calculate OID on those securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt security will also be required to include OID
in gross income, but a subsequent holder who purchases the Debt security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt security's issue price) to offset the
OID by comparable economic accruals of portions of the excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the loans, except possibly to the extent that it can
be established that those amounts are uncollectible. As a result, the amount of
income (including OID) reported by a holder of a security in any period could
significantly exceed the amount of cash distributed to the holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the securities is reduced as a result of a loan default.
However, the timing and character of any losses or reductions in income are
uncertain and, accordingly, holders of securities are encouraged to consult
their own tax advisors on this point.
Interest Weighted Securities. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities (as defined
under " -- Tax Status as a Grantor Trust - General" in this prospectus) the
payments on which consist solely or primarily of a specified portion of the
interest payments on qualified mortgages held by the REMIC or on loans
underlying Pass-Through Securities ("Interest Weighted Securities"). The Issuer
intends to take the position that all of the income derived from an Interest
Weighted Security should be treated as OID and that the amount and rate of
accrual of the OID should be calculated by treating the Interest Weighted
Security as a Compound Interest security. However, in the case of Interest
Weighted Securities that are entitled to some payments of principal and that are
Regular Interest Securities the IRS could assert that income derived from an
Interest Weighted Security should be calculated as if the security were a
security purchased at a premium equal to the excess of the price paid by the
holder for the security over its stated principal amount, if any. Under this
approach, a holder would be entitled to amortize the premium only if the holder
has in effect an election under Section 171 of the Code with respect to all
taxable debt instruments held by the holder, as described below. Alternatively,
the Internal Revenue Service could assert that an Interest Weighted Security
should be taxable under the rules governing bonds issued with contingent
payments. This treatment may be more likely in the case of Interest Weighted
Securities that are Stripped Securities as described below. See " -- Tax Status
as a Grantor Trust -- Discount or Premium on Pass-Through Securities."
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Variable Rate Debt Securities. In the case of Debt securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index, it appears that (i) the yield to maturity of those Debt
securities and (ii) in the case of Pay-Through Securities, the present value of
all payments remaining to be made on those Debt securities, should be calculated
as if the interest index remained at its value as of the issue date of those
securities. Because the proper method of adjusting accruals of OID on a variable
rate Debt security is uncertain, holders of variable rate Debt securities are
encouraged to consult their own tax advisers regarding the appropriate treatment
of those securities for federal income tax purposes. In the case of any REMIC,
no class of Regular Interest Security (or other regular interest in a REMIC)
will bear interest based on an objective rate (other than two or more qualified
floating rates).
Market Discount. A purchaser of a security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A holder that acquires a Debt
security with more than a prescribed de minimis amount of "market discount"
(generally, the excess of the principal amount of the Debt security, or the
adjusted issue price if the Debt security is issued with OID, over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt security received in that month
and, if the securities are sold, the gain realized. This market discount would
accrue in a manner to be provided in Treasury regulations but, until those
regulations are issued, this market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a Prepayment Assumption) or (ii) in the ratio of (a) in the case of
securities (or in the case of a Pass-Through Security, as set forth below, the
loans underlying the security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of securities (or, in the case of a Pass-Through Security, as described below,
the loans underlying the security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
The excess of interest paid or accrued to purchase or carry a security (or,
in the case of a Pass-Through Security, as described below, the underlying
loans) with market discount over interest received on the security is allowed as
a current deduction only to the extent the excess is greater than the market
discount that accrued during the taxable year in which the interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when the market discount is included in income, including upon the
sale, disposition, or repayment of the security (or in the case of a
Pass-Through Security, an underlying loan). A holder may elect to include market
discount in income currently as it accrues, on all market discount obligations
acquired by the holder during the taxable year the election is made and
thereafter, in which case the interest deferral rule will not apply. Holders are
encouraged to consult their own tax advisers before making this election.
Premium. A holder who purchases a Debt security, other than an Interest
Weighted Security to the extent described above, at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the security at a premium, which the holder may elect to amortize as
an offset to interest income on the security (and not as a separate deduction
item) on a constant yield method. Although no regulations addressing the
computation of premium accrual on securities similar to the securities have been
issued, the legislative history of the Tax Reform Act of 1986 indicates that
premium is to be accrued in the same manner as market discount. Accordingly, it
appears that the accrual of premium on a class of Pay-Through Securities will be
calculated using the Prepayment Assumption used in pricing the class. If a
holder makes an election to amortize premium on a Debt security, the election
will apply to all taxable debt instruments, including all REMIC regular
interests and all pass-through certificates representing ownership interests in
a trust holding debt obligations, held by the holder at the beginning of the
taxable year in which the election is made, and to all taxable debt instruments
subsequently acquired by the holder, and will be irrevocable without the consent
of the IRS. Purchasers who pay a premium for the securities are encouraged to
consult their own tax advisers regarding the election to amortize premium and
the method to be employed.
Treasury regulations dealing with amortizable bond premium (the "Final Bond
Premium Regulations") specifically do not apply to prepayable debt instruments
subject to Code Section 1272(a)(6) such as the Debt securities. Absent further
guidance from the IRS, the trustee intends to account for amortizable bond
premium in the manner described above. Prospective purchasers of the securities
are encouraged to consult their own tax advisers regarding the possible
application of the Final Bond Premium Regulations.
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Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for debt. If this election
were to be made with respect to a Debt security with market discount, the holder
of the Debt security 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 holder of the Debt security acquires during the
year of the election or thereafter. Similarly, a holder of a Debt security that
makes this election for a Debt security 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 holder owns or
acquires. The election to accrue interest, discount and premium on a constant
yield method with respect to a Debt security is irrevocable. Holders are
encouraged to consult their own tax advisers before making this election.
Taxation of the REMIC and its Holders
General. In the opinion of Andrews Kurth LLP, special counsel to the
depositor, if a REMIC election is made with respect to a series of securities,
then the arrangement by which the securities of that series are issued will be
treated as a REMIC as long as all of the provisions of the applicable Agreement
are complied with and the statutory and regulatory requirements are satisfied.
Securities will be designated as "Regular Interests" or "Residual Interests" in
a REMIC, as specified in the related prospectus supplement.
Except to the extent specified otherwise in a prospectus supplement, if a
REMIC election is made with respect to a series of securities, (i) securities
held by a domestic building and loan association will constitute "a regular or a
residual interest in a REMIC" within the meaning of Code Section
7701(a)(19)(C)(xi) (assuming that at least 95% of the REMIC's assets consist of
cash, government securities, "loans secured by an interest in real property,"
and other types of assets described in Code Section 7701(a)(19)(C)); and (ii)
securities held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code Section 856(c)(5)(B), and income with respect
to the securities will be considered "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) (assuming, for both purposes, that at least 95% of
the REMIC's assets are real estate assets). If less than 95% of the REMIC's
assets consist of assets described in Code Section 7701(a)(19)(C), then
securities held by a domestic building and loan association will represent
assets described in Code Section 7701(a)(19)(C) in the same proportion that the
REMIC assets would be so treated. Similarly, if less than 95% of the REMIC's
assets consist of "real estate assets" under Code Section 856(c)(5)(B), then
securities held by a real estate investment trust will represent "real estate
assets" in the same proportion that the REMIC's assets would be so treated and
income on the securities certificates will represent "interests on obligations
secured by mortgages on real property or on interests in real property" in the
same proportion that the income on the REMIC's assets would be so treated.
REMIC Expenses; Single Class REMICs
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Securities. In the case of a "single
class REMIC," however, the expenses will be allocated, under Treasury
regulations, among the holders of the Regular Interest Securities and the
holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each holder on that day. In the case
of a holder of a Regular Interest Security who is an individual or a
"pass-through interest holder," including certain pass-through entities but not
including real estate investment trusts, the expenses will be deductible only to
the extent that the expenses, plus other "miscellaneous itemized deductions" of
the holder, exceed 2% of the holder's adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the specified amount (which
amount will be adjusted for inflation for taxable years beginning after 1990)
will be reduced by the lesser of
o 3% of the excess of adjusted gross income over the specified amount,
or
o 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
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The reduction or disallowance of this deduction may have a significant
impact on the yield of the Regular Interest Security to a holder. In general
terms, a single class REMIC is one that either
o would qualify, under existing Treasury regulations, as a grantor trust
if it were not a REMIC (treating all interests as ownership interests,
even if they would be classified as debt for federal income tax
purposes) or
o is similar to such a trust and is structured with the principal
purpose of avoiding the single class REMIC rules.
The applicable prospectus supplement may provide for the allocation of
REMIC expenses, but if it does not, the expenses of the REMIC will be allocated
to holders of the related residual interest securities.
Taxation of the REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the Regular Interests are generally
taxable as debt of the REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between
o the gross income produced by the REMIC's assets, including stated
interest and any original issue discount or market discount on loans
and other assets, and
o deductions, including stated interest and original issue discount
accrued on Regular Interest Securities, amortization of any premium
with respect to loans, and servicing fees and other expenses of the
REMIC.
A holder of a Residual Interest Security (as defined below) that is an
individual or a "pass-through interest holder" (including certain pass-through
entities, but not including real estate investment trusts) will be unable to
deduct servicing fees payable on the loans or other administrative expenses of
the REMIC for a given taxable year, to the extent that the expenses, when
aggregated with the holder's other miscellaneous itemized deductions for that
year, do not exceed two percent of the holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on these loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue original issue discount, i.e., under the constant yield method taking
into account the Prepayment Assumption. The REMIC will deduct OID on the Regular
Interest Securities in the same manner that the holders of the Regular Interest
Securities include this discount in income, but without regard to the de minimis
rules. See "-- Taxation of Debt Securities" above. However, a REMIC that
acquires loans at a market discount must include the market discount in income
currently, as it accrues, on a constant interest basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before this date, it is possible that
this premium may be recovered in proportion to payments of loan principal.
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Prohibited Transactions and Contributions Tax. The REMIC will be subject to
a 100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions
include:
o subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
o subject to a limited exception, the sale or other disposition of a
cash flow investment;
o the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or
o the receipt of any fees or other compensation for services rendered by
the REMIC.
It is anticipated that a REMIC will not engage in any prohibited
transactions in which it would recognize a material amount of net income. In
addition, subject to a number of exceptions, a tax is imposed at the rate of
100% on amounts contributed to a REMIC after the close of the three-month period
beginning on the Startup Day. The holders of Residual Interest securities will
generally be responsible for the payment of these taxes imposed on the REMIC. To
the extent not paid by the holders or otherwise, however, these taxes will be
paid out of the trust fund and will be allocated pro rata to all outstanding
classes of securities of the REMIC.
Taxation of Holders of Residual Interest Securities
The holder of a security representing a residual interest (a "Residual
Interest Security") will take into account the "daily portion" of the taxable
income or net loss of the REMIC for each day during the taxable year on which
the holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for the quarter, and by allocating that
amount among the holders (on that day) of the Residual Interest Securities in
proportion to their respective holdings on that day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to the income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount (if this occurs, it is likely that
cash distributions will exceed taxable income in later years). Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
Treasury regulations have been proposed regarding the federal income tax
treatment of "inducement fees" received by transferees of REMIC residual
interests determined to be noneconomic residual interests. The proposed
regulations (i) provide tax accounting rules for the treatment of such fees as
income over an appropriate period and (ii) specify that inducement fees
constitute income from sources within the United States. The proposed
regulations provide that the final regulations will be applicable to taxable
years ending on or after the date final regulations are published, and thus yet
to be issued final regulations may apply to the treatment of any inducement fee
received in connection with the acquisition of a Residual Certificate.
Prospective purchaser of Residual Interest Securities are encouraged to consult
with their own tax advisors regarding the effect of these proposed regulations.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and
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pretax yield. Therefore, the after-tax yield on the Residual Interest Security
may be less than that of this type of a bond or instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which the loss arises. A holder's basis in a Residual
Interest Security will initially equal the holder's purchase price, and will
subsequently be increased by the amount of the REMIC's taxable income allocated
to the holder, and decreased (but not below zero) by the amount of distributions
made and the amount of the REMIC's net loss allocated to the holder. Any
disallowed loss may be carried forward indefinitely, but may be used only to
offset income of the REMIC generated by the same REMIC. The ability of holders
of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which the holders are encouraged
consult their own tax advisers.
Distributions. Distributions on a Residual Interest Security, whether at
their scheduled times or as a result of prepayments, will generally not result
in any additional taxable income or loss to a holder of a Residual Interest
Security. If the amount of the payment exceeds a holder's adjusted basis in the
Residual Interest Security, however, the holder will recognize gain, treated as
gain from the sale of the Residual Interest Security, to the extent of the
excess.
Sale or Exchange. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and the holder's adjusted
basis in the Residual Interest Security at the time of the sale or exchange.
Except to the extent provided in Treasury regulations, which have not yet been
issued, any loss upon disposition of a Residual Interest Security will be
disallowed if the selling holder acquires any residual interest in a REMIC or
similar mortgage pool within six months before or after the disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder of a
Residual Interest Security consisting of "excess inclusion" income may not be
offset by other deductions or losses, including net operating losses, on the
holder's federal income tax return. Further, if the holder of a Residual
Interest Security is an organization subject to the tax on unrelated business
income imposed by Code Section 511, the holder's excess inclusion income will be
treated as unrelated business taxable income of the holder. In addition, under
Treasury regulations yet to be issued, if a real estate investment trust, a
regulated investment company, a common trust fund, or certain cooperatives were
to own a Residual Interest Security, a portion of dividends (or other
distributions) paid by the real estate investment trust, or other entity, would
be treated as excess inclusion income. If a Residual Security is owned by a
Non-U.S. Person excess inclusion income is subject to tax at a rate of 30% which
may not be reduced by treaty, is not eligible for treatment as "portfolio
interest" and is subject to certain additional limitations. Please read "Tax
Treatment of Foreign Investors."
In addition, there are three rules for determining the effect of excess
inclusions on the alternative minimum taxable income of a residual holder.
First, alternative minimum taxable income for the residual holder is determined
without regard to the special rule that taxable income cannot be less than
excess inclusions. Second, a residual holder's alternative minimum taxable
income for a tax year cannot be less than excess inclusions for the year. Third,
the amount of any alternative minimum tax net operating loss deductions must be
computed without regard to any excess inclusions.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for the quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Day multiplied
by (ii) the adjusted issue price of the Residual Interest Security at the
beginning of the quarterly period. The adjusted issue price of a Residual
Interest at the beginning of each calendar quarter will equal its issue price,
calculated in a manner analogous to the determination of the issue price of a
Regular Interest, increased by the aggregate of the daily accruals for prior
calendar quarters, and decreased, but not below zero, by the amount of loss
allocated to a holder and the amount of distributions made on the Residual
Interest Security before the beginning of the quarter. In the case of a Residual
Interest Security having no economic value, the issue price will generally
remain at zero, and all income allocated to the Residual Interest Security will
be excess inclusions. The long-term federal rate, which is announced monthly by
the Treasury Department, is an interest rate that is based on the average market
yield of
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outstanding marketable obligations of the United States government having
remaining maturities in excess of nine years.
Under the REMIC Treasury regulations, in certain circumstances, transfers
of Residual Interest Securities may be disregarded. Please read "-- Restrictions
on Ownership and Transfer of Residual Interest Securities" and " -- Tax
Treatment of Foreign Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "Disqualified
Organization." Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1400C of the Code,
if the entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Agreement will prohibit Disqualified Organizations
from owning a Residual Interest Security. In addition, no transfer of a Residual
Interest Security will be permitted unless the proposed transferee shall have
furnished to the trustee an affidavit representing and warranting that it is
neither a Disqualified Organization nor an agent or nominee acting on behalf of
a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization in violation of the restrictions set forth above, a substantial tax
can be imposed on the transferor of the Residual Interest Security at the time
of the transfer. In addition, if a Disqualified Organization holds an interest
in a pass-through entity (including, among others, a partnership, trust, real
estate investment trust, regulated investment company, or any person holding as
nominee) that owns a Residual Interest Security, the pass-through entity will be
required to pay an annual tax on its allocable share of the excess inclusion
income of the REMIC. If an "electing large partnership" holds a Residual
Interest 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 under Section 860E(e) of the Code. An exception to this tax,
otherwise available to a pass-through entity that is furnished certain
affidavits by record holders of interests in the entity and that does not know
the affidavits are false, is not available to an electing large partnership. For
these purposes, an "electing large partnership" means any partnership having
more than 100 members during the preceding tax year, other than some service
partnerships and commodity pools, which elects to apply simplified reporting
provisions under the Code.
Under the REMIC Treasury regulations, if a Residual Interest Security is a
"noneconomic residual interest," as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all Federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a "noneconomic
residual interest" unless, at the time of the transfer
o the present value of the expected future distributions on the Residual
Interest Security at least equals the product of the present value of
the anticipated excess inclusions and the highest corporate income tax
rate for the year in which the transfer occurs, and
o the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which the taxes
accrue on the anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes.
The REMIC Treasury regulations presume that the transferor of a REMIC
residual interest did not have impeding the assessment or collection of tax as a
significant purpose of the transfer if it: (i) conducts a reasonable
investigation of the transferee's financial condition and concludes that the
transferee has historically paid its debts as they come due and finds no
significant evidence indicating that the transferee will not continue to pay its
debts as they come due in the future, and (ii) receives a representation from
the transferee that the transferee understands the tax obligations associated
with holding a residual interest and intends to pay those taxes as they come
due.
Final Treasury regulations issued on July 19, 2002 (the "Final
Regulations") provide a safe harbor under which transfers of noneconomic
residual interests are treated as not disregarded for federal income tax
purposes. Under the Final Regulations, a transfer of a noneconomic residual
interest will not qualify under this safe harbor
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unless the present value of the anticipated tax liabilities associated with
holding the residual interest does not exceed the sum of the present value of
the sum of (i) any consideration given to the transferee to acquire the
interest, (ii) future distributions on the interest, and (iii) any anticipated
tax savings associated with holding the interest as the REMIC generates losses.
For purposes of this calculation, the present value is calculated using a
discount rate equal to the applicable federal short-term rate.
The Final Regulations provide an additional safe harbor for transfers of
noneconomic residual interests to purchasers that are domestic, taxable C
corporations (other than real estate investment trusts, regulated investment
companies or REMICs). A transfer generally satisfies the this safe harbor if (1)
at the time of the transfer, and at the close of each of the purchaser's two
fiscal years preceding the year of transfer, the purchaser's gross assets for
financial reporting purposes exceed $100 million and its net assets for
financial reporting purposes exceed $10 million, (2) the purchaser makes a
written agreement that any subsequent transfer of the interest will be to
another taxable, domestic C corporation in a transaction that satisfies the safe
harbor, and (3) the facts and circumstances known to the transferor on or before
the date of the transfer do not reasonably indicate that the taxes associated
with the residual interest will not be paid. For these purposes a transferor
will be deemed to know that the taxes associated with the residual interest will
not be paid if the amount of any inducement payment to be made to the purchaser
relative to the liabilities assumed reasonably indicates that the taxes
associated with holding the residual interest will not be paid. In addition, the
transfer must meet the other conditions, described in the prospectus, requiring
the transferor to investigate the financial condition of the purchaser and get a
statement from the purchaser that it understands the tax nature of a noneconomic
residual interest and intends to pay the taxes associated with holding the
interest.
The Final Regulations further provide that transfers to a foreign branch of
a corporation that would be subject to tax on a net basis in the foreign
jurisdiction on the income associated with the noneconomic residual interest are
not eligible for safe harbor treatment.
The Final Regulations generally apply to transfers of noneconomic residual
interests after February 3, 2000, and thus generally apply to transfers of REMIC
residual interests should they be determined to be noneconomic residual
interests. The Final Regulations contain additional detail regarding their
application and prospective investors in the REMIC residual interest are
encouraged to consult their own tax advisors regarding the application of the
Final Regulations to a transfer of such REMIC residual interests.
If a transfer of a Residual Interest Security is disregarded, the
transferor would be liable for any Federal income tax imposed upon taxable
income derived by the transferee from the REMIC. The REMIC Treasury regulations
provide no guidance as to how to determine if a significant purpose of a
transfer is to impede the assessment or collection of tax. A similar type of
limitation exists with respect to certain transfers of residual interests by
foreign persons to United States persons. Please see "-- Tax Treatment of
Foreign Investors" below.
In addition, legislation has been proposed under which a REMIC would be
secondarily liable for the tax liability of its residual interest. It is unknown
whether this provision will be enacted. Prospective investors in REMIC residual
interests are encouraged to consult their own tax advisors regarding proposed
regulations and proposed legislation.
Mark to Market Rules. A REMIC Residual Interest Security acquired after
January 3, 1995 cannot be marked-to-market.
Administrative Matters
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
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Tax Status as a Grantor Trust
General. As specified in the related prospectus supplement if a REMIC or
partnership election is not made, in the opinion of Andrews Kurth LLP, special
counsel to the depositor, the trust fund relating to a series of securities will
be classified for federal income tax purposes as a grantor trust under subpart
E, Part I of Subchapter J of chapter 1 of subtitle A of the Code and not as an
association taxable as a corporation (the securities of the series,
"Pass-Through Securities"). In some series there will be no separation of the
principal and interest payments on the loans. In these circumstances, a holder
will be considered to have purchased a pro rata undivided interest in each of
the loans. In other cases ("Stripped Securities"), sale of the securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the loans.
Each holder must report on its federal income tax return its share of the
gross income derived from the loans (not reduced by the amount payable as fees
to the trustee and the servicer and similar fees (collectively, the "Servicing
Fee")), at the same time and in the same manner as the items would have been
reported under the holder's tax accounting method had it held its interest in
the loans directly, received directly its share of the amounts received with
respect to the loans, and paid directly its share of the Servicing Fees. In the
case of Pass-Through Securities other than Stripped Securities, the income will
consist of a pro rata share of all of the income derived from all of the loans
and, in the case of Stripped Securities, the income will consist of a pro rata
share of the income derived from each stripped bond or stripped coupon in which
the holder owns an interest. The holder of a security will generally be entitled
to deduct the Servicing Fees under Section 162 or Section 212 of the Code to the
extent that the Servicing Fees represent "reasonable" compensation for the
services rendered by the trustee and the servicer (or third parties that are
compensated for the performance of services). In the case of a noncorporate
holder, however, Servicing Fees (to the extent not otherwise disallowed, e.g.,
because they exceed reasonable compensation) will be deductible in computing the
holder's regular tax liability only to the extent that the fees, when added to
other miscellaneous itemized deductions, exceed 2% of adjusted gross income and
may not be deductible to any extent in computing the holder's alternative
minimum tax liability. In addition, the amount of itemized deductions otherwise
allowable for the taxable year for an individual whose adjusted gross income
exceeds the specified amount (which amount will be adjusted for inflation in
taxable years beginning after 1990) will be reduced by the lesser of (i) 3% of
the excess of adjusted gross income over the specified amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year.
Discount or Premium on Pass-Through Securities. The holder's purchase price
of a Pass-Through Security is to be allocated among the loans in proportion to
their fair market values, determined as of the time of purchase of the
securities. In the typical case, the trustee (to the extent necessary to fulfill
its reporting obligations) will treat each loan as having a fair market value
proportional to the share of the aggregate principal balances of all of the
loans that it represents, because the securities, generally, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a Pass-Through Security allocated to a
loan, other than to a right to receive any accrued interest thereon and any
undistributed principal payments, is less than or greater than the portion of
the principal balance of the loan allocable to the security, the interest in the
loan allocable to the Pass-Through Security will be deemed to have been acquired
at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a loan with OID in excess of a
prescribed de minimis amount or a Stripped Security, a holder of a security will
be required to report as interest income in each taxable year its share of the
amount of OID that accrues during that year in the manner described above. OID
with respect to a loan could arise, for example, by virtue of the financing of
points by the originator of the loan, or by virtue of the charging of points by
the originator of the loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a loan
will be includible in income, generally in the manner described above, except
that in the case of Pass-Through Securities, market discount is calculated with
respect to the loans underlying the certificate, rather than with respect to the
security. A holder that acquires an interest in a loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. Please read "-- Taxation of Debt Securities --
Market Discount" and " -- Premium" above.
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In the case of market discount on a Pass-Through Security attributable to
loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of the discount that is allocable to a loan
among the principal payments on the loan and to include the discount allocable
to each principal payment in ordinary income at the time the principal payment
is made. This treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the loans, a right to receive only
principal payments on the loans, or a right to receive certain payments of both
interest and principal. Certain Stripped Securities ("Ratio Strip Securities")
may represent a right to receive differing percentages of both the interest and
principal on each loan. The separation of ownership of the right to receive some
or all of the interest payments on an obligation from ownership of the right to
receive some or all of the principal payments results in the creation of
"stripped bonds" with respect to principal payments and "stripped coupons" with
respect to interest payments. The OID rules apply to stripped bonds and stripped
coupons. For purposes of computing original issue discount, a stripped bond or a
stripped coupon is treated as a debt instrument issued on the date that the
stripped interest is purchased with an issue price equal to its purchase price
or, if more than one stripped interest is purchased, the ratable share of the
purchase price allocable to the stripped interest.
Servicing fees in excess of reasonable servicing fees ("excess servicing
fees") will be treated under the stripped bond rules. If the excess servicing
fee is less than 100 basis points (i.e., 1% interest on the loan principal
balance) or the securities are initially sold with a de minimis discount
(assuming no Prepayment Assumption is required), any non-de minimis discount
arising from a subsequent transfer of the securities should be treated as market
discount. The IRS appears to require that reasonable servicing fees be
calculated on a loan by loan basis, which could result in some loans being
treated as having more than 100 basis points of interest stripped off.
The OID Regulations and judicial decisions provide no direct guidance as to
how the interest and original issue discount rules are to apply to Stripped
Securities and other Pass-Through Securities. Under the method described above
for Pay-Through Securities (the "Cash Flow Bond Method"), a Prepayment
Assumption is used and periodic recalculations are made which take into account
with respect to each accrual period the effect of prepayments during the period.
However, the Tax Reform Act of 1986 does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the underlying loans, rather than
being debt instruments "secured by" those loans. For tax years beginning after
August 5, 1997 the Taxpayer Relief Act of 1997 may allow use of the Cash Flow
Bond Method with respect to Stripped Securities and other Pass-Through
Securities because it provides that this method applies to any pool of debt
instruments the yield on which may be affected by prepayments. Nevertheless, it
is believed that the Cash Flow Bond Method is a reasonable method of reporting
income for those securities, and it is expected that OID will be reported on
that basis; provided that the applicable prospectus supplement may provide for
the reporting of OID on an alternative basis. In applying the calculation to
Pass-Through securities, the trustee will treat all payments to be received by a
holder with respect to the underlying loans as payments on a single installment
obligation. The IRS could, however, assert that original issue discount must be
calculated separately for each loan underlying a security.
Under certain circumstances, if the loans prepay at a rate faster than the
Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the trustee intends, absent contrary authority, to report income to security
holders as OID, in the manner described above for Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that
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o in certain series, each non-Interest Weighted Security is composed of
an unstripped undivided ownership interest in loans and an installment
obligation consisting of stripped principal payments;
o the non-Interest Weighted Securities are subject to the contingent
payment provisions of the Contingent Regulations; or
o each Interest Weighted Stripped security is composed of an unstripped
undivided ownership interest in loans and an installment obligation
consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are encouraged to consult their own tax
advisers regarding the proper treatment of the securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of Stripped Securities, there is
no specific legal authority existing regarding whether the character of the
securities, for federal income tax purposes, will be the same as the loans. The
IRS could take the position that the loans' character is not carried over to the
securities in these circumstances. Pass-Through Securities will be, and,
although the matter is not free from doubt, Stripped Securities should be
considered to represent "real estate assets" within the meaning of Section
856(c)(5)(B) of the Code and "loans secured by an interest in real property"
within the meaning of Section 7701(a)(19)(C)(v) of the Code; and interest income
attributable to the securities should be considered to represent "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code. Reserves or
funds underlying the securities may cause a proportionate reduction in the
above-described qualifying status categories of securities.
Sale or Exchange
Subject to the discussion below with respect to trust funds as to which a
partnership election is made, a holder's tax basis in its security is the price
the holder pays for a security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a security, measured by the
difference between the amount realized and the security's basis as so adjusted,
will generally be capital gain or loss, assuming that the security is held as a
capital asset. In the case of a security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the holder's income if the yield on the Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of the holder's holding period, over the amount of ordinary income
actually recognized by the holder with respect to the Regular Interest Security.
In general, the maximum tax rate on ordinary income for individual taxpayers is
greater than the maximum tax rate on long-term capital gains for individual
taxpayers. The maximum tax rate on both ordinary income and long-term capital
gains of corporate taxpayers is 35%.
Miscellaneous Tax Aspects
Backup Withholding. Subject to the discussion below with respect to trust
funds as to which a partnership election is made, a Holder, other than a holder
of a REMIC Residual security, may, under certain circumstances, be subject to
"backup withholding" at a rate of 28% (which rate will be increased to 31% for
payments made after December31, 2010) with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the securities. This withholding generally applies
if the holder of a security
o fails to furnish the trustee with its taxpayer identification number
("TIN");
o furnishes the trustee an incorrect TIN;
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o fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
o under certain circumstances, fails to provide the trustee or the
holder's securities broker with a certified statement, signed under
penalty of perjury, that the TIN provided is its correct number and
that the holder is not subject to backup withholding.
Backup withholding will not apply, however, with respect to certain
payments made to holders, including payments to certain exempt recipients (such
as exempt organizations) and to certain Non-U.S. Persons. Holders are encouraged
to consult their own tax advisers as to their qualification for exemption from
backup withholding and the procedure for obtaining the exemption.
The trustee will report to the holders and to the servicer for each
calendar year the amount of any "reportable payments" during the year and the
amount of tax withheld, if any, with respect to payments on the securities.
Tax Treatment of Foreign Investors
Subject to the discussion below with respect to trust funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a security (other than a Residual Interest Security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a Non-U.S. Person, the interest will normally qualify as portfolio interest
(except where the recipient is a holder, directly or by attribution, of 10% or
more of the capital or profits interest in the issuer, or the recipient is a
controlled foreign corporation to which the issuer is a related person) and will
be exempt from federal income tax. Upon receipt of appropriate ownership
statements, the issuer normally will be relieved of obligations to withhold tax
from those interest payments. These provisions supersede the generally
applicable provisions of United States law that would otherwise require the
issuer to withhold at a 30% rate (unless this rate were reduced or eliminated by
an applicable tax treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to Non-U.S. Persons. Holders of
Pass-Through Securities and Stripped Securities, including Ratio Strip
Securities, however, may be subject to withholding to the extent that the loans
were originated on or before July 18, 1984.
Interest and OID of Holders who are Non-U.S. Persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to holders of Residual Interest Securities who are Non-U.S.
Persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders should assume that this
income does not qualify for exemption from United States withholding tax as
"portfolio interest." It is clear that, to the extent that a payment represents
a portion of REMIC taxable income that constitutes excess inclusion income, a
holder of a Residual Interest Security will not be entitled to an exemption from
or reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed,
or when the Residual Interest Security is disposed of. The Treasury has
statutory authority, however, to promulgate regulations which would require
these amounts to be taken into account at an earlier time in order to prevent
the avoidance of tax. These regulations could, for example, require withholding
prior to the distribution of cash in the case of Residual Interest Securities
that do not have significant value.
Under the REMIC Treasury regulations, if a Residual Interest Security has
tax avoidance potential, a transfer of a Residual Interest Security to a
Non-U.S. Person will be disregarded for all federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest holder amounts that will equal at least 30% of each
excess inclusion, and that these amounts will be distributed at or after the
time at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Non-U.S. Person transfers a
Residual Interest Security to a U.S. Person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
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of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. Please read "-- Excess Inclusions."
Tax Characterization of the Trust Fund as a Partnership
Andrews Kurth LLP, special counsel to the depositor, will deliver its
opinion that a trust fund for which a partnership election is made will not be
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on counsel's conclusions that the nature of the income of the trust fund
will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations or the issuance of the securities has been structured as
a private placement under an IRS safe harbor, so that the trust fund will not be
characterized as a publicly traded partnership taxable as a corporation.
If the trust fund were taxable as a corporation for federal income tax
purposes, the trust fund would be subject to corporate income tax on its taxable
income. The trust fund's taxable income would include all its income, possibly
reduced by its interest expense on the notes. Any such corporate income tax
could materially reduce cash available to make payments on the notes and
distributions on the certificates, and certificateholders could be liable for
the amount of tax that is not otherwise paid by the trust fund.
Tax Consequences to Holders of the Notes
Treatment of the Notes as Indebtedness. In the case of notes for which a
REMIC election is not made, the trust fund will agree, and the noteholders will
agree by their purchase of notes, to treat the notes as debt for federal income
tax purposes. Special counsel to the depositor will, except as otherwise
provided in the related prospectus supplement, advise the depositor that the
notes will be classified as debt for federal income tax purposes. The discussion
below assumes this characterization of the notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the notes are denominated in U.S. dollars, and that the notes are
not indexed securities or Stripped Securities. Moreover, the discussion assumes
that the interest formula for the notes meets the requirements for "qualified
stated interest" under the OID Regulations, and that any OID on the notes (i.e.,
any excess of the principal amount of the notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID Regulations. If these conditions are not satisfied with respect to any given
series of notes, additional tax considerations with respect to the notes will be
disclosed in the applicable prospectus supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the notes will not be considered issued
with OID. The stated interest thereon will be taxable to a noteholder as
ordinary interest income when received or accrued in accordance with the
noteholder's method of tax accounting. Under the OID Regulations, a holder of a
note issued with a de minimis amount of OID must include the OID in income, on a
pro rata basis, as principal payments are made on the note. It is believed that
any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a note that has a fixed maturity date of not more than one year
from the issue date of the note (a "Short-Term Note") may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include
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interest on the Short-Term Note in income as it accrues, but would not be
subject to the interest expense deferral rule referred to in the preceding
sentence. Certain special rules apply if a Short-Term Note is purchased for more
or less than its principal amount.
Sale or Other Disposition. If a noteholder sells a note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the note. The
adjusted tax basis of a note to a particular noteholder will equal the holder's
cost for the note, increased by any market discount, acquisition discount, OID
and gain previously included by the noteholder in income with respect to the
note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by the noteholder
with respect to the note. Any such gain or loss will be capital gain or loss if
the note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made, or accrued, to a noteholder who is
a Non-U.S. Person (a "foreign person") generally will be considered "portfolio
interest," and generally will not be subject to United States federal income tax
and withholding tax, if the interest is not effectively connected with the
conduct of a trade or business within the United States by the Non-U.S. Person
and the Non-U.S. Person
o is not actually or constructively a "10 percent shareholder" of the
trust fund or the seller, including a holder of 10% of the outstanding
certificates, or a "controlled foreign corporation" with respect to
which the trust fund or the seller is a "related person" within the
meaning of the Code and
o provides the owner trustee or other person who is otherwise required
to withhold U.S. tax with respect to the notes with an appropriate
statement (on Form W-8BEN or a similar form), signed under penalties
of perjury, certifying that the beneficial owner of the note is a
Non-U.S. Person and providing the Non-U.S. Person's name and address.
If a note is held through a securities clearing organization or certain
other financial institutions, the organization or institution may provide the
relevant signed statement to the withholding agent; in that case, however, the
signed statement must be accompanied by a Form W-8 BEN or substitute form
provided by the Non-U.S. Person that owns the note. If the interest is not
portfolio interest, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a note by a Non-U.S. Person will be exempt from United
States federal income and withholding tax, provided that the gain is not
effectively connected with the conduct of a trade or business in the United
States by the Non-U.S. Person and 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.
Backup Withholding. Each holder of a note, other than an exempt holder such
as a corporation, tax-exempt organization, qualified pension and profit-sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident, will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt noteholder fail to
provide the required certification, the trust fund will be required to withhold
28% (which rate will be increased to 31% for payments made after December31,
2010) of the amount otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the depositor, the IRS successfully asserted that one or
more of the notes did not represent debt for federal income tax purposes, the
notes might be treated as equity interests in the trust fund. If so treated, the
trust fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on notes recharacterized as
equity). Alternatively, and most likely in the view of special counsel to the
depositor, the trust fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless,
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treatment of the notes as equity interests in a publicly traded partnership
could have adverse tax consequences to certain holders. For example, income to
certain tax-exempt entities (including pension funds) would be "unrelated
business taxable income," income to foreign holders generally would be subject
to U.S. tax and U.S. tax return filing and withholding requirements, and
individual holders might be subject to certain limitations on their ability to
deduct their share of the trust fund's expenses.
Tax Consequences to Holders of the Certificates for a Trust Fund Treated as a
Partnership
Treatment of the Trust Fund as a Partnership. If the trust fund is to be
treated as a partnership for tax purposes, the trust fund and the master
servicer will agree, and the certificateholders will agree by their purchase of
certificates, to treat the 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
trust fund, the partners of the partnership being the certificateholders, and
the notes being debt of the partnership. However, the proper characterization of
the arrangement involving the trust fund, the certificates, the notes, the trust
fund and the servicer is not clear 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 certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust fund. Any such
characterization would not result in materially adverse tax consequences to
certificateholders as compared to the consequences from treatment of the
certificates as equity in a partnership, described below. The following
discussion assumes that the certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all payments
on the certificates are denominated in U.S. dollars, none of the certificates
are Indexed securities or Strip certificates, and that a series of securities
includes a single class of certificates. If these conditions are not satisfied
with respect to any given series of certificates, additional tax considerations
with respect to the certificates will be disclosed in the applicable prospectus
supplement.
Partnership Taxation. As a partnership, the trust fund will not be subject
to federal income tax. Rather, each certificateholder will be required to
separately take into account the holder's allocated share of income, gains,
losses, deductions and credits of the trust fund. The trust fund's income will
consist primarily of interest and finance charges earned on the loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of loans. The trust fund's deductions will
consist primarily of interest accruing with respect to the notes, servicing and
other fees, and losses or deductions upon collection or disposition of loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the certificateholders will be allocated taxable income of the
trust fund for each month equal to the sum of (i) the interest that accrues on
the certificates in accordance with their terms for the month, including
interest accruing at the Pass-Through Rate for the month and interest on amounts
previously due on the certificates but not yet distributed; (ii) any trust fund
income attributable to discount on the Loans that corresponds to any excess of
the principal amount of the certificates over their initial issue price (iii)
prepayment premium payable to the certificateholders for the month; and (iv) any
other amounts of income payable to the certificateholders for the month. This
allocation will be reduced by any amortization by the trust fund of premium on
loans that corresponds to any excess of the issue price of certificates over
their principal amount. All remaining taxable income of the trust fund will be
allocated to the depositor or an affiliate. Based on the economic arrangement of
the parties, this approach for allocating trust fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the IRS would not require a greater amount of income to be allocated
to certificateholders. Moreover, even under the foregoing method of allocation,
certificateholders may be allocated income equal to the entire Pass-Through Rate
plus the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of this amount. Thus, cash
basis holders will in effect be required to report income from the certificates
on the accrual basis and certificateholders may become liable for taxes on trust
fund income even if they have not received cash from the trust fund to pay the
taxes.
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In addition, because tax allocations and tax reporting will be done on a uniform
basis for all certificateholders but certificateholders may be purchasing
certificates at different times and at different prices, certificateholders may
be required to report on their tax returns taxable income that is greater or
less than the amount reported to them by the trust fund.
All of the taxable income allocated to a certificateholder 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 that holder under the Code.
An individual taxpayer's share of expenses of the trust fund (including
fees to the servicer but not interest expense) would be miscellaneous itemized
deductions. These deductions might be disallowed to the individual in whole or
in part and might result in the holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to the holder over the life of
the trust fund.
The trust fund intends to make all tax calculations relating to income and
allocations to certificateholders on an aggregate basis. If the IRS were to
require that the calculations be made separately for each loan, the trust fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on certificateholders.
Discount and Premium. It is believed that the loans were not issued with
OID, and, therefore, the trust fund should not have OID income. However, the
purchase price paid by the trust fund for the loans may be greater or less than
the remaining principal balance of the loans at the time of purchase. If so, the
loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the trust fund will make this calculation on an aggregate
basis, but might be required to recompute it on a loan by loan basis.)
If the trust fund acquires the loans at a market discount or premium, the
trust fund will elect to include the discount in income currently as it accrues
over the life of the loans or to offset the premium against interest income on
the loans. As indicated above, a portion of the market discount income or
premium deduction may be allocated to certificateholders.
Section 708 Termination. Under Code Section 708, a sale or exchange of 50%
or more of the capital and profits in a partnership would cause a deemed
contribution of assets of the partnership (the "old partnership") to a new
partnership (the "new partnership") in exchange for interests in the new
partnership. These interests would be deemed distributed to the partners of the
old partnership in liquidation thereof, which would not constitute a sale or
exchange. Accordingly, if the trust fund were characterized as a partnership and
a sale of certificates terminated the partnership under Code Section 708, the
purchaser's basis in its ownership interest would not change.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the certificates sold.
A certificateholder's tax basis in a certificate will generally equal the
holder's cost increased by the holder's share of trust fund income (includible
in income) and decreased by any distributions received with respect to the
certificate. In addition, both the tax basis in the certificates and the amount
realized on a sale of a certificate would include the holder's share of the
notes and other liabilities of the trust fund. A holder acquiring certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in the certificates, and, upon sale or other disposition of some of the
certificates, allocate a portion of the aggregate tax basis to the certificates
sold, rather than maintaining a separate tax basis in each certificate for
purposes of computing gain or loss on a sale of that certificate.
Any gain on the sale of a certificate attributable to the holder's share of
unrecognized accrued market discount on the loans would generally be treated as
ordinary income to the holder and would give rise to special tax reporting
requirements. The trust fund does not expect to have any other assets that would
give rise to the special reporting requirements. Thus, to avoid those special
reporting requirements, the trust fund will elect to include market discount in
income as it accrues.
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If a certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect thereto, the excess will generally give rise to
a capital loss upon the retirement of the certificates.
Allocations Between Transferors and Transferees. In general, the trust
fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the certificateholders
in proportion to the principal amount of certificates owned by them as of the
close of the last day of the month. As a result, a holder purchasing
certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of a monthly convention may not be permitted by existing Treasury
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the trust fund might be reallocated among the certificateholders. The trust
fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a certificateholder sells its
certificates at a profit (loss), the purchasing certificateholder will have a
higher (lower) basis in the certificates than the selling certificateholder had.
The tax basis of the trust fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the trust fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the trust fund will not make this
election. As a result, certificateholders might be allocated a greater or lesser
amount of trust fund income than would be appropriate based on their own
purchase price for certificates.
Administrative Matters. The owner trustee is required to keep or have kept
complete and accurate books of the trust fund. These books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal year
of the trust fund will be the calendar year. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
trust fund and will report each certificateholder's allocable share of items of
trust fund income and expense to holders and the IRS on Schedule K-1. The trust
fund will provide the Schedule K-l information to nominees that fail to provide
the trust fund with the information statement described below and those nominees
will be required to forward this information to the beneficial owners of the
certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the trust fund or be subject to penalties unless
the holder notifies the IRS of all inconsistencies.
Under Section 6031 of the Code, any person that holds certificates as a
nominee at any time during a calendar year is required to furnish the trust fund
with a statement containing certain information on the nominee, the beneficial
owners and the certificates so held. This information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of the person,
(y) whether the person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
certificates that were held, bought or sold on behalf of the person throughout
the year. In addition, brokers and financial institutions that hold certificates
through a nominee are required to furnish directly to the trust fund information
as to themselves and their ownership of certificates. A clearing agency
registered under Section 17A of the Securities Exchange Act of 1934, as amended
is not required to furnish this information statement to the trust fund. The
information referred to above for any calendar year must be furnished to the
trust fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the trust fund with the information
described above may be subject to penalties.
Unless otherwise specified in the related prospectus supplement, the
depositor will be designated as the tax matters partner in the related Trust
Agreement and will be responsible for representing the certificateholders in any
dispute with the IRS. The Code provides for administrative examination of a
partnership as if the partnership were a separate and distinct taxpayer.
Generally, the statute of limitations for partnership items does not expire
before three years after the date on which the partnership information return is
filed. Any adverse determination following an audit of the return of the trust
fund by the appropriate taxing authorities could result in an adjustment of the
returns of the certificateholders, and, under certain circumstances, a
certificateholder may be precluded from separately
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litigating a proposed adjustment to the items of the trust fund. An adjustment
could also result in an audit of a certificateholder's returns and adjustments
of items not related to the income and losses of the trust fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether the
trust fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to Non-U.S.
Persons because there is no clear authority dealing with that issue under facts
substantially similar to those described in this prospectus. Although it is not
expected that the trust fund would be engaged in a trade or business in the
United States for those purposes, the trust fund will withhold as if it were so
engaged in order to protect the trust fund from possible adverse consequences of
a failure to withhold. The trust fund expects to withhold on the portion of its
taxable income, as calculated for this purpose which may exceed the
distributions to certificateholders, that is allocable to certificateholders who
are Non-U.S. Persons 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-U.S.
Persons that are taxable as corporations and at the highest federal income tax
rate applicable to U.S. individual taxpayers for all other Non-U.S. Persons.
Subsequent adoption of Treasury regulations or the issuance of other
administrative pronouncements may require the trust fund to change its
withholding procedures. In determining a holder's withholding status, the trust
fund may rely on an applicable IRS Form W-8, IRS Form W-9 or the holder's
certification of nonforeign status signed under penalties of perjury.
Each holder that is a Non-U.S. Person might be required to file a U.S.
individual or corporate income tax return (including, in the case of a
corporation, the branch profits tax) on its share of the trust fund's income.
Each holder that is a Non-U.S. Person must obtain a taxpayer identification
number from the IRS and submit that number to the trust fund on Form W-8 BEN in
order to assure appropriate crediting of the taxes withheld. A holder that is a
Non-U.S. Person generally would be entitled to file with the IRS a claim for
refund with respect to taxes withheld by the trust fund taking the position that
no taxes were due because the trust fund was not engaged in a U.S. trade or
business. However, interest payments made (or accrued) to a certificateholder
who is a Non-U.S. Person generally will be considered guaranteed payments to the
extent those payments are determined without regard to the income of the trust
fund. If these interest payments are properly characterized as guaranteed
payments, then the interest will not be considered "portfolio interest." As a
result, certificateholders will be subject to United States federal income tax
and withholding tax at a rate of 30%, unless reduced or eliminated pursuant to
an applicable treaty. In that case, a holder that is a Non-U.S. Person would
only be entitled to claim a refund for that portion of the taxes in excess of
the taxes that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to a "backup" withholding tax
of 28% (which rate will be increased to 31% for payments made after December 31,
2010) if, in general, the certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Material
Federal Income Tax Consequences," potential investors should consider the state
and local income tax consequences of the acquisition, ownership, and disposition
of the securities. State and local income tax law may differ substantially from
the corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state or locality. Therefore, potential
investors should consult their own tax advisors with respect to the various
state and local tax consequences of an investment in the securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and the Code,
which apply only to securities of a series that are not divided into subclasses.
If securities are divided into subclasses, the related prospectus supplement
will contain information concerning considerations relating to ERISA and the
Code that are applicable to those securities.
ERISA and Section 4975 of the Code impose requirements on employee benefit
plans (and on certain other retirement plans and arrangements, including
individual retirement accounts and annuities and Keogh plans as well
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as collective investment funds and separate accounts in which those plans,
accounts or arrangements are invested) (collectively, "Plans") subject to ERISA
or to Section 4975 of the Code and on persons who are fiduciaries with respect
to those Plans and other persons who bear specified relationships to Plans
("Parties in Interest"). Generally, ERISA applies to investments made by Plans.
Among other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of those Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans. Under ERISA, any
person who exercises any authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of the Plan
(subject to certain exceptions not here relevant). Certain employee benefit
plans, such as governmental plans (as defined in ERISA Section 3(32)) and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in ERISA Section 3(33)), are not subject to requirements imposed by
ERISA and Section 4975 of the Code. Accordingly, assets of those plans may be
invested in securities without regard to ERISA's requirements, but are subject
to the provisions of applicable federal or state law. Any of those plans which
is qualified and exempt from taxation under Code Sections 401(a) and 501(a),
however, is subject to the prohibited transaction rules set forth in Code
Section 503.
On November 13, 1986, the United States Department of Labor (the "DOL")
issued final regulations concerning the definition of what constitutes the
assets of a Plan. (Labor Reg. Section 2510.3-101). Under this "Plan Asset
Regulation," the underlying assets and properties of corporations, partnerships
and certain other entities in which a Plan acquires an "equity interest" could
be deemed for purposes of ERISA to be assets of the investing Plan in certain
circumstances. Under the Plan Asset Regulation, the term "equity interest" is
defined as any interest in an entity other than an instrument that is treated as
indebtedness under applicable local law and has no "substantial equity
features." If securities are not treated as equity interests in the issuer for
purposes of the Plan Asset Regulation, a Plan's investment in the securities
would not cause the assets of the issuer to be deemed plan assets. If the
securities are deemed to be equity interests in the issuer, the issuer could be
considered to hold plan assets because of a Plan's investment in those
securities. In that event, the servicer and other persons exercising management
or discretionary control over the assets of the issuer or providing services
with respect to the issuer could be deemed to be fiduciaries or other Parties in
Interest with respect to investing Plans and thus subject to the prohibited
transaction provisions of Section 406 of ERISA and section 4975 of the Code and,
in the case of fiduciaries, to the fiduciary responsibility provisions of Title
I of ERISA, with respect to transactions involving the issuer's assets. However,
the regulation generally provides that, in addition to certain other technical
exceptions, the assets of a corporation or partnership in which a Plan invests
will not be deemed for purposes of ERISA to be assets of the Plan if the equity
interest acquired by the investing Plan is a publicly-offered security. A
publicly-offered security, as defined in the Plan Asset Regulation, is a
security that is widely held, freely transferable and registered under the
Securities Exchange Act of 1934, as amended.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA and the Code prohibit a broad range of
transactions involving plan assets of a Plan and Parties in Interest with
respect to the Plan and impose additional prohibitions where Parties in Interest
are fiduciaries with respect to the Plan. Because the loans may be deemed plan
assets of each Plan that purchases securities, an investment in the securities
by a Plan might be a prohibited transaction under ERISA Sections 406 and 407 and
subject to an excise tax under Code Section 4975 unless a statutory, regulatory
or administrative exemption applies.
In Prohibited Transaction Exemption 83-1 ("PTE 83-1"), the DOL exempted
from ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage pool investment trusts and the purchase, sale
and holding of "mortgage pool pass-through certificates" in the initial issuance
of those certificates. PTE 83-1 permits, subject to certain conditions,
transactions which might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans related to the origination, maintenance and
termination of mortgage pools consisting of mortgage loans secured by first or
second mortgages or deeds of trust on single-family residential property, and
the acquisition and holding of certain mortgage pool pass-through certificates
representing an interest in those mortgage pools by Plans. If the general
conditions (discussed below) of PTE 83-1 are satisfied, investments by a Plan in
securities that represent interests in a pool consisting of loans ("Single
Family Securities") will be exempt from the prohibitions of ERISA Sections
406(a) and 407 (relating generally to transactions with Parties in Interest who
are not fiduciaries) if the Plan purchases the Single Family Securities at no
more than fair market value and will be exempt from the prohibitions of ERISA
Sections 406(b)(1) and (2) (relating generally to transactions with fiduciaries)
if, in addition, the purchase is approved by an independent fiduciary, no sales
commission is paid to the pool sponsor, the Plan does not purchase more than 25%
of all Single Family Securities,
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and at least 50% of all Single Family Securities are purchased by persons
independent of the pool sponsor or pool trustee. PTE 83-1 does not provide an
exemption for transactions involving subordinate securities. Accordingly, unless
otherwise provided in the related prospectus supplement, no transfer of a
subordinate security or a security which is not a Single Family Security may be
made to a Plan.
The discussion in this and the next succeeding paragraph applies only to
Single Family Securities. The depositor believes that, for purposes of PTE 83-1,
the term "mortgage pass-through certificate" would include: (i) securities
issued in a series consisting of only a single class of securities; and (ii)
senior securities issued in a series in which there is only one class of senior
securities; provided that the securities in the case of clause (i), or the
senior securities in the case of clause (ii), evidence the beneficial ownership
of both a specified percentage (greater than 0%) of future interest payments and
a specified percentage (greater than 0%) of future principal payments on the
loans. It is not clear whether a class of securities that evidences beneficial
ownership of a specified percentage of interest payments only or principal
payments only, or a notional amount of either principal or interest payments
would be a "mortgage pass-through certificate" for purposes of PTE 83-1.
PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption:
o the maintenance of a system of insurance or other protection for the
pooled mortgage loans and property securing such loans, and for
indemnifying securityholders against reductions in pass-through
payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate
principal balance of all covered pooled mortgage loans or the
principal balance of the largest covered pooled mortgage loan;
o the existence of a pool trustee who is not an affiliate of the pool
sponsor; and
o a limitation on the amount of the payment retained by the pool
sponsor, together with other funds inuring to its benefit, to not more
than adequate consideration for selling the mortgage loans plus
reasonable compensation for services provided by the pool sponsor to
the pool.
The depositor believes that the first general condition referred to above
will be satisfied with respect to the securities in a series issued without a
subordination feature, or the senior securities only in a series issued with a
subordination feature, provided that the subordination and Reserve Account,
subordination by shifting of interests, pool insurance or other form of credit
enhancement described under "Credit Enhancement" in this prospectus (such
subordination, pool insurance or other form of credit enhancement being the
system of insurance or other protection referred to above) with respect to a
series of securities is maintained in an amount not less than the greater of one
percent of the aggregate principal balance of the loans or the principal balance
of the largest loan. See "Description of the Securities" in this prospectus. In
the absence of a ruling that the system of insurance or other protection with
respect to a series of securities satisfies the first general condition referred
to above, there can be no assurance that these features will be so viewed by the
DOL. In any event, the trustee will not be affiliated with the depositor.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Single Family Securities
must make its own determination as to whether the first and third general
conditions, and the specific conditions described briefly in the preceding
paragraphs, of PTE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions.
The DOL has granted to certain underwriters individual administrative
exemptions (the "Underwriter Exemptions") from certain of the prohibited
transaction rules of ERISA and the related excise tax provisions of Section 4975
of the Code with respect to the initial purchase, the holding and the subsequent
resale by Plans of securities, including certificates in pass-through trusts
that consist of certain receivables, loans and other obligations, and the
servicing, operation and management of those asset-back pass-through trusts,
provided the conditions and requirements of the Underwriter Exemptions are met.
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While each Underwriter Exemption is an individual exemption separately
granted to a specific underwriter, the terms and conditions which generally
apply to the Underwriter Exemptions are substantially identical, and include the
following:
(1) the acquisition of the certificates by a Plan is on terms (including
the price for the certificates) that are at least as favorable to the
Plan as they would be in an arm's-length transaction with an unrelated
party;
(2) the rights and interests evidenced by the certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust fund, unless the investment pool
contains certain types of collateral, such as fully-secured mortgages
on real property (a "Designated Transaction");
(3) the certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic
rating categories (four, in a Designated Transaction) from Standard &
Poor's Ratings Group, a Division of The McGraw-Hill Companies ("S&P"),
Moody's Investors Service, Inc. ("Moody's") or Fitch Ratings
("Fitch");
(4) the trustee must not be an affiliate of any other member of the
Restricted Group as defined below, other than an underwriter;
(5) the sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not
more than reasonable compensation for underwriting the certificates;
the sum of all payments made to and retained by the seller pursuant to
the assignment of the loans to the trust fund represents not more than
the fair market value of such loans; the sum of all payments made to
and retained by the servicer represents not more than reasonable
compensation for such person's services under the agreement pursuant
to which the loans are pooled and reimbursements of such person's
reasonable expenses in connection therewith;
(6) the Plan investing in the certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act; and
(7) for certain types of issuers, the documents establishing the issuer
and governing the transaction must contain certain provisions intended
to protect the assets of the issuer from creditors of the sponsor.
If an issuer holds obligations that have high Loan-to-Value Ratios, the
Underwriter Exemption may apply to the issuer's non-subordinated certificates
rated in one of the two highest generic rating categories by at least one of the
rating agencies if the obligations are residential or home equity loans, and the
fair market value of the collateral on the closing date is at least 80% of the
sum of the outstanding principal balance of the obligation held in the
investment pool and the outstanding principal balance of any obligation of
higher priority secured by the same collateral.
The trust fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated
in one of the three highest rating categories (or four, in a
Designated Transaction) of S&P (as defined below), Moody's or
Fitch for at least one year prior to the 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 any Plan's acquisition of certificates.
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Moreover, the Underwriter Exemptions generally provide relief from certain
self-dealing and conflict of interest prohibited transactions that may occur
when a Plan fiduciary causes the Plan to acquire certificates in a trust holding
receivables as to which the fiduciary (or its affiliate) is an obligor, provided
that, among other requirements:
o in the case of an acquisition in connection with the initial issuance
of certificates, at least fifty percent (50%) of each class of
certificates in which Plans have invested is acquired by persons
independent of the Restricted Group;
o the fiduciary (or its affiliate) is an obligor with respect to five
percent (5%) or less of the fair market value of the obligations
contained in the trust;
o the Plan's investment in certificates of any class does not exceed
twenty-five percent (25%) of all of the certificates of that class
outstanding at the time of the acquisition; and
o immediately after the acquisition, no more than twenty-five percent
(25%) of the assets of the Plan with respect to which such person is a
fiduciary is invested in certificates representing an interest in one
or more trusts containing assets sold or serviced by the same entity.
The Underwriter Exemptions generally do not apply to Plans sponsored by the
seller, and underwriter, the trustee, the servicer, any insurer with respect to
the loans, any obligor with respect to loans included in the trust fund
constituting more than five percent (5%) of the aggregate unamortized principal
balance of the assets in the trust fund, any counterparty to a permissible
notional principal contract included in the trust, or any affiliate of those
parties (the "Restricted Group").
The Underwriter Exemptions provide exemptive relief to mortgage-backed and
asset-backed securities transactions that use pre-funding accounts and that
otherwise meet the requirements of the Underwriter Exemptions. Mortgage loans or
other secured receivables (the "Obligations") supporting payments to
certificateholders, and having a value equal to no more than twenty-five percent
(25%) of the total principal amount of the certificates being offered by the
trust, may be transferred to the trust within a 90-day or three-month period
following the closing date (the "Pre-Funding Period"), instead of being required
to be either identified or transferred on or before the closing date. The relief
is available when the following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account to the
total principal amount of the certificates being offered (the
"Pre-Funding Limit") must not exceed twenty-five percent (25%).
(2) All Obligations transferred after the closing date (the "Additional
Obligations") must meet the same terms and conditions for eligibility
as the original Obligations used to create the trust, which terms and
conditions have been approved by a Rating Agency.
(3) The transfer of such Additional Obligations to the trust during the
Pre-Funding Period must not result in the certificates to be covered
by the Underwriter Exemption receiving a lower credit rating from a
Rating Agency upon termination of the Pre-Funding Period than the
rating that was obtained at the time of the initial issuance of the
certificates by the trust.
(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the Obligations in the
trust at the end of the Pre-Funding Period must not be more than 100
basis points lower than the average interest rate for the Obligations
transferred to the trust on the closing date.
(5) In order to insure that the characteristics of the Additional
Obligations are substantially similar to the original Obligations
which were transferred to the trust fund:
(i) the characteristics of the Additional Obligations must be
monitored by an insurer or other credit support provider that is
independent of the depositor; or
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(ii) an independent accountant retained by the depositor must provide
the depositor with a letter (with copies provided to each Rating
Agency rating the certificates, the related underwriter and the
related trustee) stating whether or not the characteristics of
the Additional Obligations conform to the characteristics
described in the related prospectus or prospectus supplement
and/or Pooling and Servicing Agreement. In preparing such letter,
the independent accountant must use the same type of procedures
as were applicable to the Obligations transferred to the trust as
of the closing date.
(6) The Pre-Funding Period must end no later than three months or 90 days
after the closing date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the
Pooling and Servicing Agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be
invested only in certain permitted investments ("Certain
Investments").
(8) The related prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest account used
in connection with a pre-funding account;
(ii) the duration of the Pre-Funding Period;
(iii) the percentage and/or dollar amount of the Pre-Funding Limit for
the trust; and
(iv) that the amounts remaining in the pre-funding account at the end
of the Pre-Funding Period will be remitted to certificateholders
as repayments of principal.
(9) The related Pooling and Servicing Agreement must describe the Certain
Investments for the pre-funding account and/or capitalized interest
account and, if not disclosed in the related prospectus or prospectus
supplement, the terms and conditions for eligibility of Additional
Obligations.
The rating of a security may change. If a class of securities no longer has
a permitted rating from at least one rating agency, securities of that class
will no longer be eligible for relief under the Underwriter Exemptions, and
consequently may not be purchased by or sold to a Plan (although a Plan that had
purchased the security when it had a permitted rating would not be required by
the Underwriter Exemptions to dispose of it).
The prospectus supplement for each series of securities will indicate the
classes of securities, if any, offered thereby as to which it is expected that
an Underwriter Exemption will apply.
Any Plan fiduciary which proposes to cause a Plan to purchase securities
should consult with its counsel concerning the impact of ERISA and the Code, the
applicability of PTE 83-1 and the Underwriter Exemptions, and the potential
consequences in their specific circumstances, prior to making an investment in
the securities. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment prudence and diversification an
investment in the securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
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LEGAL INVESTMENT
The prospectus supplement for each series of securities will specify which,
if any, of the classes of securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Classes of securities that qualify as "mortgage related
securities" will be legal investments for persons, trusts, corporations,
partnerships, associations, statutory trusts, and business entities (including
depository institutions, life insurance companies and pension funds) created
pursuant to or existing under the laws of the United States or of any state
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulations to the same extent as, under
applicable law, obligations issued by or guaranteed as to principal and interest
by the United States or any of those entities. Under SMMEA, if a state enacts
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any of those entities with respect to "mortgage related
securities," securities will constitute legal investments for entities subject
to the legislation only to the extent provided in the legislation. Approximately
twenty-one states adopted this legislation prior to the October 4, 1991
deadline. SMMEA provides, however, that in no event will the enactment of any
such legislation affect the validity of any contractual commitment to purchase,
hold or invest in securities, or require the sale or other disposition of
securities, so long as the contractual commitment was made or the securities
were acquired prior to the enactment of the legislation.
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 securities
without limitations as to the percentage of their assets represented thereby,
federal credit unions may invest in mortgage related securities, and national
banks may purchase securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
24 (Seventh), subject in each case to such regulations as the applicable federal
authority may prescribe. In this connection, federal credit unions should review
the National Credit Union Administration ("NCUA") Letter to Credit Unions No.
96, as modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage related
securities and the NCUA's regulation "Investment and Deposit Activities" (12
C.F.R. Part 703), which sets forth certain restrictions on investment by federal
credit unions in mortgage related securities (in each case whether or not the
class of securities under consideration for purchase constituted a "mortgage
related security"). The NCUA issued final regulations effective December 2, 1991
that restrict and in some instances prohibit the investment by Federal Credit
Unions in certain types of mortgage related securities.
All depository institutions considering an investment in the securities
(whether or not the class of securities under consideration for purchase
constitutes a "mortgage related security") should review the Federal Financial
Institutions Examination Council's Supervisory Policy Statement on the
Securities Activities (to the extent adopted by their respective regulators)
(the "Policy Statement") setting forth, in relevant part, certain securities
trading and sales practices deemed unsuitable for an institution's investment
portfolio, and guidelines for (and restrictions on) investing in mortgage
derivative products, including "mortgage related securities," which are
"high-risk mortgage securities" as defined in the Policy Statement. According to
the Policy Statement, such "high-risk mortgage securities" include securities
such as securities not entitled to distributions allocated to principal or
interest, or Subordinated Securities. Under the Policy Statement, it is the
responsibility of each depository institution to determine, prior to purchase
(and at stated intervals thereafter), whether a particular mortgage derivative
product is a "high-risk mortgage security," and whether the purchase (or
retention) of such a product would be consistent with the Policy Statement.
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 and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," or in securities which are issued in book-entry
form.
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase securities or to purchase
securities representing more than a specified percentage of the investor's
assets.
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Investors should consult their own legal advisors in determining whether and to
what extent the securities constitute legal investments for them.
METHOD OF DISTRIBUTION
Securities are being offered hereby in series from time to time (each
series evidencing or relating to a separate trust fund) through any of the
following methods:
o by negotiated firm commitment underwriting and public reoffering by
underwriters;
o by agency placements through one or more placement agents primarily
with institutional investors and dealers; and
o by placement directly by the depositor with institutional investors.
A prospectus supplement will be prepared for each series which will
describe the method of offering being used for that series and will set forth
the identity of any underwriters thereof and either the price at which that
series is being offered, the nature and amount of any underwriting discounts or
additional compensation to the underwriters and the proceeds of the offering to
the depositor, or the method by which the price at which the underwriters will
sell the securities will be determined. Each prospectus supplement for an
underwritten offering will also contain information regarding the nature of the
underwriters' obligations, any material relationship between the depositor and
any underwriter and, where appropriate, information regarding any discounts or
concessions to be allowed or reallowed to dealers or others and any arrangements
to stabilize the market for the securities so offered. In firm commitment
underwritten offerings, the underwriters will be obligated to purchase all of
the securities of the series if any securities are purchased. Securities may be
acquired by the underwriters for their own accounts and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of sale.
This prospectus, together with the related prospectus supplement, may be
used by FTN Financial Securities Corp., an affiliate of First Horizon Asset
Securities Inc. and First Horizon Home Loan Corporation, in connection with
offers and sales related to market making transactions in the securities in
which FTN Financial Securities Corp. acts as principal. FTN Financial Securities
Corp. may also act as agent in those transactions. Sales in those transactions
will be made at prices related to prevailing prices at the time of sale.
Underwriters and agents may be entitled under agreements entered into with
the depositor to indemnification by the depositor against certain civil
liabilities, including liabilities under the Securities Act or to contribution
with respect to payments which those underwriters or agents may be required to
make in respect thereof.
If a series is offered other than through underwriters, the prospectus
supplement relating thereto will contain information regarding the nature of the
offering and any agreements to be entered into between the depositor and
purchasers of securities of the series.
LEGAL MATTERS
The validity of the securities of each series, including certain federal
income tax consequences with respect thereto, will be passed upon for the
depositor by Andrews Kurth LLP, 1717 Main Street, Suite 3700, Dallas, Texas
75201.
FINANCIAL INFORMATION
A new trust fund will be formed with respect to each series of securities
and no trust fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of securities.
Accordingly, no financial statements with respect to any trust fund will be
included in this prospectus or in the related prospectus supplement.
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RATING
It is a condition to the issuance of the securities of each series offered
hereby and by the prospectus supplement that they shall have been rated in one
of the four highest rating categories by the nationally recognized statistical
rating agency or agencies (each, a "Rating Agency") specified in the related
prospectus supplement.
A rating is based on, among other things, the adequacy of the value of the
Trust Fund Assets and any credit enhancement with respect to a class of
securities and will reflect the Rating Agency's assessment solely of the
likelihood that holders of that class of securities will receive payments to
which the holders are entitled under the related Agreement. A rating will not
constitute an assessment of the likelihood that principal prepayments on the
related loans will be made, the degree to which the rate of those prepayments
might differ from that originally anticipated or the likelihood of early
optional termination of the series of securities. A rating should not be deemed
a recommendation to purchase, hold or sell securities, inasmuch as it does not
address market price or suitability for a particular investor. Each security
rating should be evaluated independently of any other security rating. A rating
will not address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause the investor to experience a lower than
anticipated yield or that an investor purchasing a security at a significant
premium might fail to recoup its initial investment under certain prepayment
scenarios.
There is also no assurance that any rating will remain in effect for any
given period of time or that it may not be lowered or withdrawn entirely by the
Rating Agency in the future if in its judgment circumstances in the future so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a series, a rating might also be lowered or withdrawn among other
reasons, because of an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of the credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a series of securities will be determined on the basis of criteria
established by each Rating Agency rating classes of such series. These criteria
are sometimes based upon an actuarial analysis of the behavior of mortgage loans
in a larger group. This analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required with respect to each
class of securities. There can be no assurance that the historical data
supporting any such actuarial analysis will accurately reflect future experience
nor any assurance that the data derived from a large pool of mortgage loans
accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of loans. No assurance can be given that values of any
Properties have remained or will remain at their levels on the respective dates
of origination of the related loans. If the residential real estate markets
should experience an overall decline in property values such that the
outstanding principal balances of the loans in a particular trust fund and any
secondary financing on the related Properties become equal to or greater than
the value of the Properties, the rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In additional, adverse economic conditions (which may or may not
affect real property values) may affect the timely payment by mortgagors of
scheduled payments of principal and interest on the loans and, accordingly, the
rates of delinquencies, foreclosures and losses with respect to any trust fund.
To the extent that those losses are not covered by credit enhancement, they will
be borne, at least in part, by the holders of one or more classes of the
securities of the related series.
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ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX
DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the book-entry securities will be
available only in book-entry form. Investors in the book-entry securities may
hold them through any of The Depository Trust Company ("DTC"), Clearstream,
Luxembourg or Euroclear. The book-entry securities will be tradeable 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 interests in book-entry
securities through Clearstream, Luxembourg and Euroclear will be conducted in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice. Secondary market trading between investors
holding interests in book-entry securities through DTC will be conducted
according to the rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between investors holding interests in
book-entry securities through Clearstream, Luxembourg or Euroclear and investors
holding interests in book-entry securities through DTC participants will be
effected on a delivery-against-payment basis through the respective depositories
of Clearstream, Luxembourg and Euroclear (in that capacity) and other DTC
participants.
Although DTC, Euroclear and Clearstream, Luxembourg are expected to follow
the procedures described below to facilitate transfers of interests in the
book-entry securities among participants of DTC, Euroclear and Clearstream,
Luxembourg, they are under no obligation to perform or continue to perform those
procedures, and those procedures may be discontinued at any time. Neither the
Issuer nor the indenture trustee will have any responsibility for the
performance by DTC, Euroclear and Clearstream, Luxembourg or their respective
participants or indirect participants of their respective obligations under the
rules and procedures governing their obligations.
Non-U.S. holders (as described below) of book-entry securities will be
subject to U.S. withholding taxes unless the holders meet certain requirements
and deliver appropriate U.S. tax documents to the securities clearing
organizations or their participants.
INITIAL SETTLEMENT
The book-entry securities will be registered in the name of Cede & Co. as
nominee of DTC. Investors' interests in the book-entry securities will be
represented through financial institutions acting on their behalf as direct and
indirect participants in DTC. Clearstream, Luxembourg and Euroclear will hold
positions on behalf of their participants through their respective depositories,
which in turn will hold the positions in accounts as DTC participants.
Investors electing to hold interests in book-entry securities through DTC
participants, rather than through Clearstream, Luxembourg or Euroclear accounts,
will be subject to the settlement practices applicable to similar issues of
pass-through notes. Investors' securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold interests in book-entry securities through
Clearstream, Luxembourg 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. Interests in
book-entry securities will be credited to the securities custody accounts on the
settlement date against payment in same-day funds.
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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 seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Transfers between DTC Participants. Secondary market trading between DTC
participants will be settled using the DTC procedures applicable to similar
issues of pass-through notes in same-day funds.
Transfers between Clearstream, Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream, Luxembourg participants or
Euroclear participants and/or investors holding interests in book-entry
securities through them will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Transfers between DTC Seller and Clearstream, Luxembourg or Euroclear
Purchaser. When interests in book-entry securities are to be transferred on
behalf of a seller from the account of a DTC participant to the account of a
Clearstream, Luxembourg participant or a Euroclear participant or a purchaser,
the purchaser will send instructions to Clearstream, Luxembourg or Euroclear
through a Clearstream, Luxembourg participant or Euroclear participant at least
one business day before settlement. Clearstream, Luxembourg or the Euroclear
operator will instruct its respective depository to receive an interest in the
book-entry securities against payment. Payment will include interest accrued on
the book-entry securities from and including the last distribution date to but
excluding the settlement date. Payment will then be made by the respective
depository to the DTC participant's account against delivery of an interest in
the book-entry securities. After settlement has been completed, the interest
will be credited to the respective clearing system, and by the clearing system,
in accordance with its usual procedures, to the Clearstream, Luxembourg
participant's or Euroclear participant's account. The credit of the interest
will appear on the next business day and the cash debit will be back-valued to,
and the interest on the book-entry securities will accrue from, the value date
(which would be the preceding day when settlement occurred in New York). If
settlement is not completed through DTC on the intended value date (i.e., the
trade fails), the Clearstream, Luxembourg or Euroclear cash debit will be valued
instead as of the actual settlement date.
Clearstream, Luxembourg participants and Euroclear participants will need
to make available to the respective clearing system the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
pre-position funds for settlement from cash on hand, in which case the
Clearstream, Luxembourg participants or Euroclear participants will take on
credit exposure to Clearstream, Luxembourg or the Euroclear operator until
interests in the book-entry securities are credited to their accounts one day
later.
As an alternative, if Clearstream, Luxembourg or the Euroclear operator has
extended a line of credit to them, Clearstream, Luxembourg participants or
Euroclear participants can elect not to pre-position funds and allow that credit
line to be drawn upon. Under this procedure, Clearstream, Luxembourg
participants or Euroclear participants receiving interests in book-entry
securities for purchasers would incur overdraft charges for one day, to the
extent they cleared the overdraft when interests in the book-entry securities
were credited to their accounts. However, interest on the book-entry securities
would accrue from the value date. Therefore, the investment income on the
interest in the book-entry securities earned during that one-day period would
tend to offset the amount of the overdraft charges, although this result will
depend on each Clearstream, Luxembourg participant's or Euroclear participant's
particular cost of funds.
Since the settlement through DTC will take place during New York business
hours, DTC participants are subject to DTC procedures for transferring interests
in book-entry securities to the respective depository of Clearstream, Luxembourg
or Euroclear for the benefit of Clearstream, Luxembourg participants or
Euroclear participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the seller settling the sale through a DTC
participant, a cross-market transaction will settle no differently than a sale
to a purchaser settling through a DTC participant.
Finally, intra-day traders that use Clearstream, Luxembourg participants or
Euroclear participants to purchase interests in book-entry securities from DTC
participants or sellers settling through them for delivery to
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Clearstream, Luxembourg participants or Euroclear participants should note that
these trades will automatically fail on the sale side unless affirmative action
is taken. At least three techniques SHOULD be available to eliminate this
potential condition:
(a) borrowing interests in book-entry securities through Clearstream,
Luxembourg or Euroclear for one day (until the purchase side of the
intra-day trade is reflected in the relevant Clearstream, Luxembourg
or Euroclear accounts) in accordance with the clearing system's
customary procedures;
(b) borrowing interests in book-entry securities in the United States from
a DTC participant no later than one day before settlement, which would
give sufficient time for the interests to be reflected in the relevant
Clearstream, Luxembourg or Euroclear accounts 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 before the value date for the sale to the Clearstream,
Luxembourg participant or Euroclear participant.
Transfers between Clearstream, Luxembourg or Euroclear Seller and DTC
Purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
participants and Euroclear participants may employ their customary procedures
for transactions in which interests in book-entry 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, Luxembourg or the Euroclear operator through a Clearstream,
Luxembourg participant or Euroclear participant at least one business day before
settlement. Clearstream, Luxembourg or Euroclear will instruct its respective
depository to credit an interest in the book-entry securities to the DTC
participant's account against payment. Payment will include interest accrued on
the book-entry securities from and including the last distribution date to but
excluding the settlement date. The payment will then be reflected in the account
of the Clearstream, Luxembourg participant or Euroclear participant the
following business day, and receipt of the cash proceeds in the Clearstream,
Luxembourg participant's or Euroclear participant's account would be back-valued
to the value date (which would be the preceding day, when settlement occurred
through DTC in New York). If settlement is not completed on the intended value
date (i.e., the trade fails), receipt of the cash proceeds in the Clearstream,
Luxembourg participant's or Euroclear participant's account would instead be
valued as of the actual settlement date.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of book-entry securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the United States) 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 the beneficial owner and the U.S. entity required to withhold tax
complies with applicable certification requirements and (ii) the 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 notes
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 the 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 effectively connected with its conduct
of a trade or business in the United States can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected With the Conduct of a
Trade or Business in the United States).
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Exemption or Reduced Rate for Non-U.S. Persons Resident in Treaty Countries
(Form W-8BEN). Non-U.S. Persons that are beneficial 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).
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 (Payer's Request for
Taxpayer Identification Number and Certification).
Form W-8BEN and Form W-8ECI are effective until the last day of the third
succeeding calendar year from the date the form is signed, unless a change in
circumstance makes any information on the form incorrect.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation or partnership or other entity treated as a
corporation or partnership for federal income tax purposes created or organized
in or under the laws of the United States, any State thereof or the District of
Columbia or (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 of the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust. This discussion
does not deal with all aspects of U.S. federal income tax withholding that may
be relevant to foreign holders of the book-entry securities. Investors are
advised to consult their own tax advisors for specific tax advice concerning
their holding and disposing of the book-entry securities.
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INDEX OF DEFINED TERMS
Page
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10 percent shareholder........................................................99
accredited investor..........................................................106
Additional Obligations.......................................................107
Agreement.....................................................................16
APR...........................................................................20
Available Funds...............................................................32
backup.......................................................................103
backup withholding............................................................96
beneficial owner..............................................................41
BIF...........................................................................56
borrower......................................................................76
California Military Code......................................................77
capital assets................................................................83
Capitalized Interest Account..................................................58
Cash Flow Bond Method.........................................................95
CERCLA........................................................................72
Certain Investments..........................................................108
Claimable Amount..............................................................81
Class Security Balance........................................................32
Code..........................................................................31
COFI securities...............................................................39
Collateral Value..............................................................20
Combined Loan-to-Value Ratio..................................................20
commercially reasonable.......................................................71
companion classes.............................................................36
constant maturity.............................................................40
Contingent Regulations........................................................85
contracts.....................................................................75
controlled foreign corporation................................................99
cooperative housing corporation...............................................59
cooperative loans.............................................................17
cooperatives..................................................................17
covered home loans............................................................82
Cut-off Date Principal Balance................................................30
daily portions................................................................85
Debt securities...............................................................84
debt-to-income ratio..........................................................28
Definitive Security...........................................................41
Designated Transaction.......................................................106
Detailed Description..........................................................17
DOL..........................................................................104
DTC......................................................................41, 112
due-on-sale...............................................................18, 51
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effectively connected.........................................................97
Eleventh District.............................................................39
encourage.....................................................................74
equity interest..............................................................104
ERISA.........................................................................31
European Depositories.........................................................41
Events of Default.............................................................64
excess inclusion..............................................................91
excess servicing fees.........................................................95
FHA...........................................................................17
FHLBSF........................................................................39
Final Bond Premium Regulations................................................87
Final Regulations.............................................................92
Financial Intermediary........................................................41
First Horizon.................................................................25
Fitch........................................................................106
foreign person................................................................99
fully modified pass-through...................................................21
Funding Period................................................................58
Garn-St Germain Act...........................................................74
Georgia Act...................................................................82
Ginnie Mae I Certificate......................................................21
Ginnie Mae II Certificate.....................................................21
Guide.........................................................................25
high cost......................................................................9
High Cost Loans...............................................................81
high-risk mortgage securities................................................109
home loans....................................................................82
Homeownership Act.............................................................81
Indenture.....................................................................30
inducement fees...............................................................90
Insurance Proceeds............................................................57
Insured Expenses..............................................................57
Interest Settlement Rate......................................................38
Interest Weighted Securities..................................................86
L/C Bank......................................................................46
L/C Percentage................................................................46
lender........................................................................76
LIBO Method...................................................................39
Liquidation Expenses..........................................................57
Liquidation Proceeds..........................................................57
Loan Rate.....................................................................18
Loan-to-Value Ratio...........................................................20
lock-up......................................................................112
market discount...............................................................87
Master Servicing Fee..........................................................62
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MGT/EOC.......................................................................43
Money Rates...................................................................40
Moody's..................................................................47, 106
Mortgage......................................................................54
mortgage pass-through certificate............................................105
mortgage pool pass-through certificates......................................104
mortgage related securities..................................................109
National Cost of Funds Index..................................................40
NCUA.........................................................................109
new partnership..............................................................101
Non-U.S. Person...............................................................83
objective rate................................................................85
Obligations..................................................................107
OID...........................................................................84
OID Regulations...............................................................84
old partnership..............................................................101
operator..................................................................12, 72
ortgage related securities...................................................109
OTS...........................................................................40
owner.....................................................................12, 72
Parties in Interest..........................................................104
Pass-Through Rate.............................................................16
Pass-Through Securities.......................................................94
Pay-Through Security..........................................................85
percentage interests..........................................................64
Permitted Investments.........................................................47
Plans........................................................................104
Policy Statement.............................................................109
Pool Insurance Policy.........................................................48
Pool Insurer..................................................................48
Pooling and Servicing Agreement...............................................16
portfolio interest.......................................................91, 103
Pre-Funded Amount.............................................................58
Pre-Funding Account...........................................................58
Pre-Funding Limit............................................................107
Pre-Funding Period...........................................................107
Prepayment Assumption.........................................................85
Primary Mortgage Insurance Policy.............................................19
Prime Rate....................................................................40
Principal Prepayments.........................................................33
Property Improvement Loans....................................................78
prudent investor.............................................................109
PTE 83-1.....................................................................104
Purchase Price................................................................29
qualified floating rate.......................................................85
qualified floating rates......................................................85
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qualified liquidation.........................................................68
qualified stated interest.................................................84, 98
Rating Agency................................................................111
Ratio Strip Securities........................................................95
RCRA..........................................................................72
real estate assets........................................................88, 96
real estate mortgage investment conduit.......................................31
Record Date...................................................................31
Refinance Loan................................................................20
Regular Interest Securities...................................................84
Regular Interests.............................................................88
related person................................................................99
Relevant Depositary...........................................................41
Relief Act....................................................................77
REMIC.........................................................................22
reportable payments...........................................................97
Residual Interest Security....................................................90
residual interests............................................................31
Residual Interests............................................................88
responsible parties...........................................................72
Restricted Group.............................................................107
Retained Interest.............................................................30
Rules.........................................................................41
S&P..........................................................................106
SAIF..........................................................................56
Sale and Servicing Agreement..................................................16
SEC.......................................................................24, 46
secured by....................................................................95
secured creditor exclusion....................................................72
Securities Act................................................................21
Security Account..............................................................56
Security Owners...............................................................41
Security Register.............................................................31
Sellers.......................................................................16
Senior Securities.............................................................45
Servicing Fee.................................................................94
Short-Term Note...............................................................98
Single Family Properties......................................................19
Single Family Securities.....................................................104
SMMEA........................................................................109
stripped bonds................................................................95
stripped coupons..............................................................95
Stripped Securities...........................................................94
structuring range.............................................................36
Subsequent Loans..............................................................58
substantial equity features..................................................104
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tenant-stockholder............................................................59
Terms and Conditions..........................................................43
TIN...........................................................................96
Title I Loans.................................................................78
Title I Program...............................................................78
Title V.......................................................................75
Trust Agreement...........................................................16, 30
Trust Fund Assets.............................................................16
U.S. Person..............................................................83, 115
UCC...........................................................................71
Underwriter Exemptions.......................................................105
unrelated business taxable income.......................................100, 101
VA............................................................................17
VA Guaranty...................................................................62
window period.................................................................74
window period states..........................................................74
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[FIRST HORIZON LOGO]
FIRST HORIZON ABS TRUST 2004-HE1
(ISSUER)
$302,628,000
(APPROXIMATE)
FIRST HORIZON ABS NOTES, SERIES 2004-HE1
-----------------------------------
PROSPECTUS SUPPLEMENT
-----------------------------------
FTN FINANCIAL
DEALERS WILL DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS OF THE NOTES AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS. IN ADDITION, ALL DEALERS SELLING THE NOTES WILL BE REQUIRED TO
DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS UNTIL JUNE 20, 2004.
MARCH 22, 2004
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
STATEMENT OF DIFFERENCES
The registered trademark symbol shall be expressed as.................... 'r'
The section symbol shall be expressed as................................. 'SS'
The greater-than-or-equal-to sign shall be expressed as.................. >=