PROSPECTUS SUPPLEMENT Filed Pursuant to Rule 424(b)5
(TO PROSPECTUS DATED SEPTEMBER 17, 2004) Registration number 333-118832-01
$710,040,100 (APPROXIMATE)
SEQUOIA MORTGAGE TRUST 2004-11
MORTGAGE PASS-THROUGH CERTIFICATES
SEQUOIA RESIDENTIAL FUNDING, INC.
DEPOSITOR
-------------------
Consider carefully the risk Sequoia Mortgage Trust 2004-11 will issue:
factors described in this
prospectus supplement. - Eight classes of senior
certificates, including three
The certificates will classes of interest-only
represent interests in a trust certificates and two classes of
fund only and will not residual interest certificates;
represent an interest in, or and
an obligation of, the seller
or the depositor or any of - Six classes of subordinate
their affiliates. certificates.
This prospectus supplement and the accompanying prospectus relate only to the
offering of certificates listed in the table on page S-1 under "Summary --
Offered Certificates" and not to the other classes of certificates that will be
issued by the trust fund as described in this prospectus supplement.
The assets of the trust fund will primarily consist of three pools of
conventional, adjustable rate, fully amortizing mortgage loans secured by first
liens on one-to-four family residential properties having the additional
characteristics described in "Description of the Mortgage Pools" in this
prospectus supplement.
The certificates offered by this prospectus supplement will be purchased by
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities
LLC, Greenwich Capital Markets, Inc. and Morgan Stanley & Co. Incorporated, as
underwriters, from Sequoia Residential Funding, Inc., as depositor, and are
being offered by the underwriters from time to time for sale to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. The underwriters have the right to reject any order. Proceeds to
Sequoia Residential Funding, Inc. from the sale of these certificates will be
approximately 102.35% of their initial principal balance, before deducting
expenses.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE CERTIFICATES OR DETERMINED THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
On or about November 23, 2004, delivery of the certificates offered by this
prospectus supplement (other than the Class A-R Certificate, which will be
delivered in physical, fully registered form) will be made through the
book-entry facilities of The Depository Trust Company, Clearstream Banking,
societe anonyme and the Euroclear System.
Underwriters:
-------------------
MERRILL LYNCH & CO. BANC OF AMERICA
SECURITIES LLC
(Co-Lead Manager) (Co-Lead Manager)
Co-Managers:
RBS GREENWICH CAPITAL
MORGAN STANLEY
November 18, 2004
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We tell you about the certificates 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 certificates,
and (2) this prospectus supplement, which describes the specific terms of your
certificates and may be different from the information in the prospectus.
IF THE TERMS OF YOUR CERTIFICATES AND ANY OTHER INFORMATION CONTAINED
HEREIN VARY BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS,
YOU SHOULD RELY ON THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
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 table of contents for this prospectus
supplement 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 certificates, this prospectus
supplement and the accompanying prospectus may be used by Banc of America
Securities LLC or Morgan Stanley & Co. Incorporated, each an affiliate of one of
the servicers, in connection with market making transactions in those
certificates. Each of Banc of America Securities LLC or Morgan Stanley & Co.
Incorporated may act as principal or agent in these transactions. These
transactions will be at market prices at the time of sale and not at the prices
of the initial offering. Certain information in this prospectus supplement will
be updated from time to time for as long as Bank of America, N.A. or Morgan
Stanley Dean Witter Credit Corporation, respectively, continues to be a servicer
of the mortgage loans owned by the trust fund.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement are defined under "Index of Certain Definitions" in this
prospectus supplement.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the certificates and with respect to their unsold allotments and
subscriptions. In addition, all dealers selling the certificates will be
required to deliver a prospectus supplement and prospectus for ninety days
following the date of this prospectus supplement.
WHERE YOU CAN FIND MORE INFORMATION
Federal securities law requires the filing of certain information with the
Securities and Exchange Commission (the "SEC"), including annual, quarterly and
special reports, proxy statements and other information. You can read and copy
these documents at the public reference facility maintained by the SEC at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You
can also copy and inspect such reports, proxy statements and other information
at the following regional offices of the SEC:
S-ii
Woolworth Building Chicago Regional Office
233 Broadway 175 West Jackson Boulevard
New York, New York 10279 Suite 900
Chicago, Illinois 60604
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. SEC filings are also available to the public on the
SEC's web site at http://www.sec.gov. The SEC allows us to "incorporate by
reference" the information we file with it, which means that we can disclose
important information to you by referring you to those documents. The
information that we incorporate by reference is considered to be part of this
prospectus supplement, and later information that we file with the SEC will
automatically update and supersede this information.
This prospectus supplement and the accompanying prospectus are part of a
registration statement filed by the depositor with the SEC. You may request a
free copy of any of the above filings by writing or calling:
SEQUOIA RESIDENTIAL FUNDING, INC.
ONE BELVEDERE PLACE, SUITE 330
MILL VALLEY, CA 94941
(415) 381-1765
You should rely only on the information provided in this prospectus
supplement or the accompanying prospectus or incorporated by reference herein.
We have not authorized anyone else to provide you with different information.
You should not assume that the information in this prospectus supplement or the
accompanying prospectus is accurate as of any date other than the date on the
cover page of this prospectus supplement or the accompanying prospectus or that
the information incorporated by reference herein is accurate as of any date
other than the date stated therein.
S-iii
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
----
SUMMARY ........................................................ S-1
RISK FACTORS ................................................... S-12
DESCRIPTION OF THE
MORTGAGE POOLS .............................................. S-20
General ..................................................... S-20
The Mortgage Loans .......................................... S-21
The Additional Collateral Loans ............................. S-25
Tabular Characteristics of the
Mortgage Loans ........................................... S-26
The Indices ................................................. S-56
Assignment of the Mortgage
Loans .................................................... S-56
Underwriting Standards ...................................... S-58
DESCRIPTION OF THE
CERTIFICATES ................................................ S-63
General ..................................................... S-63
Book-Entry Certificates ..................................... S-66
Payments on Mortgage Loans;
Accounts ................................................. S-71
Available Distribution Amount ............................... S-71
Distributions of Interest ................................... S-72
Distributions of Principal .................................. S-82
Priority of Distributions ................................... S-89
Limited Cross-Collateralization ............................. S-91
Subordination of the Payment of
the Subordinate Certificates ............................. S-92
Allocation of Realized Losses ............................... S-93
Reports to Certificateholders ............................... S-94
Final Scheduled Distribution Date ........................... S-95
Optional Clean-Up Redemption of
the Certificates ......................................... S-96
The Trustee and the Securities
Administrator ............................................ S-96
Voting Rights ............................................... S-96
THE SERVICERS .................................................. S-97
GreenPoint Mortgage Funding,
Inc ...................................................... S-97
GMAC Mortgage Corporation ................................... S-97
Cendant Mortgage Corporation ................................ S-98
Morgan Stanley Dean Witter
Credit Corporation ....................................... S-100
Bank of America, N.A ........................................ S-103
SERVICING OF THE MORTGAGE
LOANS ....................................................... S-105
General ..................................................... S-105
Servicing and Collection
Procedures .................................................. S-105
Servicing Compensation and
Payment of Expenses; Master
Servicing Compensation ................................... S-106
Adjustment to Servicing Fees in
Connection with Certain Prepaid Mortgage Loans ........... S-107
Advances .................................................... S-107
Evidence as to Compliance ................................... S-108
Master Servicer Default; Servicer Default ................... S-108
Resignation of Servicers; Assignment and Merger ............. S-108
YIELD, PREPAYMENT AND
WEIGHTED AVERAGE LIFE ....................................... S-109
Yield Considerations ........................................ S-109
Subordination of the Offered Subordinate Certificates ....... S-112
Weighted Average Life ....................................... S-112
Sensitivity of the Class X-A1,
Class X-A2 and Class X-B
Certificates ............................................. S-120
USE OF PROCEEDS ................................................ S-122
FEDERAL INCOME TAX CONSEQUENCES ................................ S-122
Additional Tax Considerations Applicable to the LIBOR
Certificates ............................................. S-122
Additional Tax Considerations Applicable to the Class X
Certificates ............................................. S-124
The Class A-R Certificates .................................. S-125
Tax Return Disclosure Requirements .......................... S-125
ERISA MATTERS .................................................. S-126
METHOD OF DISTRIBUTION ......................................... S-130
S-iv
LEGAL MATTERS .................................................. S-131
RATINGS ........................................................ S-131
INDEX OF CERTAIN
DEFINITIONS .................................................... I-1
ANNEX I: GLOBAL
CLEARANCE, SETTLEMENT
AND TAX DOCUMENTATION
PROCEDURES ............................................... S-A-1
S-v
TABLE OF CONTENTS
PROSPECTUS
Page
----
SUMMARY OF PROSPECTUS ........................... 4
RISK FACTORS .................................... 8
THE DEPOSITOR ................................... 13
THE TRUST ....................................... 13
General ....................................... 13
The Loans ..................................... 15
Home Equity Loans ............................. 17
Agency Securities ............................. 19
Private Mortgage-backed Securities ............ 26
Substitution of Trust Assets .................. 28
USE OF PROCEEDS ................................. 28
LOAN PROGRAM .................................... 28
Underwriting Standards ........................ 28
Qualifications of Sellers ..................... 30
Quality Control ............................... 30
Representations by Sellers;
Repurchases ................................. 30
DESCRIPTION OF THE
SECURITIES .................................... 31
General ....................................... 32
Distributions on Securities ................... 34
Advances ...................................... 36
Compensating Interest ......................... 37
Reports to Securityholders .................... 38
Categories of Classes of Securities ........... 39
Book-Entry Registration of
Securities .................................. 42
CREDIT ENHANCEMENT .............................. 46
General ....................................... 46
Subordination ................................. 47
Insurance Policies, Surety Bonds and
Guaranties .................................. 49
Cross Support ................................. 49
Reserve Accounts .............................. 49
Pool Insurance Policies ....................... 50
Over-Collateralization ........................ 52
Letter of Credit .............................. 52
Other Insurance, Guaranties, Letters of
Credit and Similar Instruments or
Agreements .................................. 53
YIELD AND PREPAYMENT
CONSIDERATIONS ................................ 53
THE AGREEMENTS .................................. 56
Assignment of the Trust Assets ................ 56
Payments on Loans; Deposits to
Collection Account .......................... 58
Pre-Funding Account ........................... 60
Subservicing by Sellers ....................... 61
Collection Procedures ......................... 61
Hazard Insurance .............................. 62
Primary Mortgage Insurance .................... 64
Claims Under Insurance Policies and
Other Realization Upon Defaulted
Loans ....................................... 65
Servicing and Other Compensation
and Payment of Expenses ..................... 66
Evidence as to Compliance ..................... 66
Certain Matters Regarding the
Servicer and the Depositor .................... 66
Events of Default; Rights Upon Event
of Default .................................. 68
Amendment ..................................... 71
Termination; Optional Termination ............. 71
The Trustee ................................... 73
CERTAIN LEGAL ASPECTS OF THE
LOANS ......................................... 73
General ....................................... 73
Foreclosure/Repossession ...................... 74
Environmental Risks ........................... 77
Rights of Redemption .......................... 79
Anti-Deficiency Legislation;
Bankruptcy Laws; Tax Liens .................. 79
Due-on-Sale Clauses ........................... 80
Enforceability of Prepayment Charges
and Late Payment Fees ....................... 81
Applicability of Usury Laws ................... 81
Servicemembers Civil Relief Act ............... 82
Junior Mortgages; Rights of Senior
Mortgagees .................................. 82
Consumer Protection Laws ...................... 84
S-vi
FEDERAL INCOME TAX
CONSEQUENCES .................................. 84
Overview ...................................... 84
Non-REMIC Securities .......................... 85
REMIC Securities .............................. 91
Withholding with Respect to Certain
Foreign Investors .......................... 102
Backup Withholding ............................ 103
STATE TAX CONSIDERATIONS ........................ 104
ERISA CONSIDERATIONS ............................ 104
LEGAL INVESTMENT ................................ 111
METHOD OF DISTRIBUTION .......................... 112
LEGAL MATTERS ................................... 113
FINANCIAL INFORMATION ........................... 113
AVAILABLE INFORMATION ........................... 113
INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE ..................... 114
RATING .......................................... 114
INDEX OF DEFINED TERMS .......................... 116
S-vii
SUMMARY
This summary highlights selected information from this prospectus
supplement and does not contain all the information that you need to consider in
making your investment decision. Please read this entire prospectus supplement
and the accompanying prospectus carefully for additional information about the
offered certificates.
OFFERED CERTIFICATES
Sequoia Mortgage Trust 2004-11 Mortgage Pass-Through Certificates consist
of the classes of certificates listed in the table below, together with the
Class B-4, Class B-5, Class B-6 and Class LT-R Certificates. Only the classes of
certificates listed in the table below are being offered by this prospectus
supplement:
INITIAL CLASS
PRINCIPAL INTEREST
CLASS AMOUNT (1) RATE DESIGNATION CUSIP
A-1 .................. $ 433,985,000 (5) Senior 81744F FJ 1
A-2 .................. 86,036,000 (6) Senior 81744F FK 8
A-3 .................. 170,694,000 (5) Senior 81744F FL 6
X-A1 ................. (2) (2) Notional/Senior 81744F FM 4
X-A2 ................. (3) (3) Notional/Senior 81744F FN 2
X-B .................. (4) (4) Notional/Senior 81744F FP 7
A-R .................. 100 (7) Residual/Senior 81744F FQ 5
B-1 .................. 8,947,000 (5) Subordinate 81744F FR 3
B-2 .................. 6,084,000 (5) Subordinate 81744F FS 1
B-3 .................. 4,294,000 (8) Subordinate 81744F FT 9
- ----------
(1) These balances are approximate and are subject to an increase or decrease
of up to 5%, as described in this prospectus supplement.
(2) The Class X-A1 Certificates will consist of two components, the Pool 1
Component and the Pool 2 Component (each as defined in this prospectus
supplement). Interest will accrue on the Class X-A1 Certificates based
upon a notional amount equal to the sum of the notional amounts of the
Pool 1 Component and the Pool 2 Component. On any distribution date, the
notional amount of the Pool 1 Component will be equal to the class
principal amount of the Class A-1 Certificates immediately prior to such
distribution date, and the notional amount of the Pool 2 Component will be
equal to the class principal amount of the Class A-2 Certificates
immediately prior to such distribution date. Interest will accrue on the
Class X-A1 Certificates as described in this prospectus supplement under
"Description of the Certificates -- Distributions of Interest."
Distributions on the Class X-A1 Certificates in respect of the Pool 1
Component and the Pool 2 Component will be subject to certain limitations
in connection with basis risk shortfalls of the Class A-1 and Class A-2
Certificates, as applicable, and as otherwise described herein. No
principal will be distributed on the Class X-A1 Certificates. The holder
of the Class X-A1 Certificates may not transfer the related components
separately.
(3) Interest will accrue on the Class X-A2 Certificates based upon a notional
amount. On any distribution date, the class notional amount of the Class
X-A2 Certificates will be equal to the class principal amount of the Class
A-3 Certificates immediately prior to such distribution date. Interest
will accrue on the Class X-A2 Certificates as described in this prospectus
supplement under "Description of the Certificates -- Distributions of
Interest." Distributions on the Class X-A2 Certificates will be subject
to certain limitations in connection with basis risk shortfalls on the
Class A-3 Certificates, and as otherwise described herein. No principal
will be distributable on the Class X-A2 Certificates.
(4) Interest will accrue on the Class X-B Certificates based upon a notional
amount. On any distribution date, the class notional amount of the Class
X-B Certificates will be equal to the sum of the class principal amounts
of the Class B-1 and
S-1
Class B-2 Certificates immediately prior to such distribution date.
Interest will accrue on the Class X-B Certificates as described in this
prospectus supplement under "Description of the Certificates --
Distributions of Interest." Distributions on the Class X-B Certificates
will be subject to certain limitations in connection with basis risk
shortfalls on the Class B-1 and Class B-2 Certificates, and as otherwise
described herein. No principal will be distributable on the Class X-B
Certificates.
(5) Interest will accrue on the Class A-1, Class A-3, Class B-1 and Class B-2
Certificates based upon one-month LIBOR plus a specified margin, subject
to limitation, as described in this prospectus supplement. One-month
LIBOR, for the initial accrual period will be determined two business days
prior to the closing date and will be reset every month, as described
under "Description of the Certificates -- Distributions of Interest --
Determination of LIBOR."
(6) Interest will accrue on the Class A-2 Certificates based upon six-month
LIBOR plus a specified margin, subject to limitation, as described in this
prospectus supplement. Six-month LIBOR, for the initial accrual period
will be determined two business days prior to the closing date and will be
reset every six months, as described under "Description of the
Certificates -- Distributions of Interest -- Determination of LIBOR."
(7) Interest will accrue on the Class A-R Certificates based upon the weighted
average of the net interest rates of the pool 1 mortgage loans, as
described in this prospectus supplement.
(8) Interest will accrue on the Class B-3 Certificates based upon the weighted
average of the net interest rates on all of the mortgage loans, as
described in this prospectus supplement.
The certificates offered by this prospectus supplement, except for the
Class A-R Certificate, will be issued in book-entry form and in the minimum
denominations (or multiples thereof) set forth under "Description of the
Certificates -- General" in this prospectus supplement. The Class A R
Certificate will be issued in fully registered definitive form.
The certificates represent ownership interests in a trust fund which will
consist primarily of three separate pools of mortgage loans, "pool 1," "pool 2"
and "pool 3."
Generally, with certain limited exceptions discussed at "Limited
Cross-Collateralization" below, distributions to the Class A-1 and Class A-R
Certificates and to the component of the Class X-A1 Certificates related to pool
1 will be solely derived from collections on the pool 1 mortgage loans,
distributions to the Class A-2 Certificates and to the component of the Class
X-A1 Certificates related to pool 2, will be solely derived from collections on
the pool 2 mortgage loans, and distributions to the Class A-3 and Class X-A2
Certificates will be solely derived from collections on the pool 3 mortgage
loans. Aggregate collections from all three pools of mortgage loans will be
available to make distributions on the Class X-B, Class B-1, Class B-2 and Class
B-3 Certificates and the other subordinate classes.
THE TRUST
Sequoia Mortgage Trust 2004-11 will be formed pursuant to a pooling and
servicing agreement among the depositor, the master servicer, the securities
administrator and the trustee. The certificates represent solely beneficial
ownership interests in the trust fund created under the pooling and servicing
agreement and not an interest in, or the obligation of, the depositor or any
other person.
THE TRUSTEE
HSBC Bank USA, National Association, a national banking association, will
act as trustee of the trust under the pooling and servicing agreement.
S-2
THE ORIGINATORS
Approximately 41.55%, 31.24% and 11.11% of the mortgage loans in pool 1
were originated by GreenPoint Mortgage Funding, Inc., Morgan Stanley Dean Witter
Credit Corporation and RBC Mortgage Company, respectively. Approximately 46.39%,
17.87%, 17.49% and 11.86% of the mortgage loans in pool 2 were originated by
GreenPoint Mortgage Funding, Inc., Bank of America, N.A., Morgan Stanley Dean
Witter Credit Corporation and RBC Mortgage Company, respectively. All of the
mortgage loans in pool 3 were originated by Merrill Lynch Credit Corporation.
The remainder of the mortgage loans were originated by various mortgage lending
institutions.
THE SELLER
RWT Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of
Redwood Trust, Inc., has previously acquired the mortgage loans, directly or
indirectly, from the originators. On the closing date, RWT Holdings, Inc., as
seller, will sell all of its interest in the mortgage loans to the depositor.
THE DEPOSITOR
On the closing date, Sequoia Residential Funding, Inc., a Delaware
corporation and indirect wholly-owned subsidiary of Redwood Trust, Inc., will
assign all of its interest in the mortgage loans to the trustee for the benefit
of certificateholders.
THE CUSTODIAN
Wells Fargo Bank, National Association will maintain custody of the
mortgage files relating to the mortgage loans on behalf of the trust.
THE MASTER SERVICER
Wells Fargo Bank, National Association.
THE SERVICERS
Bank of America, N.A., Cendant Mortgage Corporation, GMAC Mortgage
Corporation, GreenPoint Mortgage Funding, Inc., Morgan Stanley Dean Witter
Credit Corporation and Residential Funding Corporation will initially service
the mortgage loans. Following the closing date, the servicing of substantially
all of the mortgage loans currently serviced by GreenPoint Mortgage Funding,
Inc. is expected to be transferred to GMAC Mortgage Corporation. In addition,
servicing may subsequently be transferred to servicers other than GMAC Mortgage
Corporation or the initial servicers, in accordance with the pooling and
servicing agreement and the servicing agreements, as described in this
prospectus supplement.
The servicers will service the mortgage loans pursuant to existing
servicing agreements between each such servicer and the seller. The rights of
the seller under each such servicing agreement will be assigned to the
depositor, and the depositor, in turn, will assign such rights to the trustee
for the benefit of certificateholders.
We refer you to "Servicing of the Mortgage Loans" in this prospectus
supplement for more information.
THE SECURITIES ADMINISTRATOR
Wells Fargo Bank, National Association.
S-3
CUT-OFF DATE
November 1, 2004. The cut-off date is the date after which the trust fund
will be entitled to receive all collections on and proceeds of the mortgage
loans.
DISTRIBUTION DATE
The 20th day of each month or, if such day is not a business day, the next
business day thereafter, commencing in December 2004. Distributions on each
distribution date will be made to certificateholders of record as of the related
record date, except that the final distribution on the certificates will be made
only upon presentment and surrender of the certificates at the corporate trust
office of the trustee.
RECORD DATE
With respect to the Class A-1, Class A-2, Class A-3, Class B-1 and Class
B-2 Certificates, the last business day preceding a distribution date (or the
closing date, in the case of the first distribution date), unless such
certificates are no longer book-entry certificates, in which case the record
date is the last business day of the month preceding the month of a distribution
date. With respect to all other classes of certificates, the record date will be
last business day of the month preceding the month of a distribution date (or
the closing date, in the case of the first distribution date).
DISTRIBUTIONS OF INTEREST
On each distribution date, to the extent of available funds from the
related mortgage pool (or all of the pools in the aggregate, in the case of the
Class X-B, Class B-1, Class B-2 and Class B-3 Certificates), each class of
certificates and each of the components of the Class X-A1 Certificates will,
subject to the limitations described herein, be entitled to receive accrued and
unpaid interest determined on the basis of the outstanding class principal
amount of such class immediately prior to such distribution date (or component
notional amount, in the case of the Class X-A1 Certificates or class notional
amount, in the case of the Class X-A2 or Class X-B Certificates), the applicable
certificate interest rate and the related accrual period.
On each distribution date, (i) amounts otherwise distributable in respect
of the Pool 1 Component of the Class X-A1 Certificates will instead be deposited
into a reserve fund and distributed to the Class A-1 Certificates, to the extent
of any accrued and unpaid interest shortfalls on such class attributable solely
to basis risk, (ii) amounts otherwise distributable in respect of the Pool 2
Component of the Class X-A1 Certificates will instead be deposited into a
reserve fund and distributed to the Class A-2 Certificates, to the extent of any
accrued and unpaid interest shortfalls on such classes attributable solely to
basis risk, (iii) amounts otherwise distributable in respect of the Class X-A2
Certificates will instead be deposited into a reserve fund and distributed to
the Class A-3 Certificates, to the extent of any accrued and unpaid interest
shortfalls on such classes attributable solely to basis risk and (iv) amounts
otherwise distributable to the Class X-B Certificates will instead be deposited
in a reserve fund and distributed sequentially to the Class B-1 and Class B-2
Certificates, in that order, to the extent of any accrued and unpaid interest
shortfalls on such classes attributable solely to basis risk. The Class X-A1,
Class X-A2 and Class X-B Certificates will not be reimbursed for any shortfalls
resulting from the payment rules described in this paragraph.
The accrual period applicable to the Class A-1, Class A-2, Class A-3,
Class B-1 and Class B-2 Certificates for a given
S-4
distribution date will be the period commencing on the 20th day of the month
immediately preceding the month in which such distribution date occurs (or in
the case of the first distribution date, beginning on the closing date of this
transaction) and ending on the 19th day of the month in which such distribution
date occurs. The accrual period applicable to all other classes of offered
certificates will be the calendar month preceding the month in which the
distribution date occurs. Interest on all classes of certificates for all
accrual periods will be calculated and payable on the basis of a 360-day year
consisting of twelve 30-day months, except that for the first accrual period
only, interest on the Class A-1, Class A-2, Class A-3, Class B-1 and Class B-2
Certificates will be calculated and payable on the basis of a 27-day accrual
period and a year assumed to consist of 360 days.
Interest payments will be allocated among certificateholders of a class of
certificates on a pro rata basis.
We refer you to "Description of the Certificates -- Distributions of
Interest" in this prospectus supplement for more information.
DISTRIBUTIONS OF PRINCIPAL
The amount of principal distributable on the certificates (other than the
interest-only certificates) on any distribution date will be determined by (1)
formulas that allocate portions of principal payments received on the mortgage
loans among the different classes of certificates and (2) the amount of funds
actually received on the mortgage loans and available to make distributions on
the certificates. Funds actually received on the mortgage loans may consist of
scheduled payments and unscheduled payments resulting from prepayments by
borrowers, liquidation of defaulted mortgage loans or repurchases of mortgage
loans under the circumstances described in this prospectus supplement.
Generally, each group of senior certificates will receive principal
payments on each distribution date in an amount equal to the related "Senior
Principal Distribution Amount" based on principal collections from the related
mortgage pool for the related due period. Except under the limited circumstances
described in this prospectus supplement, the Class B-1, Class B-2 and Class B-3
Certificates and the other subordinate classes will not receive principal
distributions (or subsequent recoveries) from collections on the mortgage loans
until the distribution date in December 2014. From and after that distribution
date, provided that certain tests are met, the Class B-1, Class B-2 and Class
B-3 Certificates and the other subordinate classes will receive principal
collections in an amount equal to their allocable share of the related
"Subordinate Principal Distribution Amount" based on collections of principal
from the mortgage pools in the aggregate for the related due period.
We refer you to "Description of the Certificates -- Distributions of
Principal" in this prospectus supplement and "Description of the Securities --
Distributions on Securities" in the prospectus for more information.
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date for the offered certificates is the
distribution date in December 2034, which is the distribution date in the month
following the scheduled maturity date for the latest maturing mortgage loan.
S-5
LIMITED CROSS-COLLATERALIZATION
In certain limited circumstances relating to a pool's experiencing either
rapid prepayments or disproportionately high realized losses, principal and
interest collected from the other pools may be applied to pay principal or
interest, or both, to the senior certificates or components thereof, as
applicable, related to the pool experiencing such conditions.
We refer you to "Description of the Certificates -- Limited
Cross-Collateralization" in this prospectus supplement for more information.
OPTIONAL CLEAN-UP REDEMPTION OF THE CERTIFICATES
On any distribution date on or after the distribution date (the "initial
clean-up call date") on which the aggregate outstanding principal balance of the
mortgage loans is equal to or less than 10% of the aggregate principal balance
of the mortgage loans as of the cut-off date, subject to satisfaction of the
conditions described in the pooling and servicing agreement, the master servicer
will purchase all of the mortgage loans and apply the proceeds to redeem the
certificates at a price equal to 100% of the unpaid principal balance of the
certificates, plus accrued and unpaid interest thereon (excluding the amount of
any unpaid shortfalls described at "Description of the Certificates --
Distributions of Interest -- Net WAC Shortfalls").
If the master servicer fails to purchase the mortgage loans in the trust
fund on the initial clean-up call date, then on the immediately following
distribution date, the related margin for the Class A-1, Class A-2, Class A-3,
Class B-1 and Class B-2 Certificates will increase as described at "Description
of the Certificates -- Distributions of Interest" and " -- Optional Clean-Up
Redemption of the Certificates" in this prospectus supplement, and such
increased margin will be in effect on all subsequent distribution dates.
We refer you to "Description of the Certificates -- Optional Clean-Up
Redemption of the Certificates" in this prospectus supplement for more
information.
CREDIT ENHANCEMENT
Subordination. The subordinate classes of certificates will provide credit
enhancement for the senior certificates. In addition, the Class B-1 Certificates
will have a payment priority over the Class B-2, Class B-3, Class B-4, Class B-5
and Class B-6 Certificates; the Class B-2 Certificates will have a payment
priority over the Class B-3, Class B-4, Class B-5 and Class B-6 Certificates;
and the Class B-3 Certificates will have a payment priority over the Class B-4,
Class B-5 and Class B-6 Certificates.
If the mortgage loans in any pool experience losses, then the principal
amount of the subordinate class of certificates that is lowest in seniority and
still outstanding will be reduced by the amount of those losses until the total
outstanding principal balance of such class equals zero.
If a loss has been allocated to reduce the principal amount of your
certificate, you will receive no payment in respect of that reduction, except to
the extent of any subsequent recoveries allocable to your certificate. On any
distribution date on which a subsequent recovery is distributed, the class
principal amount of any class of certificates then outstanding to which a
realized loss amount has been applied will be increased, by the amount of such
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subsequent recovery as described at "Description of the Certificates --
Distributions of Interest" in this prospectus supplement. However, it is
expected that the Class B-1, Class B-2 and Class B-3 Certificates and the other
subordinate classes will not receive any distributions in respect of subsequent
recoveries before the distribution date in December 2014.
If the subordination of the subordinate certificates is insufficient to
absorb losses, then, to the extent described in this prospectus supplement, the
senior certificates relating to the mortgage pool incurring the realized losses
will be allocated such losses and may never receive all of their principal
payments.
We refer you to "Risk Factors -- Potential Inadequacy of Credit
Enhancement," "Description of the Certificates -- Priority of Distributions" and
" -- Allocation of Realized Losses" in this prospectus supplement for more
information.
THE MORTGAGE LOANS
Statistical Information. The statistical information on the mortgage loans
presented herein is based on the principal balance of such mortgage loans as of
November 1, 2004 (referred to herein as the "cut-off date"). Such information
does not take into account defaults, delinquencies and prepayments that may have
occurred with respect to the mortgage loans since such date. As a result, the
statistical distribution of the characteristics in the final mortgage pools as
of the closing date will vary from the statistical distribution of such
characteristics as presented in this prospectus supplement, although such
variance will not be material.
General. On the cut-off date, the assets of the trust fund consisted of
approximately 1,961 mortgage loans with a total principal balance of
approximately $715,767,526. The mortgage loans consist primarily of adjustable
rate, conventional, fully amortizing, first lien residential mortgage loans, all
of which have an original term to stated maturity of either 25 or 30 years.
Pool 1 Characteristics. As of the cut-off date, pool 1 consisted of
approximately 1,182 mortgage loans having a total principal balance of
approximately $449,725,717 (or approximately 62.83% of the aggregate cut-off
date balance of the mortgage loans). The mortgage interest rates of
approximately 50.00% and 50.00% of the pool 1 mortgage loans adjust based on the
one-month LIBOR and six-month LIBOR index, respectively, and all such mortgage
loans have original terms to maturity of either 25 or 30 years.
All of the pool 1 mortgage loans provide for payments of interest at the
related mortgage interest rate, but no payments of principal, for a period of
five years (in the case of approximately 5.28% of the pool 1 mortgage loans) or
ten years (in the case of approximately 94.72% of the pool 1 mortgage loans), in
each case following origination of such mortgage loan. Following such five- or
ten-year period, the monthly payment with respect to each such pool 1 mortgage
loan will be increased to an amount sufficient to amortize the principal balance
of such mortgage loan over its remaining term, and to pay interest at the
related mortgage interest rate.
Pool 2 Characteristics. As of the cut-off date, pool 2 consisted of
approximately 241 mortgage loans having a total principal balance of
approximately $89,156,717 (or approximately 12.46% of
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the aggregate cut-off date balance of the mortgage loans). The mortgage interest
rates of all of the pool 2 mortgage loans adjust based on the six-month LIBOR
index and all such mortgage loans have original terms to maturity of either 25
or 30 years.
All of the pool 2 mortgage loans provide for payments of interest at the
related mortgage interest rate, but no payments of principal, for a period of
five years (in the case of approximately 10.23% of the pool 2 mortgage loans) or
ten years (in the case of approximately 89.77% of the pool 2 mortgage loans), in
each case following origination of such mortgage loan. Following such five-or
ten-year period, the monthly payment with respect to each such pool 2 mortgage
loan will be increased to an amount sufficient to amortize the principal balance
of such mortgage loan over its remaining term and to pay interest at the related
mortgage interest rate.
Pool 3 Characteristics. As of the cut-off date, pool 3 consisted of
approximately 538 mortgage loans having a total principal balance of
approximately $176,885,091 (or approximately 24.71% of the aggregate cut-off
date balance of the mortgage loans). The mortgage interest rates of
approximately 50.44% and 49.56% of the pool 3 mortgage loans adjust based on the
one-month LIBOR and six-month LIBOR index, respectively, and all such mortgage
loans have original terms to maturity of 25 years.
All of the pool 3 mortgage loans provide for payments of interest at the
related mortgage interest rate, but no payments of principal, for a period of
ten years following origination of such mortgage loan. Following such
interest-only period, the monthly payment with respect to each such pool 3
mortgage loan will be increased to an amount sufficient to amortize the
principal balance of such mortgage loan over its remaining term, and to pay
interest at the related mortgage interest rate.
All of the pool 3 mortgage loans were acquired by the seller in connection
with the exercise of a clean-up call with respect to a trust previously
established by the depositor in 1997. These mortgage loans will have shorter
remaining terms to maturity than the mortgage loans in pool 1 or pool 2.
We refer you to "Description of the Mortgage Pools" in this prospectus
supplement for more information.
Summary Statistical Data. The following table summarizes the
characteristics of the mortgage loans in the aggregate and by pool as of the
cut-off date. More complete tabular information concerning the statistical
characteristics of the mortgage loans in the aggregate and by mortgage pool as
of the cut-off date can be found at "Description of the Mortgage Pools --
Tabular Characteristics of the Mortgage Loans" in this prospectus supplement.
Aggregate Outstanding Principal Balance: .. $715,767,526
Pool 1: ................................... $449,725,717
Pool 2: ................................... $ 89,156,717
Pool 3: ................................... $176,885,091
Aggregate Number of Mortgage Loans: ....... 1,961
Pool 1: ................................... 1,182
Pool 2: ................................... 241
Pool 3: ................................... 538
Aggregate Average Current Balance: ........ $ 365,001
Pool 1: ................................... $ 380,479
Pool 2: ................................... $ 369,945
Pool 3: ................................... $ 328,783
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Aggregate Weighted Average Mortgage
Interest Rate: ......................... 3.565%
Pool 1: ................................... 3.574%
Pool 2: ................................... 3.739%
Pool 3: ................................... 3.453%
Aggregate Weighted Average Gross 1.714%
Margin: ................................
Pool 1: ................................... 1.671%
Pool 2: ................................... 1.753%
Pool 3: ................................... 1.803%
Aggregate Weighted Average Original
Term to Maturity: ...................... 327 months
Pool 1: ................................... 335 months
Pool 2: ................................... 339 months
Pool 3: ................................... 300 months
Aggregate Weighted Average Remaining
Term to Maturity: ...................... 304 months
Pool 1: ................................... 334 months
Pool 2: ................................... 338 months
Pool 3: ................................... 211 months
Additional Collateral Loans. Approximately 2.33%, 1.54% and 39.48% of the
pool 1, pool 2 and pool 3 mortgage loans, respectively, in addition to being
secured by real property, are secured by a security interest in a limited amount
of additional collateral owned by the borrower or a third-party guarantor. Such
additional collateral may no longer be required when the principal balance of
such additional collateral mortgage loan is reduced to a predetermined amount
set forth in the related pledge agreement or guaranty agreement, as applicable,
or when the loan-to-value ratio for such additional collateral mortgage loan is
reduced to the applicable loan-to-value ratio for such additional collateral
mortgage loan by virtue of an increase in the appraised value of the mortgaged
property as determined by the related servicer.
We refer you to "Description of the Mortgage Pools -- The Additional
Collateral Loans" for more information.
SERVICING OF THE MORTGAGE LOANS
The master servicer will supervise the performance of each servicer under
the related servicing agreement.
Under the servicing agreements, the servicers are generally obligated to
make monthly advances of cash (to the extent such advances are deemed
recoverable), which will be included with mortgage principal and interest
collections, in an amount equal to any delinquent monthly payments due on the
mortgage loans on the immediately preceding determination date. The master
servicer will be obligated to make any required advance if a servicer fails in
its obligation to do so, to the extent described in this prospectus supplement.
The master servicer and the servicers will be entitled to reimburse themselves
for any such advances from future payments and collections (including insurance
or liquidation proceeds) with respect to the mortgage loans. However, if the
master servicer or the servicers make advances which are determined to be
nonrecoverable from future payments and collections on the related mortgage
loan, such parties will be entitled to reimbursement for such advances prior to
any distributions to certificateholders.
The servicers will also make interest payments to compensate in part for
any shortfall in interest payments on the certificates which results from a
mortgagor prepaying a mortgage loan in whole. However, the amount of such
payments will generally not exceed the servicing fees payable to the servicers
for the related due period. If a servicer fails to make a required payment in
respect of such shortfalls, the master servicer will be obligated to reduce a
portion of its master servicing fee to the extent necessary to fund any such
shortfall.
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We refer you to "Servicing of the Mortgage Loans" in this prospectus
supplement for more detail.
FEDERAL INCOME TAX CONSEQUENCES
The trustee will elect to treat all or a portion of the assets of the
trust fund as comprising multiple REMICs for federal income tax purposes. Each
of the offered certificates, other than the Class A-R Certificate, will
represent ownership of "regular interests" in a REMIC and certain offered
certificates will also represent rights under a cap contract held outside the
REMIC. The Class A-R Certificate will be designated as the sole class of
"residual interest" in the upper-tier REMIC.
There are restrictions on the types of investors that are permitted to
purchase the Class A-R Certificate.
We refer you to "Federal Income Tax Consequences" in this prospectus
supplement and in the prospectus for more information.
ERISA MATTERS
Subject to important considerations described under "ERISA Matters" in
this prospectus supplement and in the accompanying prospectus, the offered
certificates, other than the Class A-R Certificate, will be eligible for
purchase by persons investing assets of employee benefit plans or individual
retirement accounts. The Class A-R Certificate will NOT be eligible for purchase
by any such plan or account.
We refer you to "ERISA Matters" in this prospectus supplement and "ERISA
Considerations" in the accompanying prospectus for more information.
LEGAL INVESTMENT
Generally all of the certificates offered by this prospectus supplement
(except the Class A-R, Class B-2 and Class B-3 Certificates) will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984.
There are other restrictions on the ability of certain types of investors
to purchase the certificates that prospective investors should consider.
We refer you to "Legal Investment" in the prospectus for more information.
RATING OF THE CERTIFICATES
The certificates offered by this prospectus supplement will initially have
the following ratings from Moody's Investors Service, Inc., Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc. and Fitch
Ratings.
MOODY'S S&P FITCH
CLASS RATING RATING RATING
- ----- ------- ------ ------
A-1 Aaa AAA AAA
A-2 Aaa AAA AAA
A-3 Aaa AAA AAA
A-R Aaa AAA AAA
X-A1 Aaa AAA AAA
X-A2 Aaa AAA AAA
X-B Aaa AAA AAA
B-1 Aa2 AA AA
B-2 A2 A A
B-3 Baa2 BBB BBB
- - These ratings are not recommendations to buy, sell or hold these
certificates. A rating may be changed or withdrawn at any time by the
assigning rating agency.
- - The ratings do not address the possibility that, as a result of principal
prepayments,
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the yield on your certificates may be lower than anticipated.
- - These ratings do not address the possibility that, as a result of Net WAC
Shortfalls, current interest otherwise payable to the Class X-A1, Class
X-A2 or Class X-B certificates will instead be used to pay such amounts to
other classes of certificates.
- - The ratings do not address the likelihood that any Net WAC Shortfall, as
described in this prospectus supplement, will be repaid to
certificateholders.
We refer you to "Ratings" in this prospectus supplement for a more
complete discussion of the certificate ratings.
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RISK FACTORS
INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN CONNECTION WITH THE
PURCHASE OF CERTIFICATES. YOU SHOULD ALSO CONSIDER THE RISK FACTORS DESCRIBED IN
THE ACCOMPANYING PROSPECTUS. ALL STATISTICAL INFORMATION REFERRED TO IN THIS
SECTION IS BASED ON THE MORTGAGE POOLS AS CONSTITUTED ON THE CUT-OFF DATE.
PREPAYMENTS ARE UNPREDICTABLE AND AFFECT YIELD
The rate of principal distributions and yield to maturity on the
certificates will be directly related to the rate of principal payments on the
mortgage loans of the related mortgage pool, in the case of the Class A-1, Class
A-R, Class A-2, Class A-3 and Class X-A2 Certificates and the components related
to the Class X-A1 Certificates, or the combined mortgage pools, in the case of
the Class X-B Certificates and the subordinate certificates. For example, the
rate of principal payments on the mortgage loans will be affected by the
following:
- the amortization schedules of the mortgage loans;
- the rate of principal prepayments, including partial prepayments and
full prepayments resulting from:
- refinancing by borrowers;
- liquidations of defaulted loans by the related servicer; and
- repurchases of mortgage loans by the seller as a result of
defective documentation or breaches of representations and
warranties.
The yield to maturity of the certificates will also be affected by the
master servicer's exercise of its optional clean-up redemption right.
As of the cut-off date, approximately 75.82%, 77.46% and all of the
mortgage loans in pool 1, pool 2 and pool 3, respectively, may be prepaid in
whole or in part at any time without payment of a prepayment penalty. The rate
of principal payments on mortgage loans is influenced by a wide variety of
economic, geographic, social and other factors, including general economic
conditions, the level of prevailing interest rates, the availability of
alternative financing and homeowner maturity. For example, if interest rates for
similar loans fall below the interest rates on the mortgage loans, the rate of
prepayment would generally be expected to increase. Conversely, if interest
rates on similar loans rise above the interest rates on the mortgage loans, the
rate of prepayment would generally be expected to decrease. We cannot predict
the rate at which borrowers will repay their mortgage loans. Please consider the
following:
- if you are purchasing any offered certificate at a discount, your
yield may be lower than expected if principal payments on the
related mortgage loans occur at a slower rate than you expected;
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- if you are purchasing any offered certificate at a premium, your
yield may be lower than expected if principal payments on the
related mortgage loans occur at a faster rate than you expected, and
you could lose your initial investment;
- if the rate of default and the amount of losses on the related
mortgage loans are higher than you expect, then your yield may be
lower than you expect;
- the earlier a payment of principal occurs, the greater the impact on
your yield. For example, if you purchase any offered certificate at
a premium, although the average rate of principal payments is
consistent with your expectations, if the rate of principal payments
occurs initially at a rate higher than expected, which would
adversely impact your yield, a subsequent reduction in the rate of
principal payments will not offset any adverse yield effect;
- the priorities governing payments of scheduled and unscheduled
principal will have the effect of accelerating the rate of principal
payments to holders of the classes of senior certificates relative
to the classes of subordinate certificates; and
- prospective purchasers of the Class X-A1, Class X-A2 and Class X-B
Certificates should carefully consider the risk that a rapid rate of
principal payments on the related mortgage loans could result in the
failure of such purchasers to recover their initial investments.
See "Yield, Prepayment and Weighted Average Life" and "Description of the
Certificates -- Distributions of Principal" in this prospectus supplement for a
description of the factors that may influence the rate and timing of prepayments
on the mortgage loans.
MORTGAGE LOANS WITH INTEREST-ONLY PAYMENTS AND HIGH BALANCE LOANS
All of the mortgage loans provide for payment of interest at the related
mortgage rate, but no payment of principal, for a period of five or ten years
following the origination of the related mortgage loan. Following the applicable
interest-only period, the monthly payment with respect to each mortgage loan
will be increased to an amount sufficient to amortize the principal balance of
such mortgage loan over its remaining term, and to pay interest at the related
mortgage interest rate.
Such interest-only mortgage loans will, absent other considerations,
result in longer weighted average lives of the certificates when compared to
certificates backed by fully amortizing mortgage loans without interest-only
periods. If you purchase a certificate at a discount, you should consider that
the extension of its weighted average life could result in a lower yield than
would be the case if such mortgage loans provided for payment of principal and
interest on every distribution date. In addition, a borrower may view the
absence of any obligation to make a payment of principal during the first five
or ten years of the term of the mortgage loan as a disincentive to prepayment.
If a recalculated monthly payment as described above is substantially
higher than a borrower's previous interest-only monthly payment, that loan may
also be subject to an increased risk of delinquency and loss.
See "Description of the Mortgage Pools" in this prospectus supplement.
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As of the cut-off date, the principal balances of approximately 46 of the
mortgage loans in pool 1, representing approximately 16.18% of the pool 1
cut-off date balance, were in excess of $1,000,000, approximately 4 of the
mortgage loans in pool 2, representing approximately 6.83% of the pool 2 cut-off
date balance, were in excess of $1,000,000, and approximately 20 of the mortgage
loans in pool 3, representing approximately 17.95% of the pool 3 cut-off date
balance, were in excess of $1,000,000. You should consider the risk that the
loss and delinquency experience on these high balance loans may have a
disproportionate effect on the related mortgage pool.
YOUR YIELD MAY BE AFFECTED BY CHANGES IN INTEREST RATES
No prediction can be made as to future levels of one-month LIBOR (the
applicable index in determining the certificate interest rate for the Class A-1,
Class A-3, Class B-1 and Class B-2 Certificates and the mortgage interest rate
for approximately 50.00% and 50.44% of the mortgage loans in pool 1 and pool 3,
respectively), six-month LIBOR (the applicable index in determining certificate
interest rate of the Class A-2 Certificates and the mortgage interest rates for
approximately 50.00% and 49.56% of the mortgage loans in pool 1 and pool 3,
respectively, and all of the mortgage loans in pool 2) or as to the timing of
any changes therein, each of which will directly affect the yields of the
certificates.
As described in this prospectus supplement, the interest rates of the
certificates are capped as follows:
- if the weighted average net mortgage rate of the mortgage loans in
pool 1, in the case of the Class A-1 Certificates is less than both
(i) one-month LIBOR plus the related margin and (ii) 11.50%, then
the interest rate of the Class A-1 Certificates will be the weighted
average net mortgage rate of the mortgage loans in pool 1;
- if the weighted average net mortgage rate of the mortgage loans in
pool 2, in the case of the Class A-2 Certificates is less than both
(i) six-month LIBOR plus the related margin and (ii) 11.50%, then
the interest rate of the Class A-2 Certificates will be the weighted
average net mortgage rate of the mortgage loans in pool 2;
- if the weighted average net mortgage rate of the mortgage loans in
pool 3, in the case of the Class A-3 Certificates is less than both
(i) one-month LIBOR plus the related margin and (ii) 11.50%, then
the interest rate of the Class A-3 Certificates will be the weighted
average net mortgage rate of the mortgage loans in pool 3; and
- if the weighted average net mortgage rate of all the mortgage loans,
in the case of the Class B-1 and Class B-2 Certificates is less than
both (i) one-month LIBOR plus the related margin and (ii) 11.50%,
then the interest rate of those certificates will be the subordinate
net WAC of the mortgage loans.
- In no event will the interest rates of the Class A-1, Class A-2,
Class A-3, Class B-1 or Class B-2 Certificates exceed 11.50%
In addition, although the interest rate on each mortgage loan adjusts in
accordance with fluctuations in the value of either one-month LIBOR or six-month
LIBOR, the interest rate on a mortgage loan may be limited to a stated maximum
rate. As a result of such limitations,
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increases in the value of one-month LIBOR or six-month LIBOR will not
necessarily be reflected in corresponding increases in the value of the weighted
average net mortgage rates of the mortgage loans in the related mortgage pool or
in the entire trust fund.
The prepayment of mortgage loans with relatively higher net mortgage rates
may also result in a lower weighted average net mortgage rate. Consequently, if
on any distribution date the interest rate of the Class A-1, Class A-2, Class
A-3, Class B-1 or Class B-2 Certificates is limited by the application of the
related weighted average net mortgage rate cap during the related interest
accrual period, the value of those certificates may be temporarily or
permanently reduced.
Investors in the offered certificates should be aware that the mortgage
rates on approximately 50.00% and 49.56% of the mortgage loans in pool 1 and
pool 3, respectively, and on all of the mortgage loans in pool 2 are generally
adjustable semi-annually based on the related six-month LIBOR index. The value
of one-month LIBOR used in determining the interest rates for the Class A-1,
Class A-3, Class B-1 and Class B-2 Certificates will be reset monthly before the
beginning of each accrual period. Consequently, in the case of pool 1 and pool
3, the interest that becomes due on those mortgage loans during the related due
period may be less than interest that would accrue on the related certificates
at the rate of one-month LIBOR plus the related margin. In a rising interest
rate environment, such certificates may receive interest at the related weighted
average net mortgage rate for a protracted period of time. Investors in the
Class A-2 Certificates should consider that the adjustment dates on the pool 2
mortgage loans will vary throughout the pool, whereas the value of six-month
LIBOR used in determining the interest rate for the Class A-2 Certificates will
be reset semi-annually before the beginning of the related accrual period. As a
result, in a changing interest rate environment, the weighted average net
mortgage rate of the pool 2 mortgage loans may be insufficient to pay the full
amount of interest on the Class A-2 Certificates.
To the extent that the related weighted average net mortgage rate of the
mortgage loans limits the amount of interest paid on the Class A-1, Class A-2,
Class A-3, Class B-1 and Class B-2 Certificates, the difference between the
related weighted average net mortgage rate and the interest rate of those
classes of certificates, calculated without giving effect to such limitation,
will create a shortfall that will carry forward with interest thereon, as
described herein. However, any such resulting shortfall will only be paid to the
extent there are amounts on deposit in the reserve fund funded from (i) in the
case of the Class A-1 Certificates, amounts otherwise payable to the Pool 1
Component of the Class X-A1 Certificates, (ii) in the case of the Class A-2
Certificates, amounts otherwise payable to the Pool 2 Component of the Class
X-A1 Certificates, (iii) in the case of the Class A-3 Certificates, amounts
otherwise payable to the Class X-A2 Certificates and (iv) in the case of the
Class B-1 and Class B-2 Certificates, amounts otherwise payable on the Class X-B
Certificates. Accordingly, these shortfalls may remain unpaid on any optional
clean-up redemption or final distribution date.
See "Description of the Certificates -- Distributions of Interest" in this
prospectus supplement.
LIMITED CROSS-COLLATERALIZATION AMONG THE MORTGAGE POOLS; LIMITED RECOURSE
With very limited exception described in "Description of the Certificates
- -- Limited Cross-Collateralization," interest and principal on the Class A-1,
Class A-R, Class A-2, Class A-
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3 and Class X-A2 Certificates and the components of the Class X-A1 Certificates
will be allocated based on amounts collected in respect of the mortgage loans in
the related mortgage pool, and the mortgage pools will generally not be
"cross-collateralized" - interest and principal collections received from the
mortgage loans in a pools will only be available for distribution to the related
certificates or components thereof and not to the senior certificates or
components related to the other pool. For example, collections from pool 1 will
generally only be available to make distributions to the Class A-1 and Class A-R
Certificates and the Pool 1 Component of the Class X-A1 Certificates, but not to
the Class A-2, Class A-3 or Class X-A2 Certificates or to the Pool 2 Component
of the Class X-A1 Certificates; collections from pool 2 will generally only be
available to make distributions to the Class A-2 Certificates and the Pool 2
Component of the Class X-A1 Certificates, but not to the Class A-1, Class A-R,
Class A-3 or Class X-A2 Certificates or to the Pool 1 Component of the Class
X-A1 Certificates; collections from pool 3 will generally only be available to
make distributions to the Class A-3 and Class X-A2 Certificates, but not to the
Class A-1, Class A-R, Class A-2 or Class X-A1 Certificates and collections from
all of the mortgage pools will be available to make distributions to the Class
X-B Certificates and the subordinate certificates.
Because the subordinate certificates represent interests in all of the
mortgage pools, the class principal amounts of the subordinate certificates
could be reduced to zero as a result of realized losses on the mortgage loans in
any one pool. Therefore, the allocation of realized losses on the mortgage loans
in any one pool to the subordinate certificates will reduce the subordination
provided by the subordinate certificates to all of the senior certificates,
including the senior certificates related to the mortgage pool that did not
suffer any losses. This will increase the likelihood that future realized losses
may be allocated to the senior certificates related to the mortgage pool that
did not suffer those previous losses.
Neither the certificates nor the assets of the trust fund will be
guaranteed by the depositor, the seller, the master servicer, the servicers, the
trustee or any of their respective affiliates or insured by any governmental
agency. Consequently, if collections on the related mortgage loans are
insufficient to make all payments required on the certificates and the
protection against losses provided by subordination is exhausted, you may incur
a loss on your investment.
DELINQUENCIES DUE TO SERVICING TRANSFER
As described in this prospectus supplement, a servicing transfer to GMAC
Mortgage Corporation is expected to occur following the closing date with
respect to all mortgage loans serviced by GreenPoint Mortgage Funding, Inc. In
addition, mortgage loans serviced by one or more of the other initial servicers
may be transferred in the future to new servicers in accordance with the
provisions of the pooling and servicing agreement and the related servicing
agreement.
Mortgage loans subject to servicing transfers may experience increased
delays in payment until all of the borrowers are informed of the transfer and
the related servicing mortgage files and records and all other relevant data has
been obtained by the new servicer.
See "The Servicers" and "Servicing of the Mortgage Loans" in this
prospectus supplement.
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POTENTIAL INADEQUACY OF CREDIT ENHANCEMENT
The certificates are not insured by any financial guaranty insurance
policy. The subordination and loss allocation features described in this
prospectus supplement are intended to enhance the likelihood that holders of
more senior classes of certificates will receive regular payments of interest
and principal, but are limited in nature and may be insufficient to cover all
losses on the mortgage loans.
The amount of any loss experienced on a mortgage loan will be applied to
reduce the principal amount of the class of subordinate certificates with the
highest numerical class designation, until the principal balance of that class
has been reduced to zero. If subordination is insufficient to absorb losses,
then holders of more senior classes will incur losses and may never receive all
of their principal payments. You should consider the following:
- if you buy a Class B-3 Certificate and losses on the mortgage loans
exceed the total principal amount of the Class B-4, Class B-5 and
Class B-6 Certificates, the principal amount of your certificate
will be reduced proportionately with the principal amount of the
other Class B-3 Certificates by the amount of that excess;
- if you buy a Class B-2 Certificate and losses on the mortgage loans
exceed the total principal amount of the Class B-3, Class B- 4,
Class B-5 and Class B-6 Certificates, the principal amount of your
certificate will be reduced proportionately with the principal
amount of the other Class B-2 Certificates by the amount of that
excess;
- if you buy a Class B-1 Certificate and losses on the mortgage loans
exceed the total principal amount of the Class B-2, Class B-3, Class
B-4, Class B-5 and Class B-6 Certificates, the principal amount of
your certificate will be reduced proportionately with the principal
amount of the other Class B-1 Certificates by the amount of that
excess; and
- after the total class principal amount of the subordinate
certificates has been reduced to zero, losses on the mortgage loans
realized by any mortgage pool will reduce the class principal
amounts of the related senior certificates.
See "Description of the Certificates -- Priority of Distributions" and "
- -- Allocation of Realized Losses" in this prospectus supplement.
CASH FLOW CONSIDERATIONS AND RISKS
The related mortgage loans, the related mortgaged property and additional
collateral and other assets of the trust are the sole source of payments on the
certificates. Even if the mortgaged properties provide adequate security for the
mortgage loans, you could encounter substantial delays in connection with the
liquidation of mortgage loans that are delinquent. This could result in
shortfalls in payments on the certificates if the credit enhancement provided by
subordination is insufficient. Further, liquidation expenses, such as legal
fees, real estate taxes and maintenance and preservation expenses, will reduce
the security for the related mortgage loans and could thereby reduce the
proceeds payable to certificateholders. If any of the mortgaged properties and
additional collateral fail to provide adequate security for the related
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mortgage loans, certificateholders could experience a loss if the credit
enhancement created by the subordination has been exhausted.
CONCENTRATION OF MORTGAGE LOANS COULD ADVERSELY AFFECT YOUR INVESTMENT
Approximately 28.93%, 27.68% and 18.41% of the mortgage loans included in
pool 1, pool 2 and pool 3, respectively, are secured by mortgaged properties
located in California. In addition, approximately 11.84%, 10.63% and 10.18% of
the mortgage loans included in pool 1, pool 2 and pool 3, respectively, are
secured by mortgaged properties located in Florida. Approximately 2.93%, 3.48%
and 16.68% of the mortgage loans included in pool 1, pool 2 and pool 3,
respectively, are secured by mortgaged properties located in New York.
Consequently, losses and prepayments on the mortgage loans in a particular pool
and the resultant payments on the related certificates may be affected
significantly by changes in the housing markets and the regional economies in
areas in these states and by the occurrence of natural disasters, such as
earthquakes, hurricanes, tornadoes, tidal waves, mud slides, fires and floods in
areas in these states.
Natural disasters affect regions of the United States from time to time
and may result in increased losses on mortgage loans in those regions, or in
insurance payments that will constitute prepayments of those mortgage loans.
Properties located in certain parts of the southern and eastern United States
may have been damaged by the hurricanes and tropical storms that recently
affected those areas.
See "Description of the Mortgage Pools -- Tabular Characteristics of the
Mortgage Loans" in this prospectus supplement.
MILITARY ACTION AND TERRORIST ATTACKS
The effects that military action by U.S. forces in Iraq or other regions
and terrorist attacks in the United States or other incidents and related
military action may have on the performance of the mortgage loans or on the
values of mortgaged properties cannot be determined at this time. Investors
should consider the possible effects on delinquency, default and prepayment
experience of the mortgage loans. Federal agencies and non-government lenders
have and may continue to defer, reduce or forgive payments and delay foreclosure
proceedings in respect of loans to borrowers affected in some way by recent and
possible future events. In addition, activation of a substantial number of U.S.
military reservists or members of the National Guard may significantly increase
the proportion of mortgage loans whose mortgage rates are reduced by application
of the Servicemembers Civil Relief Act or similar state laws, and neither the
master servicer nor the servicers will be required to advance for any interest
shortfall caused by any such reduction. Shortfalls in interest may result from
the application of the Servicemembers Civil Relief Act or similar state laws.
Interest payable to senior and subordinate certificateholders will be reduced on
a pro rata basis by any reductions in the amount of interest collectible as a
result of application of the Servicemembers Civil Relief Act or similar state
laws.
ABILITY TO RESELL SECURITIES MAY BE LIMITED
There is currently no market for any of the certificates and the
underwriters are not required to assist investors in resales of the offered
certificates, although they may do so. We cannot assure you that a secondary
market will develop, or if it does develop, that it will continue to exist for
the term of the certificates. Consequently, you may not be able to sell your
S-18
certificates readily or at prices that will enable you to realize your desired
yield. The market values of the certificates are likely to fluctuate; these
fluctuations may be significant and could result in significant losses to you.
The secondary market for mortgage pass-through certificates has
experienced periods of illiquidity and can be expected to do so in the future.
Illiquidity can have a severe adverse effect on the prices of certificates that
are especially sensitive to prepayment, credit or interest rate risk, or that
have been structured to meet the investment requirements of limited categories
of investors.
CONSEQUENCES OF OWNING BOOK-ENTRY SECURITIES
LIMIT ON LIQUIDITY OF SECURITIES. Issuance of the certificates in
book-entry form may reduce their liquidity in the secondary trading market
because investors may be unwilling to purchase certificates for which they
cannot obtain physical certificates.
LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Since transactions in the
book-entry certificates can be effected only though the DTC, participating
organizations, indirect participants and certain banks, your ability to transfer
or pledge a book-entry certificate to persons or entities that do not
participate in the DTC system or otherwise to take actions in respect of such
certificates, may be limited due to lack of physical certificates.
DELAYS IN PAYMENTS. You may experience some delay in the receipt of
payments on book-entry certificates because the payment will be forwarded by the
Trustee to DTC for DTC to credit the accounts of its participants which will
thereafter credit them to your account either directly or indirectly through
indirect participants, as applicable.
DELINQUENCIES MAY ADVERSELY AFFECT INVESTMENT
The mortgage loans were either originated or acquired in accordance,
generally, with the underwriting guidelines described in this prospectus
supplement. We cannot assure you that the values of the mortgaged properties
have remained or will remain at levels in effect on the date of origination of
the related mortgage loans.
YOU COULD BE ADVERSELY AFFECTED BY VIOLATIONS OF CONSUMER PROTECTION LAWS
Applicable state laws generally regulate interest rates and other charges
and require certain disclosures. In addition, state and federal consumer
protection laws, unfair and deceptive practices acts and debt collection
practices acts may apply to the origination or collection of the mortgage loans.
Depending on the provisions of the applicable law, violations of these laws may
limit the ability of the servicers to collect all or part of the principal of or
interest on the mortgage loans, may entitle the borrower to a refund of related
amounts previously paid and, in addition, could subject the master servicer or
the related servicer to damages and administrative enforcement.
The Federal Home Ownership and Equity Protection Act of 1994, commonly
known as HOEPA, prohibits inclusion of some provisions in mortgage loans that
have mortgage rates or origination costs in excess of prescribed levels, and
requires that borrowers be given certain disclosures prior to the consummation
of such mortgage loans. Some states, as in the case of Georgia's Fair Lending
Act of 2002, have enacted, or may enact, similar laws or regulations,
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which in some case impose restrictions and requirements greater than those in
HOEPA. Failure to comply with these laws, to the extent applicable to any of the
mortgage loans, could subject the trust as an assignee of the mortgage loans, to
monetary penalties and could result in the borrowers rescinding such mortgage
loans against the trust. Lawsuits have been brought in various states making
claims against assignees of high cost loans for violations of state law. Named
defendants in these cases have included numerous participants within the
secondary mortgage market, including some securitization trusts. The seller
believes that the mortgage loans do not include any mortgage loan in violation
of HOEPA, the Georgia Fair Lending Act of 2002 or similar state laws. However,
if the trust should include loans subject to HOEPA or in material violation of
similar state laws, it will have repurchase remedies against the original
transferors.
See "Certain Legal Aspects of the Loans" in the accompanying prospectus.
BANKRUPTCY AND INSOLVENCY RISKS
It is believed that the transfer of the mortgage loans from the seller to
the depositor and from the depositor to the trust will each be treated as a sale
rather than a secured financing for purposes of state law. Counsel for the
seller and the depositor will render an opinion on the closing date that in the
event of the bankruptcy of either the seller or the depositor, the mortgage
loans and other assets of the trust fund would not be considered part of the
seller's or depositor's bankruptcy estates and, thus, would not be available to
their creditors. On the other hand, a bankruptcy trustee or one of the creditors
of the seller or the depositor might challenge this conclusion and argue that
the transfer of the mortgage loans should be characterized as a pledge of assets
in a secured borrowing rather than as a sale. Such an attempt, even if
unsuccessful, might result in delays in distributions on the certificates.
DESCRIPTION OF THE MORTGAGE POOLS
GENERAL
The following is a summary description of the Mortgage Loans in the
Mortgage Pools as of November 1, 2004 (the "Cut-off Date"). The information
presented herein does not take into account any Mortgage Loans that have or may
prepay in full or have been or may be removed because of incomplete
documentation or otherwise for the period from the Cut-off Date to the Closing
Date, or other Mortgage Loans that may be substituted therefor. Prior to the
issuance of the Certificates, Mortgage Loans will be removed from one or more
Mortgage Pools if the Depositor deems such removal necessary or appropriate. A
limited number of other mortgage loans may be included in the Mortgage Pools
prior to the issuance of the Certificates. As a result, the information
regarding the Mortgage Loans may vary from comparable information based upon the
actual composition of the Mortgage Pools as of the Closing Date, although such
variance will not be material.
Whenever reference is made herein to a percentage of some or all of the
Mortgage Loans or some or all of a Mortgage Pool, such percentage is determined
on the basis of the Stated Principal Balance of the Mortgage Loans in the
aggregate or of a particular Mortgage Pool as of the Cut-off Date.
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THE MORTGAGE LOANS
At the Cut-off Date, the assets of the Trust Fund consisted of three pools
("Pool 1," "Pool 2" and "Pool 3," respectively, and each, a "Mortgage Pool")
having, in the aggregate, approximately 1,961 conventional, adjustable rate
mortgage loans (the "Mortgage Loans") secured by first liens on one-to-four
family residential properties (each, a "Mortgaged Property") with original terms
to maturity of either 25 or 30 years, having an aggregate Stated Principal
Balance as of the Cut-off Date of approximately $715,767,526 (the "Aggregate
Cut-off Date Balance"). As described herein at "Description of the Certificates
- -- General," the Mortgage Loans have been segregated into Pool 1, Pool 2 and
Pool 3 for the purpose of allocating distributions among the Senior
Certificates. Each Mortgage Pool has the characteristics described below.
Pool 1 consists of approximately 1,182 Mortgage Loans (the "Pool 1
Mortgage Loans") having a Cut-off Date balance of approximately $449,725,717
(approximately 62.83% of the Aggregate Cut-off Date Balance). Approximately
50.00% and 50.00% of the Pool 1 Mortgage Loans are One-Month LIBOR and Six-Month
LIBOR indexed Mortgage Loans, respectively (see " -- The Indices" below), and
all such loans have original terms to maturity of either 25 or 30 years. All of
the Pool 1 Mortgage Loans provide for payment of interest at the related
Mortgage Rate, but no payment of principal, for a period of five years (in the
case of approximately 5.28% of the Pool 1 Mortgage Loans) or ten years (in the
case of approximately 94.72% of the Pool 1 Mortgage Loans), in each case
following the origination of the related Mortgage Loan. Following such five- or
ten-year interest-only period, the Scheduled Payment with respect to each such
Pool 1 Mortgage Loan will be increased to an amount sufficient to amortize the
principal balance of such Mortgage Loan over its remaining term, and to pay
interest at the related Mortgage Rate.
As of the Cut-off Date, with respect to those Pool 1 Mortgage Loans which
adjust their Mortgage Rates in accordance with One-Month LIBOR (the "One-Month
LIBOR Loans"), the weighted average Mortgage Rate is expected to be
approximately 3.452% per annum, the weighted average Servicing Fee Rate is
expected to be approximately 0.379% per annum, the weighted average margin is
expected to be approximately 1.612% per annum, the weighted average remaining
term to maturity is expected to be approximately 332 months, and the weighted
average interest only remaining term is expected to be approximately 118 months.
As of the Cut-off Date, with respect to those Pool 1 Mortgage Loans which
adjust their Mortgage Rates in accordance with Six-Month LIBOR (the "Six-Month
LIBOR Loans"), the weighted average Mortgage Rate is expected to be
approximately 3.696% per annum, the weighted average Servicing Fee Rate is
expected to be approximately 0.376% per annum, the weighted average margin is
expected to be approximately 1.730% per annum, the weighted average remaining
term to maturity is expected to be approximately 337 months, and the weighted
average interest only remaining term is expected to be approximately 114 months.
Pool 2 consists of approximately 241 Mortgage Loans (the "Pool 2 Mortgage
Loans"), having a Cut-off Date balance of approximately $89,156,717
(approximately 12.46% of the Aggregate Cut-off Date Balance). All of the Pool 2
Mortgage Loans are Six-Month LIBOR indexed Mortgage Loans (see " -- The Indices"
below), and all such loans have original terms to maturity of either 25 or 30
years. All of the Pool 2 Mortgage Loans provide for payment of interest at the
related Mortgage Rate, but no payment of principal, for a period of five years
(in
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the case of approximately 10.23% of the Pool 2 Mortgage Loans) or ten years (in
the case of approximately 89.77% of the Pool 2 Mortgage Loans), in each case
following the origination of the related Mortgage Loan. Following such five-year
or ten-year interest-only period, the Scheduled Payment with respect to each
such Pool 2 Mortgage Loan will be increased to an amount sufficient to amortize
the principal balance of such Mortgage Loan over its remaining term and to pay
interest at the related Mortgage Rate.
As of the Cut-off Date, with respect to the Pool 2 Mortgage Loans, the
weighted average Mortgage Rate is expected to be approximately 3.739% per annum,
the weighted average Servicing Fee Rate is expected to be approximately 0.375%
per annum, the weighted average margin is expected to be approximately 1.753%
per annum, the weighted average remaining term to maturity is expected to be
approximately 338 months, and the weighted average interest only remaining term
is expected to be approximately 113 months.
Pool 3 consists of approximately 538 Mortgage Loans (the "Pool 3 Mortgage
Loans") having a Cut-off Date balance of approximately $176,885,091
(approximately 24.71% of the Aggregate Cut-off Date Balance). Approximately
50.44% and 49.56% of the Pool 3 Mortgage Loans are One-Month LIBOR and Six-Month
LIBOR indexed Mortgage Loans, respectively (see " -- The Indices" below), and
all such loans have original terms to maturity of 25 years. All of the Pool 3
Mortgage Loans provide for payment of interest at the related Mortgage Rate, but
no payment of principal, for a period of ten years following the origination of
the related Mortgage Loan. Following such interest-only period, the Scheduled
Payment with respect to each such Pool 3 Mortgage Loan will be increased to an
amount sufficient to amortize the principal balance of such Mortgage Loan over
its remaining term, and to pay interest at the related Mortgage Rate.
As of the Cut-off Date, with respect to those Pool 3 Mortgage Loans which
adjust their Mortgage Rates in accordance with One-Month LIBOR, the weighted
average Mortgage Rate is expected to be approximately 3.468% per annum, the
weighted average Servicing Fee Rate is expected to be approximately 0.250% per
annum, the weighted average margin is expected to be approximately 1.716% per
annum, the weighted average remaining term to maturity is expected to be
approximately 211 months, and the weighted average interest only remaining term
is expected to be approximately 31 months.
As of the Cut-off Date, with respect to those Pool 3 Mortgage Loans which
adjust their Mortgage Rates in accordance with Six-Month LIBOR, the weighted
average Mortgage Rate is expected to be approximately 3.439% per annum, the
weighted average Servicing Fee Rate is expected to be approximately 0.250% per
annum, the weighted average margin is expected to be approximately 1.890% per
annum, the weighted average remaining term to maturity is expected to be
approximately 211 months, and the weighted average interest only remaining term
is expected to be approximately 31 months.
All of the Pool 3 Mortgage Loans were acquired by the Seller in connection
with the exercise of a clean-up call with respect to the Sequoia Mortgage Trust
2, which was established by the Depositor in October 1997. These Mortgage Loans
have shorter remaining terms to maturity than the Pool 1 Mortgage Loans or the
Pool 2 Mortgage Loans and may, therefore result in shorter weighted average
lives on the Group 3 Certificates.
S-22
Approximately 41.55%, 31.24% and 11.11% of the Pool 1 Mortgage Loans were
originated by GreenPoint Mortgage Funding, Inc., Morgan Stanley Dean Witter
Credit Corporation and RBC Mortgage Company, respectively. Approximately 46.39%,
17.87%, 17.49% and 11.86% of the Pool 2 Mortgage Loans were originated by
GreenPoint Mortgage Funding, Inc., Bank of America, N.A., Morgan Stanley Dean
Witter Credit Corporation and RBC Mortgage Company, respectively. All of the
Pool 3 Mortgage Loans were originated by Merrill Lynch Credit Corporation.
Certain general information with respect to the Mortgage Loans is set
forth below. Prior to the Closing Date, Mortgage Loans may be removed from the
Trust Fund and other mortgage loans may be substituted therefor. The Depositor
believes that the information set forth herein with respect to the Mortgage
Loans as presently constituted is representative of the characteristics of the
Mortgage Loans as they will be constituted at the Closing Date, although the
numerical data and certain other characteristics of the Mortgage Loans described
herein may vary within a range of plus or minus 5%.
None of the Mortgage Loans will be guaranteed by any governmental agency.
All of the Mortgage Loans will have been assigned to the Trust Fund by the
Depositor, which, in turn, will have acquired them from the Seller pursuant to
an agreement (the "Mortgage Loan Purchase Agreement") between the Depositor and
the Seller. The Mortgage Loans have been acquired by the Seller, directly or
indirectly, from the Originators in the ordinary course of its business. All of
the Mortgage Loans were underwritten by the Originators substantially in
accordance with the underwriting criteria specified herein. See " --
Underwriting Standards" below. The Servicers will service the Mortgage Loans
pursuant to existing Servicing Agreements with the Seller, which agreements have
been assigned to the Trust Fund.
The Mortgage Loans generally provide for payments due on the first day of
each month (the "Due Date"). Due to the provisions for monthly advances by the
applicable Servicer, scheduled payments made by the borrowers either earlier or
later than the scheduled Due Dates thereof will not affect the amortization
schedule or the relative application of such payments to principal and interest.
Approximately 18.00% of the Mortgage Loans (by Aggregate Cut-off Date Balance)
include prepayment penalties for early voluntary prepayments in full or in part.
The Mortgage Loans were originated from May 1996 through October 2004. No
more than approximately 0.89% of the Mortgage Loans are secured by Mortgaged
Properties located in any one zip code area. The latest stated maturity date of
any Mortgage Loan is November 2034.
As of the Cut-off Date, 15 of the Pool 3 Mortgage Loans, representing
approximately 2.09% of the Pool 3 Mortgage Loans were between 30 and 59 days
delinquent. As of the Cut-off Date, none of the Pool 1 Mortgage Loans or Pool 2
Mortgage Loans was more than 29 days delinquent, and none of the Pool 3 Mortgage
Loans was more than 59 days delinquent.
As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans is expected to be approximately 3.565% per annum, the weighted average
Servicing Fee Rate is expected to be approximately 0.346% per annum, the
weighted average margin is expected to be approximately 1.714% per annum, the
weighted average remaining term to maturity is expected to be approximately 304
months, and the weighted average interest only remaining term is expected to be
approximately 94 months.
S-23
No Mortgage Loan had a Loan-to-Value Ratio at origination of more than
100.00%. Approximately 1.75% of the Mortgage Loans had an Effective
Loan-to-Value Ratio at origination of greater than 80%. Substantially all of the
Mortgage Loans with an Effective Loan-to-Value Ratio at origination of greater
than 80% are covered by a primary mortgage insurance policy. All of the Mortgage
Loans originated by MSDWCC with Loan-to-Value Ratios greater than 80% at
origination were originated under MSDWCC's FlexSource(TM) Loans program, and all
of the Mortgage Loans originated by Merrill Lynch Credit Corporation ("MLCC")
with Loan-to-Value Ratios greater than 80% at origination were originated by
MLCC under its Mortgage 100(SM) or Parent Power(R) programs. In each case, in
addition to being secured by real property, such Mortgage Loans may be secured
by a security interest in a limited amount of additional collateral owned by the
borrower or are supported by a third-party guarantee as described at " -- The
Additional Collateral Loans" below.
The "Loan-to-Value Ratio" of a Mortgage Loan at any given time is a
fraction, expressed as a percentage, the numerator of which is the principal
balance of the related Mortgage Loan at the date of determination and the
denominator of which is (a) in the case of a purchase, the lesser of the selling
price of the Mortgaged Property and its appraised value determined in an
appraisal obtained by the originator at origination of such Mortgage Loan, or
(b) in the case of a refinance, the appraised value of the Mortgaged Property at
the time of such refinance. No assurance can be given that the value of any
Mortgaged Property has remained or will remain at the level that existed on the
appraisal or sales date. If residential real estate values generally or in a
particular geographic area decline, the Loan-to-Value Ratios might not be a
reliable indicator of the rates of delinquencies, foreclosures and losses that
could occur with respect to such Mortgage Loans. The "Effective Loan-to-Value
Ratio" means a fraction, expressed as a percentage, the numerator of which is
the original Stated Principal Balance of the related Mortgage Loan, less the
amount secured by the related Additional Collateral required at the time of
origination, if any, and the denominator of which is the appraised value of the
related Mortgaged Property at such time, or in the case of a Mortgage Loan
financing the acquisition of the Mortgaged Property, the sales price of the
Mortgaged Property if such sales price is less than such appraised value.
As set forth in the "Credit Scores" table below, credit scores have been
supplied with respect to the mortgagors. Credit scores are obtained by many
mortgage lenders in connection with mortgage loan applications to help assess a
borrower's credit-worthiness. Credit scores are generated by models developed by
a third party which analyzed data on consumers in order to establish patterns
which are believed to be indicative of the borrower's probability of default.
The credit score is based on a borrower's historical credit data, including,
among other things, payment history, delinquencies on accounts, levels of
outstanding indebtedness, length of credit history, types of credit, and
bankruptcy experience. Credit scores range from approximately 250 to
approximately 900, with higher scores indicating an individual with a more
favorable credit history compared to an individual with a lower score. However,
a credit score purports only to be a measurement of the relative degree of risk
a borrower represents to a lender, i.e., that a borrower with a higher score is
statistically expected to be less likely to default in payment than a borrower
with a lower score. In addition, it should be noted that credit scores were
developed to indicate a level of default probability over a two-year period
which does not correspond to the life of a mortgage loan. Furthermore, credit
scores were not developed specifically for use in connection with mortgage
loans, but for consumer loans in general. Therefore, a credit score does not
take into consideration the effect of mortgage loan characteristics (which may
differ from consumer loan characteristics) on the probability of repayment by
the borrower. There can
S-24
be no assurance that a credit score will be an accurate predictor of the likely
risk or quality of the related mortgage loan.
THE ADDITIONAL COLLATERAL LOANS
Those Mortgage Loans with Loan-to-Value Ratios at origination in excess of
80% originated under the MSDWCC FlexSource(TM) Loans program or under MLCC's
Mortgage 100(SM) or Parent Power(R) programs are, in general, in addition to
being secured by real property, also either (i) secured by a security interest
in additional collateral (generally securities) owned by the borrower (referred
to as Mortgage 100(SM) Loans in the MLCC program) or (ii) supported by a third
party guarantee (usually a parent of the borrower), which in turn was secured by
a security interest in collateral (normally securities) or by a lien on
residential real estate of the guarantor (and/or supported by the right to draw
on a home equity line of credit extended by MLCC to the guarantor), such loans
in clause (ii) being referred to as "Parent Power(R) Loans" in the case of the
MLCC program and such loans in clauses (i) and (ii) being referred to as
"FlexSource(TM) Loans" in the case of the MSDWCC program. Such Mortgage Loans
secured by collateral described in clauses (i) and (ii) are also collectively
referred to as "Additional Collateral Loans" and the collateral referred to in
clauses (i) and (ii) is referred to herein as "Additional Collateral." The
amount of Additional Collateral generally does not exceed 30% of the loan
amount, although the amount of Additional Collateral may exceed 30% of the loan
amount if the original principal amount of the loan exceeds $1,000,000. In
limited cases, either MSDWCC or MLCC may require Additional Collateral in excess
of 30% of the loan amount as part of the underwriting decision. The requirement
to maintain Additional Collateral generally terminates when the principal
balance of an Additional Collateral Loan is reduced to a predetermined amount
set forth in the related pledge agreement or guaranty agreement, as applicable,
or when the Loan-to-Value Ratio is reduced to the originator's applicable
Loan-to-Value Ratio limit for that loan by virtue of an increase in the
appraised value of the related Mortgaged Property as determined by the
applicable originator. The pledge agreement and the guaranty agreement, as
applicable, and the security interest in the Additional Collateral, if any,
provided in the case of an Additional Collateral Loan will be assigned to the
Trustee as part of the Trust Fund. To the extent Mortgage Loans include any
Additional Collateral Loans that are supported by a guarantee that is secured by
a lien on residential real estate, the lien will not be transferred to the
Depositor or the Trustee; however, MSDWCC or MLCC, as applicable, will be
obligated to make all reasonable efforts to realize on any such lien if the
related Mortgage Loan defaults and is accelerated or is liquidated upon default
as permitted by the related pledge agreement and applicable state law.
On or prior to the Closing Date, the Depositor will have assigned to the
Trust Fund its rights under limited purpose surety bonds issued to MLCC and
MSDWCC, respectively, by AMBAC Assurance Corporation (the "Limited Purpose
Surety Bonds"), each of which is intended to guarantee the receipt by the Trust
Fund of certain shortfalls in the net proceeds realized from the liquidation of
any required Additional Collateral (such amount not to exceed 30% of the
original principal amount of the related Additional Collateral Loan) to the
extent that any such shortfall results in a loss of principal as an Additional
Collateral Loan that becomes a Liquidated Mortgage Loan, as more particularly
described in, and as limited by, the terms and provisions of the applicable
Limited Purpose Surety Bond. The Limited Purpose Surety Bonds will not cover any
payments on the Certificates that are recoverable or sought to be recovered as a
voidable preference under applicable law.
S-25
No assurance can be given as to the amount of proceeds, if any, that might
be realized from Additional Collateral. Proceeds from the liquidation of any
Additional Collateral will be included in net proceeds only when permitted by
applicable state law and by the terms of the related pledge or guaranty
agreement, as applicable.
TABULAR CHARACTERISTICS OF THE MORTGAGE LOANS
Tabular Characteristics of the Mortgage Loans (Aggregate Pool)
The Mortgage Loans are expected to have the following approximate
aggregate characteristics as of the Cut-off Date.
Number of Mortgage Loans 1,961
Total Stated Principal Balance $715,767,526
Mortgage Rates:
Weighted Average 3.565%
Range 2.250% to 5.125%
Weighted Average Margin 1.714%
Weighted Average Remaining Term to Maturity (in months) 304
The Stated Principal Balances of the Mortgage Loans range from
approximately $3,213 to approximately $5,800,000. The Mortgage Loans have an
average Stated Principal Balance of approximately $365,001.
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans is expected to be approximately 71.61%, and no Mortgage Loan had a
Loan-to-Value Ratio at origination exceeding 100.00%.
No more than approximately 0.89% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following information sets forth in tabular format certain
information, as of the Cut-off Date, as to the Mortgage Loans. Other than with
respect to rates of interest, percentages (approximate) are stated by Stated
Principal Balance of the Mortgage Loans as of the Cut-off Date and have been
rounded and may not total 100%.
S-26
CUT-OFF DATE STATED PRINCIPAL BALANCE (1) (AGGREGATE POOL)
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
CUT-OFF DATE MORTGAGE BALANCE BALANCE
STATED PRINCIPAL BALANCES ($) LOANS OUTSTANDING OUTSTANDING
- ---------------------------------------- ---------- ------------------ ----------------
3,212.58 -- 100,000.00...... 213 $ 14,117,431.17 1.97%
100,000.01 -- 200,000.00...... 472 71,306,352.26 9.96
200,000.01 -- 300,000.00...... 371 91,792,699.15 12.82
300,000.01 -- 400,000.00...... 294 102,640,707.91 14.34
400,000.01 -- 500,000.00...... 213 95,749,441.15 13.38
500,000.01 -- 600,000.00...... 125 69,458,526.05 9.70
600,000.01 -- 700,000.00...... 72 47,106,188.01 6.58
700,000.01 -- 800,000.00...... 57 42,915,266.22 6.00
800,000.01 -- 900,000.00...... 25 21,688,023.55 3.03
900,000.01 -- 1,000,000.00...... 49 48,368,153.75 6.76
1,000,000.01 -- 1,500,000.00...... 46 57,410,233.60 8.02
1,500,000.01 -- 2,000,000.00...... 15 26,644,924.29 3.72
2,000,000.01 -- 2,500,000.00...... 3 7,063,500.00 0.99
2,500,000.01 -- 3,000,000.00...... 4 10,557,500.02 1.47
3,000,000.01 -- 5,800,000.00...... 2 8,948,578.56 1.25
----- ----------------- ------
TOTAL.................................. 1,961 $ 715,767,525.69 100.00%
===== ================= ======
- ----------
(1) As of the Cut-off Date, the average Stated Principal Balance of the
Mortgage Loans is expected to be approximately $365,001.
S-27
CURRENT MORTGAGE RATES(1) (AGGREGATE POOL)
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
CURRENT MORTGAGE RATES (%) LOANS OUTSTANDING OUTSTANDING
- ---------------------------- --------- --------------- ------------
2.250.............. 1 $ 1,100,000.00 0.15%
2.251 -- 2.500.............. 5 2,193,415.96 0.31
2.501 -- 2.750.............. 15 6,859,560.21 0.96
2.751 -- 3.000.............. 115 50,597,725.06 7.07
3.001 -- 3.250.............. 335 141,367,681.90 19.75
3.251 -- 3.500.............. 406 153,063,134.61 21.38
3.501 -- 3.750.............. 465 168,192,117.20 23.50
3.751 -- 4.000.............. 399 136,936,582.51 19.13
4.001 -- 4.250.............. 145 36,397,182.32 5.09
4.251 -- 4.500.............. 53 13,282,888.39 1.86
4.501 -- 4.750.............. 19 4,567,737.53 0.64
4.751 -- 5.000.............. 2 674,500.00 0.09
5.001 -- 5.125.............. 1 535,000.00 0.07
----- --------------- ------
TOTAL .................... 1,961 $715,767,525.69 100.00%
===== =============== ======
- ----------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans is expected to be approximately 3.565% per annum.
REMAINING TERM(1) (AGGREGATE POOL)
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
REMAINING TERM (MONTHS) LOANS OUTSTANDING OUTSTANDING
- ---------------------------- --------- --------------- ------------
202 - 204 .................. 7 $ 2,087,372.24 0.29%
205 - 210 .................. 215 67,563,221.97 9.44
211 - 216 .................. 316 107,234,497.07 14.98
283 - 288 .................. 1 324,016.15 0.05
289 - 294 .................. 2 277,039.78 0.04
295 - 300 .................. 500 215,433,517.29 30.10
343 - 348 .................. 3 1,169,693.17 0.16
349 - 354 .................. 8 1,869,152.40 0.26
355 - 360 .................. 909 319,809,015.62 44.68
----- --------------- ------
TOTAL .................. 1,961 $715,767,525.69 100.00%
===== =============== ======
- ----------
(1) As of the Cut-off Date, the weighted average Remaining Term of the
Mortgage Loans as of the Cut-off Date is expected to be approximately 304
months.
S-28
ORIGINAL LOAN-TO-VALUE RATIOS (1) (AGGREGATE POOL)
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
ORIGINAL LOAN-TO-VALUE MORTGAGE BALANCE BALANCE
RATIOS (%) LOANS OUTSTANDING OUTSTANDING
- ------------------------------ --------- ----------------- ------------
2.00 - 10.00................ 3 $ 373,865.99 0.05%
10.01 - 20.00................ 9 1,683,194.65 0.24
20.01 - 30.00................ 20 4,834,597.62 0.68
30.01 - 40.00................ 66 22,312,014.45 3.12
40.01 - 50.00................ 131 45,776,704.90 6.40
50.01 - 60.00................ 173 75,788,029.34 10.59
60.01 - 65.00................ 118 53,914,234.90 7.53
65.01 - 70.00................ 232 92,469,735.71 12.92
70.01 - 75.00................ 253 100,621,842.98 14.06
75.01 - 80.00................ 687 225,698,244.27 31.53
80.01 - 85.00................ 18 6,735,155.63 0.94
85.01 - 90.00................ 37 11,882,249.11 1.66
90.01 - 95.00................ 28 8,057,579.27 1.13
95.01 - 100.00................ 186 65,620,076.87 9.17
----- ----------------- ------
TOTAL ................... 1,961 $ 715,767,525.69 100.00%
===== ================= ======
- ----------
(1) As of the Cut-off Date, the weighted average original Loan-to-Value Ratio
of the Mortgage Loans is expected to be approximately 71.61%. See
"Description of the Mortgage Pools -- The Mortgage Loans" herein.
EFFECTIVE LOAN-TO-VALUE RATIOS(1) (AGGREGATE POOL)
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
EFFECTIVE LOAN-TO-VALUE MORTGAGE BALANCE BALANCE
RATIOS (%) LOANS OUTSTANDING OUTSTANDING
- ----------------------------- --------- ----------------- -----------
2.00 - 10.00................ 3 $ 373,865.99 0.05%
10.01 - 20.00................ 9 1,683,194.65 0.24
20.01 - 30.00................ 22 5,167,313.00 0.72
30.01 - 40.00................ 67 22,987,014.45 3.21
40.01 - 50.00................ 152 49,951,289.95 6.98
50.01 - 60.00................ 185 81,150,316.90 11.34
60.01 - 65.00................ 125 55,450,295.26 7.75
65.01 - 70.00................ 402 156,323,171.97 21.84
70.01 - 75.00................ 264 106,137,974.54 14.83
75.01 - 80.00................ 679 224,030,039.26 31.30
80.01 - 85.00................ 14 3,758,746.33 0.53
85.01 - 90.00................ 27 6,524,022.52 0.91
90.01 - 95.00................ 12 2,230,280.87 0.31
----- ----------------- ------
TOTAL..................... 1,961 $ 715,767,525.69 100.00%
===== ================= ======
- ----------
(1) As of the Cut-off Date, the weighted average Effective Loan-to-Value Ratio
of the Mortgage Loans is expected to be approximately 68.20%. See
"Description of the Mortgage Pools -- The Mortgage Loans" herein.
S-29
CREDIT SCORE(1) (AGGREGATE POOL)
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
CREDIT SCORE LOANS OUTSTANDING OUTSTANDING
- -------------------------- --------- --------------- -----------
Not Available ............ 2 $ 660,986.64 0.09%
473 - 479 ................ 1 98,200.05 0.01
480 - 499 ................ 2 158,304.75 0.02
500 - 519 ................ 2 429,463.02 0.06
520 - 539 ................ 4 572,073.83 0.08
540 - 559 ................ 4 819,572.19 0.11
560 - 579 ................ 7 1,124,072.89 0.16
580 - 599 ................ 2 232,550.78 0.03
600 - 619 ................ 16 5,889,194.84 0.82
620 - 639 ................ 18 8,539,808.43 1.19
640 - 659 ................ 53 19,195,075.24 2.68
660 - 679 ................ 122 48,302,583.24 6.75
680 - 699 ................ 225 88,748,944.58 12.40
700 - 719 ................ 250 92,702,268.33 12.95
720 - 739 ................ 240 84,784,909.20 11.85
740 - 759 ................ 271 104,429,466.42 14.59
760 - 779 ................ 353 132,354,796.32 18.49
780 - 799 ................ 279 93,623,286.32 13.08
800 - 819 ................ 108 30,176,368.60 4.22
820 - 838 ................ 2 2,925,600.02 0.41
----- --------------- ------
TOTAL ................. 1,961 $715,767,525.69 100.00%
===== =============== ======
- ----------
(1) The weighted average Credit Score (determined at origination in the case
of the Pool 1 Mortgage Loans and the Pool 2 Mortgage Loans and determined
at the Cut-off Date, in the case of the Pool 3 Mortgage Loans) is expected
to be approximately 735. See "Description of the Mortgage Pools -- The
Mortgage Loans" herein.
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES (AGGREGATE POOL)
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
STATE LOANS OUTSTANDING OUTSTANDING
- ---------------------- --------- --------------- ------------
California............ 360 $187,339,117.80 26.17%
Florida............... 230 80,753,719.62 11.28
New York.............. 108 45,754,707.30 6.39
Other................. 1,263 401,919,980.97 56.15
----- --------------- ------
TOTAL........... 1,961 $715,767,525.69 100.00%
===== =============== ======
- ----------
(1) Other includes 46 other states, the District of Columbia and the Virgin
Islands, with under 5% concentration, individually. No more than
approximately 0.89% of the Mortgage Loans will be secured by Mortgage
Properties in any one postal zip code area.
S-30
OCCUPANCY TYPE(1) (AGGREGATE POOL)
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
OCCUPANCY TYPE LOANS OUTSTANDING OUTSTANDING
- --------------------- --------- --------------- ------------
Primary.............. 1,676 $625,429,899.27 87.38%
Second Home.......... 195 73,521,626.16 10.27
Investment........... 90 16,816,000.26 2.35
----- --------------- ------
TOTAL............ 1,961 $715,767,525.69 100.00%
===== =============== ======
- ----------
(1) Based upon representations of the related borrowers at the time of
origination.
PROPERTY TYPE (AGGREGATE POOL)
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
PROPERTY TYPE LOANS OUTSTANDING OUTSTANDING
- -------------------------------------------- --------- --------------- -----------
Single Family............................... 1,198 $455,530,616.89 63.64%
Planned Unit Development.................... 492 182,124,119.22 25.44
Condominium................................. 223 61,970,022.77 8.66
Two-to-Four Family.......................... 28 8,741,568.45 1.22
Cooperative................................. 15 6,179,550.35 0.86
Townhouse................................... 5 1,221,648.01 0.17
----- --------------- ------
TOTAL................................... 1,961 $715,767,525.69 100.00%
===== =============== ======
LOAN PURPOSE (AGGREGATE POOL)
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
LOAN PURPOSE LOANS OUTSTANDING OUTSTANDING
- ----------------------------------------- --------- ----------------- -----------
Purchase................................. 885 $ 325,382,180.78 45.46%
Refinance (Cash-out)..................... 589 232,932,230.80 32.54
Refinance (Rate-Term).................... 487 157,453,114.11 22.00
----- ------------------ ------
TOTAL................................ 1,961 $ 715,767,525.69 100.00%
===== ================== ======
S-31
LOAN DOCUMENTATION (AGGREGATE POOL)
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
LOAN DOCUMENTATION LOANS OUTSTANDING OUTSTANDING
- ------------------------------------------- --------- --------------- -----------
Full Documentation ........................ 1,253 $409,333,706.35 57.19%
Alternative Documentation ................. 200 94,525,626.85 13.21
Asset Verification/No Income Verification.. 228 93,585,494.97 13.07
Lite Documentation ........................ 135 58,542,544.05 8.18
Limited Documentation ..................... 118 47,967,939.87 6.70
No Income/No Asset ........................ 12 7,659,279.46 1.07
No Ratio .................................. 12 2,604,500.00 0.36
Streamlined Documentation ................. 2 1,289,994.14 0.18
Reduced Documentation ..................... 1 258,440.00 0.04
----- --------------- ------
TOTAL ................................. 1,961 $715,767,525.69 100.00%
===== =============== ======
MARGIN(1) (AGGREGATE POOL)
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
GROSS MARGIN (%) LOANS OUTSTANDING OUTSTANDING
- ----------------------- --------- --------------- ------------
0.875.................. 2 $ 1,730,870.75 0.24%
1.000.................. 4 1,848,144.07 0.26
1.125.................. 25 9,775,461.30 1.37
1.250.................. 57 21,233,266.15 2.97
1.375.................. 243 110,504,601.79 15.44
1.500.................. 284 113,741,109.26 15.89
1.625.................. 283 105,097,733.66 14.68
1.750.................. 250 100,104,049.49 13.99
1.875.................. 200 74,791,700.51 10.45
2.000.................. 219 84,604,079.13 11.82
2.125.................. 107 36,223,007.39 5.06
2.250.................. 179 40,952,554.46 5.72
2.375.................. 32 5,109,698.42 0.71
2.500.................. 18 3,639,591.39 0.51
2.625.................. 25 2,057,095.96 0.29
2.750.................. 31 3,707,561.96 0.52
3.000.................. 1 112,000.00 0.02
3.125.................. 1 535,000.00 0.07
----- --------------- ------
TOTAL............... 1,961 $715,767,525.69 100.00%
===== =============== ======
- ----------
(1) As of the Cut-off Date, the weighted average margin of the Mortgage Loans
is expected to be approximately 1.714%.
S-32
MAXIMUM MORTGAGE RATE(1) (AGGREGATE POOL)
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
MAXIMUM MORTGAGE RATE (%) LOANS OUTSTANDING OUTSTANDING
- -------------------------------------- --------- --------------- -----------
11.000 ............................... 2 $ 443,944.92 0.06%
12.000 ............................... 1,305 495,571,829.50 69.24
12.130 ............................... 23 13,748,060.97 1.92
12.250 ............................... 37 17,796,442.81 2.49
12.380 ............................... 44 27,027,965.60 3.78
12.500 ............................... 190 78,713,391.76 11.00
12.630 ............................... 47 23,191,645.78 3.24
12.750 ............................... 78 21,469,116.70 3.00
12.880 ............................... 35 8,978,247.81 1.25
13.000 ............................... 50 10,563,279.69 1.48
13.130 ............................... 41 6,909,412.95 0.97
13.250 ............................... 59 6,092,879.89 0.85
13.380 ............................... 15 2,256,104.02 0.32
13.500 ............................... 12 1,257,500.12 0.18
13.630 ............................... 12 730,203.55 0.10
13.750 ............................... 11 1,017,499.62 0.14
----- --------------- ------
TOTAL ............................... 1,961 $715,767,525.69 100.00%
===== =============== ======
- ----------
(1) As of the Cut-off Date, the weighted average Maximum Mortgage rate of the
Mortgage Loans is expected to be approximately 12.179% per annum.
NEXT NOTE RATE ADJUSTMENT DATE(1) (AGGREGATE POOL)
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
NEXT NOTE RATE ADJUSTMENT DATE LOANS OUTSTANDING OUTSTANDING
- ----------------------------------- --------- ----------------- -----------
December 2004...................... 851 $ 338,023,827.57 47.23%
January 2005....................... 104 37,550,061.82 5.25
February 2005...................... 101 29,675,390.21 4.15
March 2005......................... 140 47,789,168.73 6.68
April 2005......................... 418 143,811,199.87 20.09
May 2005........................... 347 118,917,877.49 16.61
----- ----------------- ------
TOTAL............................ 1,961 $ 715,767,525.69 100.00%
===== ================= ======
- ----------
(1) As of the Cut-off Date, the weighted average months to the next adjustment
date of the Mortgage Loans was approximately 3 months.
S-33
Tabular Characteristics of the Pool 1 Mortgage Loans
The Pool 1 Mortgage Loans are expected to have the following approximate
aggregate characteristics as of the Cut-off Date.
Number of Pool 1 Mortgage Loans 1,182
Total Stated Principal Balance $ 449,725,717
Mortgage Rates:
Weighted Average 3.574%
Range 2.500% to 5.000%
Weighted Average Margin 1.671%
Weighted Average Remaining Term to Maturity (in months) 334
The Stated Principal Balances of the Pool 1 Mortgage Loans range from
approximately $50,000 to approximately $5,800,000. The Pool 1 Mortgage Loans
have an average Stated Principal Balance of approximately $380,479.
The weighted average Loan-to-Value Ratio at origination of the Pool 1
Mortgage Loans is expected to be approximately 69.03%, and no Pool 1 Mortgage
Loan had a Loan-to-Value Ratio at origination exceeding 100.00%.
No more than approximately 1.29% of the Pool 1 Mortgage Loans are secured
by Mortgaged Properties located in any one zip code area.
The following information sets forth in tabular format certain
information, as of the Cut-off Date, as to the Pool 1 Mortgage Loans. Other than
with respect to rates of interest, percentages (approximate) are stated by
Stated Principal Balance of the Pool 1 Mortgage Loans as of the Cut-off Date and
have been rounded and may not total 100%.
S-34
CUT-OFF DATE STATED PRINCIPAL BALANCE(1) - POOL 1
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
CUT-OFF DATE MORTGAGE BALANCE BALANCE
STATED PRINCIPAL BALANCES ($) LOANS OUTSTANDING OUTSTANDING
- ------------------------------------------ --------- ---------------- ------------
50,000.00 -- 100,000.00......... 72 $ 6,095,016.99 1.36%
100,000.01 -- 200,000.00......... 297 44,718,414.22 9.94
200,000.01 -- 300,000.00......... 230 57,069,010.05 12.69
300,000.01 -- 400,000.00......... 199 69,297,691.09 15.41
400,000.01 -- 500,000.00......... 140 62,988,123.43 14.01
500,000.01 -- 600,000.00......... 82 45,125,697.69 10.03
600,000.01 -- 700,000.00......... 37 24,185,545.34 5.38
700,000.01 -- 800,000.00......... 38 28,391,239.08 6.31
800,000.01 -- 900,000.00......... 13 11,269,801.45 2.51
900,000.01 -- 1,000,000.00......... 28 27,800,545.27 6.18
1,000,000.01 -- 1,500,000.00......... 30 37,621,295.86 8.37
1,500,000.01 -- 2,000,000.00......... 11 19,233,336.68 4.28
2,000,000.01 -- 2,500,000.00......... 2 4,760,000.00 1.06
2,500,000.01 -- 3,000,000.00......... 2 5,370,000.00 1.19
3,000,000.01 -- 5,800,000.00......... 1 5,800,000.00 1.29
----- ---------------- -------
Total 1,182 $ 449,725,717.15 100.00%
===== ================ =======
- ----------
(1) As of the Cut-off Date, the average Stated Principal Balance of the Pool 1
Mortgage Loans is expected to be approximately $380,479.
CURRENT MORTGAGE RATES(1) - POOL 1
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
CURRENT MORTGAGE RATES (%) LOANS OUTSTANDING OUTSTANDING
- --------------------------------- --------- ---------------- ------------
2.500................... 1 $ 84,900.00 0.02%
2.501 -- 2.750................... 4 1,146,303.66 0.25
2.751 -- 3.000................... 72 31,755,094.97 7.06
3.001 -- 3.250................... 253 98,168,252.40 21.83
3.251 -- 3.500................... 241 90,167,941.10 20.05
3.501 -- 3.750................... 286 103,863,491.10 23.09
3.751 -- 4.000................... 240 93,642,485.23 20.82
4.001 -- 4.250................... 65 21,866,683.89 4.86
4.251 -- 4.500................... 16 6,216,264.80 1.38
4.501 -- 4.750................... 3 2,251,800.00 0.50
4.751 -- 5.000................... 1 562,500.00 0.13
----- ---------------- ------
TOTAL......................... 1,182 $ 449,725,717.15 100.00%
===== ================ ======
- ----------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Pool 1
Mortgage Loans is expected to be approximately 3.574% per annum.
S-35
REMAINING TERM(1) - POOL 1
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
REMAINING TERM (MONTHS) LOANS OUTSTANDING OUTSTANDING
- ----------------------------- --------- ----------------- -----------
283 -- 288 ................. 1 $ 324,016.15 0.07%
289 -- 294 ................. 2 277,039.78 0.06
295 -- 300 ................. 426 183,908,588.07 40.89
343 -- 348 ................. 2 789,732.75 0.18
349 -- 354 ................. 5 1,430,665.31 0.32
355 -- 360 ................. 746 262,995,675.09 58.48
----- ----------------- ------
TOTAL...................... 1,182 $ 449,725,717.15 100.00%
===== ================= ======
- ----------
(1) As of the Cut-off Date, the weighted average Remaining Term of the Pool 1
Mortgage Loans as of the Cut-off Date is expected to be approximately 334
months.
ORIGINAL LOAN-TO-VALUE RATIOS(1) - POOL 1
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
ORIGINAL LOAN-TO-VALUE MORTGAGE BALANCE BALANCE
RATIO (%) LOANS OUTSTANDING OUTSTANDING
- ----------------------------- --------- ----------------- -----------
12.31 -- 20.00............. 6 $ 1,498,496.41 0.33%
20.01 -- 30.00............. 13 3,493,011.31 0.78
30.01 -- 40.00............. 42 16,488,007.43 3.67
40.01 -- 50.00............. 67 28,171,148.07 6.26
50.01 -- 60.00............. 108 54,952,601.97 12.22
60.01 -- 65.00............. 80 36,518,139.86 8.12
65.01 -- 70.00............. 169 65,460,557.18 14.56
70.01 -- 75.00............. 173 68,427,288.81 15.22
75.01 -- 80.00............. 478 158,171,514.80 35.17
80.01 -- 85.00............. 7 1,105,504.76 0.25
85.01 -- 90.00............. 17 4,682,398.81 1.04
90.01 -- 95.00............. 6 1,974,321.36 0.44
95.01 -- 100.00............. 16 8,782,726.38 1.95
----- ---------------- -------
TOTAL.................... 1,182 $ 449,725,717.15 100.00%
===== ================ =======
- ----------
(1) As of the Cut-off Date, the weighted average Original Loan-to-Value Ratio
of the Pool 1 Mortgage Loans is expected to be approximately 69.03%. See
"Description of the Mortgage Pools -- The Mortgage Loans" herein.
S-36
EFFECTIVE LOAN-TO-VALUE RATIOS(1) - POOL 1
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
EFFECTIVE LOAN-TO-VALUE MORTGAGE BALANCE BALANCE
RATIOS (%) LOANS OUTSTANDING OUTSTANDING
- ----------------------------- --------- --------------- -----------
12.31 -- 20.00............. 6 $ 1,498,496.41 0.33%
20.01 -- 30.00............. 15 3,825,726.69 0.85
30.01 -- 40.00............. 42 16,488,007.43 3.67
40.01 -- 50.00............. 67 28,171,148.07 6.26
50.01 -- 60.00............. 110 56,319,601.97 12.52
60.01 -- 65.00............. 80 36,518,139.86 8.12
65.01 -- 70.00............. 183 74,258,568.18 16.51
70.01 -- 75.00............. 173 68,427,288.81 15.22
75.01 -- 80.00............. 478 158,171,514.80 35.17
80.01 -- 85.00............. 7 1,105,504.76 0.25
85.01 -- 90.00............. 16 3,967,398.81 0.88
90.01 -- 95.00............. 5 974,321.36 0.22
----- --------------- ------
TOTAL................... 1,182 $449,725,717.15 100.00%
===== =============== ======
- ----------
(1) As of the Cut-off Date, the weighted average Effective Loan-to-Value Ratio
of the Pool 1 Mortgage Loans is expected to be approximately 68.30%. See
"Description of the Mortgage Pools -- The Mortgage Loans" herein.
CREDIT SCORE(1) - POOL 1
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
CREDIT SCORE LOANS OUTSTANDING OUTSTANDING
- ----------------------- --------- ---------------- -----------
576 -- 579............. 1 $ 152,715.38 0.03%
600 -- 619............. 4 1,366,200.00 0.30
620 -- 639............. 7 3,970,250.00 0.88
640 -- 659............. 21 7,899,376.03 1.76
660 -- 679............. 82 28,745,984.92 6.39
680 -- 699............. 148 58,594,622.90 13.03
700 -- 719............. 172 60,266,286.20 13.40
720 -- 739............. 160 58,464,511.15 13.00
740 -- 759............. 165 69,645,943.47 15.49
760 -- 779............. 222 87,162,335.53 19.38
780 -- 799............. 155 57,833,394.53 12.86
800 -- 819............. 44 15,198,497.04 3.38
820 -- 838............. 1 425,600.00 0.09
----- ---------------- ------
TOTAL............... 1,182 $ 449,725,717.15 100.00%
===== ================ ======
- ----------
(1) The weighted average Credit Score of the Pool 1 Mortgage Loans (determined
at origination) is expected to be approximately 736. See "Description of
the Mortgage Pools -- The Mortgage Loans" herein.
S-37
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES - POOL 1
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
STATE LOANS OUTSTANDING OUTSTANDING
- ----------------------------- --------- ----------------- -----------
California .................. 254 $ 130,093,967.70 28.93%
Florida ..................... 142 53,259,180.49 11.84
Other ....................... 786 266,372,568.96 59.23
----- ------------------ ------
TOTAL .................. 1,182 $ 449,725,717.15 100.00%
===== ================== ======
- --------------------
(1) Other includes 43 other states, and the District of Columbia, with under
5% concentration, individually. No more than approximately 1.29% of the
Pool 1 Mortgage Loans will be secured by Mortgage Properties in any one
postal zip code area.
OCCUPANCY TYPE (1) - POOL 1
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
OCCUPANCY TYPE LOANS OUTSTANDING OUTSTANDING
- --------------------------------- --------- ------------------ -----------
Primary ......................... 1,020 $ 387,534,733.89 86.17%
Second Home ..................... 119 52,058,465.62 11.58
Investment ...................... 43 10,132,517.64 2.25
----- ------------------ ------
TOTAL ....................... 1,182 $ 449,725,717.15 100.00%
===== ================== ======
- --------------------
(1) Based upon representations of the related borrowers at the time of
origination.
PROPERTY TYPE - POOL 1
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
PROPERTY TYPE LOANS OUTSTANDING OUTSTANDING
- --------------------------------- --------- ------------------ -----------
Single Family ................... 707 $ 279,191,360.17 62.08%
Planned Unit Development ........ 327 122,169,480.57 27.17
Condominium ..................... 127 37,823,557.46 8.41
Two-to-Four Family .............. 15 5,506,576.88 1.22
Cooperative ..................... 3 4,188,000.00 0.93
Townhouse ....................... 3 846,742.07 0.19
----- ------------------ ------
TOTAL ....................... 1,182 $ 449,725,717.15 100.00%
===== ================== ======
S-38
LOAN PURPOSE - POOL 1
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
LOAN PURPOSE LOANS OUTSTANDING OUTSTANDING
- --------------------------------- --------- ----------- -----------
Purchase ........................ 431 $ 170,433,785.46 37.90%
Refinance (Cash-out) ............ 392 163,799,156.17 36.42
Refinance (Rate-Term) ........... 359 115,492,775.52 25.68
----- ------------------ ------
TOTAL ........................ 1,182 $ 449,725,717.15 100.00%
===== ================== ======
LOAN DOCUMENTATION - POOL 1
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
DOCUMENTATION LOANS OUTSTANDING OUTSTANDING
- --------------------------------------------- ------------------ ------------------ -----------
Full Documentation .......................... 603 $ 198,566,459.18 44.15%
Alternative Documentation ................... 177 85,457,886.23 19.00
Asset Verification/No Income Verification.... 181 73,187,704.51 16.27
Lite Documentation .......................... 120 51,502,117.05 11.45
Limited Documentation ....................... 79 31,384,230.41 6.98
No Income/No Asset .......................... 10 7,014,379.77 1.56
No Ratio .................................... 11 2,354,500.00 0.52
Reduced Documentation ....................... 1 258,440.00 0.06
----- ------------------ ------
TOTAL ................................... 1,182 $ 449,725,717.15 100.00%
===== ================== ======
S-39
MARGIN (1) - POOL 1
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
MARGIN (%) LOANS OUTSTANDING OUTSTANDING
- --------------------------------- --------- ------------------ -----------
1.000 ........................... 3 $ 748,144.07 0.17%
1.125 ........................... 15 6,124,319.90 1.36
1.250 ........................... 47 17,792,166.16 3.96
1.375 ........................... 214 90,318,777.11 20.08
1.500 ........................... 204 75,027,982.68 16.68
1.625 ........................... 192 65,205,904.19 14.50
1.750 ........................... 148 50,504,047.72 11.23
1.875 ........................... 129 48,844,526.63 10.86
2.000 ........................... 118 50,217,207.22 11.17
2.125 ........................... 47 22,025,668.25 4.90
2.250 ........................... 62 22,096,393.22 4.91
2.375 ........................... 2 258,080.00 0.06
2.750 ........................... 1 562,500.00 0.13
----- ------------------ ------
TOTAL ....................... 1,182 $ 449,725,717.15 100.00%
===== ================== ======
- ------------------
(1) As of the Cut-off Date, the weighted average gross margin of the Pool 1
Mortgage Loans is expected to be approximately 1.671%.
MAXIMUM MORTGAGE RATE(1) - POOL 1
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
MAXIMUM MORTGAGE RATE (%) LOANS OUTSTANDING OUTSTANDING
- --------------------------------- --------- ------------------ -----------
11.000 .......................... 2 $ 443,944.92 0.10%
12.000 .......................... 1,073 397,624,192.72 88.41
12.500 .......................... 107 51,657,579.51 11.49
----- ------------------ ------
TOTAL ........................ 1,182 $ 449,725,717.15 100.00%
===== ================== ======
- ------------------
(1) As of the Cut-off Date, the weighted average Maximum Mortgage Rate of the
Pool 1 Mortgage Loans is expected to be approximately 12.056% per annum.
S-40
NEXT NOTE RATE ADJUSTMENT DATE (1) - POOL 1
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
NEXT NOTE RATE ADJUSTMENT DATE LOANS OUTSTANDING OUTSTANDING
- --------------------------------- --------- ------------------ ---------
December 2004 ................... 551 $ 230,584,519.43 51.27%
January 2005 .................... 29 16,163,894.07 3.59
February 2005 ................... 30 10,514,139.30 2.34
March 2005 ...................... 67 20,510,403.71 4.56
April 2005 ...................... 294 96,927,587.21 21.55
May 2005 ........................ 211 75,025,173.43 16.68
----- ------------------ ------
TOTAL ....................... 1,182 $ 449,725,717.15 100.00%
===== ================== ======
- ---------------------
(1) As of the Cut-off Date, the weighted average months to next rate
adjustment date of the Pool 1 Mortgage Loans was approximately 3 months.
Tabular Characteristics of the Pool 2 Mortgage Loans
The Pool 2 Mortgage Loans are expected to have the following approximate
aggregate characteristics as of the Cut-off Date.
Number of Mortgage Loans 241
Total Stated Principal Balance $ 89,156,717
Mortgage Rates:
Weighted Average 3.739%
Range 2.375% to 5.125%
Weighted Average Margin 1.753%
Weighted Average Remaining Term to Maturity (in months) 338
The Stated Principal Balances of the Pool 2 Mortgage Loans range from
approximately $40,782 to approximately $1,852,500. The Pool 2 Mortgage Loans
have an average Stated Principal Balance of approximately $369,945.
The weighted average Loan-to-Value Ratio at origination of the Pool 2
Mortgage Loans is expected to be approximately 70.68%, and no Pool 2 Mortgage
Loan had a Loan-to-Value Ratio at origination exceeding 100.00%.
No more than approximately 2.08% of the Pool 2 Mortgage Loans are secured
by Mortgaged Properties located in any one zip code area.
The following information sets forth in tabular format certain
information, as of the Cut-off Date, as to the Pool 2 Mortgage Loans. Other than
with respect to rates of interest, percentages (approximate) are stated by
Stated Principal Balance of the Pool 2 Mortgage Loans as of the Cut-off Date and
have been rounded and may not total 100%.
S-41
CUT-OFF DATE STATED PRINCIPAL BALANCE (1) - POOL 2
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
CUT-OFF DATE MORTGAGE BALANCE BALANCE
STATED PRINCIPAL BALANCES ($) LOANS OUTSTANDING OUTSTANDING
----------------------------- --------- ----------------- -----------
40,782.32 -- 100,000.00 .............. 17 $ 1,275,048.22 1.43%
100,000.01 -- 200,000.00 .............. 49 7,542,436.75 8.46
200,000.01 -- 300,000.00 .............. 54 13,570,983.28 15.22
300,000.01 -- 400,000.00 .............. 38 13,293,671.16 14.91
400,000.01 -- 500,000.00 .............. 31 13,946,532.12 15.64
500,000.01 -- 600,000.00 .............. 17 9,540,020.00 10.70
600,000.01 -- 700,000.00 .............. 14 9,127,085.00 10.24
700,000.01 -- 800,000.00 .............. 6 4,602,793.74 5.16
800,000.01 -- 900,000.00 .............. 5 4,328,897.00 4.86
900,000.01 -- 1,000,000.00 .............. 6 5,836,749.99 6.55
1,000,000.01 -- 1,500,000.00 .............. 2 2,440,000.00 2.74
1,500,000.01 -- 1,852,500.00 .............. 2 3,652,500.00 4.10
--- ----------------- -----
TOTAL ..................................... 241 $ 89,156,717.26 100.00%
=== ================= ======
- -------------------------
(1) As of the Cut-off Date, the average Stated Principal Balance of the Pool 2
Mortgage Loans is expected to be approximately $369,945.
CURRENT MORTGAGE RATES(1) - POOL 2
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
CURRENT MORTGAGE RATES (%) LOANS OUTSTANDING OUTSTANDING
-------------------------- ----- ----------- -----------
2.375 -- 2.500 ............................ 2 $ 808,515.96 0.91%
2.501 -- 2.750 ............................ 2 396,934.10 0.45
2.751 -- 3.000 ............................ 5 1,287,880.00 1.44
3.001 -- 3.250 ............................ 16 5,006,881.20 5.62
3.251 -- 3.500 ............................ 46 17,356,168.45 19.47
3.501 -- 3.750 ............................ 81 28,486,805.87 31.95
3.751 -- 4.000 ............................ 69 25,745,131.69 28.88
4.001 -- 4.250 ............................ 11 5,253,549.99 5.89
4.251 -- 4.500 ............................ 6 3,717,850.00 4.17
4.501 -- 4.750 ............................ 1 450,000.00 0.50
4.751 -- 5.000 ............................ 1 112,000.00 0.13
5.001 -- 5.125 ............................ 1 535,000.00 0.60
--- ----------------- ------
TOTAL ................................... 241 $ 89,156,717.26 100.00%
=== ================= ======
- -------------------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of Pool 2
Mortgage Loans is expected to be approximately 3.739% per annum.
S-42
REMAINING TERM (1) - POOL 2
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
REMAINING TERM (MONTHS) LOANS OUTSTANDING OUTSTANDING
- --------------------------------------------- --------- ----------------- -----------
298 -- 300 .............................. 74 $ 31,524,929.22 35.36%
343 -- 348 .............................. 1 379,960.42 0.43
349 -- 354 .............................. 3 438,487.09 0.49
355 -- 360 .............................. 163 56,813,340.53 63.72
--- ----------------- -----
TOTAL ................................... 241 $ 89,156,717.26 100.00%
=== ================= ======
- ------------------
(1) As of the Cut-off Date, the weighted average Remaining Term of the Pool 2
Mortgage Loans as of the Cut-off Date is expected to be approximately 338
months.
ORIGINAL LOAN-TO-VALUE RATIOS(1) - POOL 2
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
ORIGINAL LOAN-TO-VALUE MORTGAGE BALANCE BALANCE
RATIOS (%) LOANS OUTSTANDING OUTSTANDING
- --------------------------------------------- --------- ----------------- -----------
18.73 -- 20.00 ............................ 2 $ 137,800.00 0.15%
20.01 -- 30.00 ............................ 2 900,000.00 1.01
30.01 -- 40.00 ............................ 8 2,889,968.26 3.24
40.01 -- 50.00 ............................ 14 4,781,045.54 5.36
50.01 -- 60.00 ............................ 21 6,647,193.58 7.46
60.01 -- 65.00 ............................ 12 5,787,838.17 6.49
65.01 -- 70.00 ............................ 32 14,139,114.26 15.86
70.01 -- 75.00 ............................ 32 13,314,291.38 14.93
75.01 -- 80.00 ............................ 105 36,746,816.12 41.22
80.01 -- 85.00 ............................ 2 610,000.00 0.68
85.01 -- 90.00 ............................ 6 1,241,799.97 1.39
90.01 -- 95.00 ............................ 4 760,849.98 0.85
95.01 -- 100.00 ............................ 1 1,200,000.00 1.35
--- ----------------- ------
TOTAL ................................... 241 $ 89,156,717.26 100.00%
=== ================= ======
- ------------------
(1) As of the Cut-off Date, the weighted average Original Loan-to-Value Ratio
of the Pool 2 Mortgage Loans is expected to be approximately 70.68%. See
"Description of the Mortgage Pools -- The Mortgage Loans" herein.
S-43
EFFECTIVE LOAN-TO-VALUE RATIOS(1) - POOL 2
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
EFFECTIVE LOAN-TO-VALUE MORTGAGE BALANCE BALANCE
RATIOS (%) LOANS OUTSTANDING OUTSTANDING
- --------------------------------------------- --------- ----------------- -----------
18.73 -- 20.00 ............................ 2 $ 137,800.00 0.15%
20.01 -- 30.00 ............................ 2 900,000.00 1.01
30.01 -- 40.00 ............................ 8 2,889,968.26 3.24
40.01 -- 50.00 ............................ 15 4,953,045.54 5.56
50.01 -- 60.00 ............................ 21 6,647,193.58 7.46
60.01 -- 65.00 ............................ 11 5,615,838.17 6.30
65.01 -- 70.00 ............................ 33 15,339,114.26 17.20
70.01 -- 75.00 ............................ 32 13,314,291.38 14.93
75.01 -- 80.00 ............................ 105 36,746,816.12 41.22
80.01 -- 85.00 ............................ 2 610,000.00 0.68
85.01 -- 90.00 ............................ 6 1,241,799.97 1.39
90.01 -- 95.00 ............................ 4 760,849.98 0.85
--- ----------------- ------
TOTAL ................................... 241 $ 89,156,717.26 100.00%
=== ================= ======
- ----------------------
(1) As of the Cut-off Date, the weighted average Effective Loan-to-Value Ratio
of the Pool 2 Mortgage Loans is expected to be approximately 70.25%. See
"Description of the Mortgage Pool -- General" herein.
CREDIT SCORE (1) - POOL 2
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
CREDIT SCORE LOANS OUTSTANDING OUTSTANDING
- -------------------------------------------- --------- ----------------- -----------
611 -- 619 .............................. 1 $ 50,000.00 0.06%
620 -- 639 .............................. 2 1,472,000.00 1.65
640 -- 659 .............................. 9 2,910,173.23 3.26
660 -- 679 .............................. 16 7,692,340.82 8.63
680 -- 699 .............................. 37 15,242,827.56 17.10
700 -- 719 .............................. 28 9,841,520.31 11.04
720 -- 739 .............................. 23 6,916,413.51 7.76
740 -- 759 .............................. 44 14,395,012.18 16.15
760 -- 779 .............................. 44 18,259,992.02 20.48
780 -- 799 .............................. 27 9,237,976.63 10.36
800 -- 816 .............................. 10 3,138,461.00 3.52
--- ----------------- ------
TOTAL .............................. 241 $ 89,156,717.26 100.00%
=== ================= ======
- -------------------------
(1) The weighted average Credit Score of the Pool 2 Mortgage Loans (determined
at origination) is approximately 732. See "Description of the Mortgage
Pools -- The Mortgage Loans" herein.
S-44
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES - POOL 2
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
STATE LOANS OUTSTANDING OUTSTANDING
- --------------------------------- --------- ------------------ -----------
California ...................... 52 $ 24,680,429.05 27.68%
Florida ......................... 26 9,478,883.62 10.63
Arizona ......................... 14 5,673,928.56 6.36
Colorado ........................ 18 5,523,403.74 6.20
Texas ........................... 15 4,514,267.75 5.06
Other ........................... 116 39,285,804.54 44.06
--- ------------------ ------
TOTAL ...................... 241 $ 89,156,717.26 100.00%
=== ================== ======
- -----------------
(1) Other includes 26 other states, and the District of Columbia, with
under 5% concentration, individually. No more than approximately 2.08%
the Pool 2 Mortgage Loans will be secured by Mortgage Properties in any
one postal zip code area.
OCCUPANCY TYPE (1) - POOL 2
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
OCCUPANCY TYPE LOANS OUTSTANDING OUTSTANDING
- --------------------------------- --------- ------------------ -----------
Primary ......................... 208 $ 79,337,860.96 88.99%
Second Home ..................... 23 7,436,215.17 8.34
Investment ...................... 10 2,382,641.13 2.67
--- ------------------ ------
TOTAL ....................... 241 $ 89,156,717.26 100.00%
=== ================== ======
- ------------
(1) Based upon representations of the related borrowers at the time of
origination.
PROPERTY TYPE - POOL 2
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
PROPERTY TYPE LOANS OUTSTANDING OUTSTANDING
- --------------------------------- --------- ------------------ -----------
Single Family ................... 139 $ 50,636,967.47 56.80%
Planned Unit Development ........ 75 27,719,113.86 31.09
Condominium ..................... 24 9,737,729.99 10.92
Two-to-Four Family .............. 1 688,000.00 0.77
Townhouse ....................... 2 374,905.94 0.42
--- ------------------ ------
TOTAL ....................... 241 $ 89,156,717.26 100.00%
=== ================== ======
S-45
LOAN PURPOSE - POOL 2
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
LOAN PURPOSE LOANS OUTSTANDING OUTSTANDING
- -------------------------- --------- ------------------ -----------
Purchase ................. 103 $ 42,753,805.94 47.95%
Refinance (Cash-out) ..... 73 27,176,748.76 30.48
Refinance (Rate-Term) .... 65 19,226,162.56 21.56
--- ------------------ ------
TOTAL ................ 241 $ 89,156,717.26 100.00%
=== ================== ======
LOAN DOCUMENTATION - POOL 2
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
DOCUMENTATION LOANS OUTSTANDING OUTSTANDING
- ------------------------------------------------------------ --------- ---------------- -----------
Full Documentation ......................................... 120 $ 37,301,663.59 41.84%
Asset Verification/No Income Verification. ................. 47 20,397,790.46 22.88
Limited Documentation ...................................... 35 15,220,347.63 17.07
Alternative Documentation .................................. 21 8,301,588.89 9.31
Lite Documentation ......................................... 15 7,040,427.00 7.90
No Income/No Asset ......................................... 2 644,899.69 0.72
No Ratio ................................................... 1 250,000.00 0.28
--- ---------------- ------
TOTAL .................................................. 241 $ 89,156,717.26 100.00%
=== ================ ======
MARGIN (1) - POOL 2
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
MARGIN (%) LOANS OUTSTANDING OUTSTANDING
- --------------------------------- --------- ---------------- -----------
1.125 ........................... 6 $ 1,816,790.95 2.04%
1.250 ........................... 7 2,122,664.99 2.38
1.375 ........................... 14 5,222,349.14 5.86
1.500 ........................... 47 17,776,192.49 19.94
1.625 ........................... 40 14,209,896.96 15.94
1.750 ........................... 31 11,848,485.91 13.29
1.875 ........................... 27 10,782,917.10 12.09
2.000 ........................... 37 14,113,064.44 15.83
2.125 ........................... 10 3,609,963.29 4.05
2.250 ........................... 19 6,631,391.99 7.44
2.375 ........................... 1 376,000.00 0.42
3.000 ........................... 1 112,000.00 0.13
3.125 ........................... 1 535,000.00 0.60
--- ---------------- ------
TOTAL ........................ 241 $ 89,156,717.26 100.00%
=== ================ ======
- ------------------------
(1) As of the Cut-off Date, the weighted average gross margin of the Pool 2
Mortgage Loans is expected to be approximately 1.753%.
S-46
MAXIMUM MORTGAGE RATE(1) - POOL 2
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
MAXIMUM MORTGAGE RATE (%) LOANS OUTSTANDING OUTSTANDING
------------------------- ----- ----------- -----------
12.000 ............................................ 205 $76,842,024.88 86.19%
12.500 ............................................ 36 12,314,692.38 13.81
--- -------------- ------
TOTAL ....................................... 241 $89,156,717.26 100.00%
=== ============== ======
- -------------------
(1) As of the Cut-off Date, the weighted average Maximum Mortgage Rate of the
Pool 2 Mortgage Loans is expected to be approximately 12.069% per annum.
NEXT NOTE RATE ADJUSTMENT DATE(1) - POOL 2
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
NEXT NOTE RATE ADJUSTMENT DATE LOANS OUTSTANDING OUTSTANDING
- -------------------------------------------------------- --------- ---------------- -----------
December 2004 .......................................... 8 $ 2,760,078.69 3.10%
January 2005 ........................................... 13 4,320,283.82 4.85
February 2005 .......................................... 11 3,695,341.60 4.14
March 2005 ............................................. 38 11,833,513.46 13.27
April 2005 ............................................. 97 40,074,656.70 44.95
May 2005 ............................................... 74 26,472,842.99 29.69
--- ---------------- ------
TOTAL .............................................. 241 $ 89,156,717.26 100.00%
=== ================ ======
- ----------------
(1) As of the Cut-off Date, the weighted average months to the next adjustment
date of the Pool 2 Mortgage Loans was approximately 5 months.
S-47
Tabular Characteristics of the Pool 3 Mortgage Loans
The Pool 3 Mortgage Loans are expected to have the following approximate
aggregate characteristics as of the Cut-off Date.
Number of Mortgage Loans 538
Total Stated Principal Balance $ 176,885,091
Mortgage Rates:
Weighted Average 3.453%
Range 2.250% to 4.625%
Weighted Average Margin 1.803%
Weighted Average Remaining Term to Maturity (in months) 211
The Stated Principal Balances of the Pool 3 Mortgage Loans range from
approximately $3,213 to approximately $3,148,579. The Pool 3 Mortgage Loans have
an average Stated Principal Balance of approximately $328,783.
The weighted average Loan-to-Value Ratio at origination of the Pool 3
Mortgage Loans is expected to be approximately 78.65%, and no Pool 3 Mortgage
Loan had a Loan-to-Value Ratio at origination exceeding 100.00%.
No more than approximately 1.78% of the Pool 3 Mortgage Loans are secured
by Mortgaged Properties located in any one zip code area.
As of the Cut-off Date, 15 of the Pool 3 Mortgage Loans, representing
approximately 2.09% of the Pool 3 Mortgage Loans were between 30 and 59 days
delinquent.
The following information sets forth in tabular format certain
information, as of the Cut-off Date, as to the Pool 3 Mortgage Loans. Other than
with respect to rates of interest, percentages (approximate) are stated by
Stated Principal Balance of the Pool 3 Mortgage Loans as of the Cut-off Date and
have been rounded and may not total 100%.
S-48
CUT-OFF DATE STATED PRINCIPAL BALANCE (1) - POOL 3
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
CUT-OFF DATE MORTGAGE BALANCE BALANCE
STATED PRINCIPAL BALANCES ($) LOANS OUTSTANDING OUTSTANDING
----------------------------- ----- ----------- -----------
3,212.58 -- 100,000.00 ................. 124 $ 6,747,365.96 3.81%
100,000.01 -- 200,000.00 ................. 126 19,045,501.29 10.77
200,000.01 -- 300,000.00 ................. 87 21,152,705.82 11.96
300,000.01 -- 400,000.00 ................. 57 20,049,345.66 11.33
400,000.01 -- 500,000.00 ................. 42 18,814,785.60 10.64
500,000.01 -- 600,000.00 ................. 26 14,792,808.36 8.36
600,000.01 -- 700,000.00 ................. 21 13,793,557.67 7.80
700,000.01 -- 800,000.00 ................. 13 9,921,233.40 5.61
800,000.01 -- 900,000.00 ................. 7 6,089,325.10 3.44
900,000.01 -- 1,000,000.00 ................. 15 14,730,858.49 8.33
1,000,000.01 -- 1,500,000.00 ................. 14 17,348,937.74 9.81
1,500,000.01 -- 2,000,000.00 ................. 2 3,759,087.61 2.13
2,000,000.01 -- 2,500,000.00 ................. 1 2,303,500.00 1.30
2,500,000.01 -- 3,000,000.00 ................. 2 5,187,500.02 2.93
3,000,000.01 -- 3,148,578.56 ................. 1 3,148,578.56 1.78
------ ----------------- ------
TOTAL ........................................... 538 $ 176,885,091.28 100.00%
====== ================= ======
- -----------------------
(1) As of the Cut-off Date, the average Stated Principal Balance of the Pool 3
Mortgage Loans is expected to be approximately $328,783.
CURRENT MORTGAGE RATES(1) - POOL 3
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
CURRENT MORTGAGE RATES (%) LOANS OUTSTANDING OUTSTANDING
-------------------------- ----- ----------- -----------
2.250 .................... 1 $ 1,100,000.00 0.62%
2.251 -- 2.500 .................... 2 1,300,000.00 0.73
2.501 -- 2.750 .................... 9 5,316,322.45 3.01
2.751 -- 3.000 .................... 38 17,554,750.09 9.92
3.001 -- 3.250 .................... 66 38,192,548.30 21.59
3.251 -- 3.500 .................... 119 45,539,025.06 25.74
3.501 -- 3.750 .................... 98 35,841,820.23 20.26
3.751 -- 4.000 .................... 90 17,548,965.59 9.92
4.001 -- 4.250 .................... 69 9,276,948.44 5.24
4.251 -- 4.500 .................... 31 3,348,773.59 1.89
4.501 -- 4.625 .................... 15 1,865,937.53 1.05
------ ----------------- ------
TOTAL .................................. 538 $ 176,885,091.28 100.00%
====== ================= ======
- ---------------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Pool 3
Mortgage Loans is expected to be approximately 3.453% per annum.
S-49
REMAINING TERM (1) - POOL 3
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
REMAINING TERM (MONTHS) LOANS OUTSTANDING OUTSTANDING
----------------------- ----- ----------- -----------
202 -- 204 ................................ 7 $ 2,087,372.24 1.18%
205 -- 210 ................................ 215 67,563,221.97 38.20
211 -- 215 ................................ 316 107,234,497.07 60.62
----- ----------------- --------
TOTAL ................................... 538 $ 176,885,091.28 100.00%
===== ================= ========
- ---------------------
(1) As of the Cut-off Date, the weighted average Remaining Term of the Pool 3
Mortgage Loans as of the Cut-off Date is expected to be approximately 211
months.
ORIGINAL LOAN-TO-VALUE RATIOS(1) - POOL 3
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
ORIGINAL LOAN-TO-VALUE MORTGAGE BALANCE BALANCE
RATIOS (%) LOANS OUTSTANDING OUTSTANDING
---------- ----- ----------- -----------
2.00 -- 10.00 .............................. 3 $ 373,865.99 0.21%
10.01 -- 20.00 .............................. 1 46,898.24 0.03
20.01 -- 30.00 .............................. 5 441,586.31 0.25
30.01 -- 40.00 .............................. 16 2,934,038.76 1.66
40.01 -- 50.00 .............................. 50 12,824,511.29 7.25
50.01 -- 60.00 .............................. 44 14,188,233.79 8.02
60.01 -- 65.00 .............................. 26 11,608,256.87 6.56
65.01 -- 70.00 .............................. 31 12,870,064.27 7.28
70.01 -- 75.00 .............................. 48 18,880,262.79 10.67
75.01 -- 80.00 .............................. 104 30,779,913.35 17.40
80.01 -- 85.00 .............................. 9 5,019,650.87 2.84
85.01 -- 90.00 .............................. 14 5,958,050.33 3.37
90.01 -- 95.00 .............................. 18 5,322,407.93 3.01
95.01 -- 100.00 ............................. 169 55,637,350.49 31.45
----- ------------------- -------
TOTAL ................................... 538 $ 176,885,091.28 100.00%
===== =================== =======
- ---------------------
(1) As of the Cut-off Date, the weighted average Original Loan-to-Value Ratio
of the Pool 3 Mortgage Loans is expected to be approximately 78.65%. See
"Description of the Mortgage Pools -- The Mortgage Loans" herein.
S-50
EFFECTIVE LOAN-TO-VALUE RATIOS(1) - POOL 3
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
EFFECTIVE LOAN-TO-VALUE MORTGAGE BALANCE BALANCE
RATIOS (%) LOANS OUTSTANDING OUTSTANDING
---------- ----- ----------- -----------
2.00 -- 10.00 ............................................. 3 $ 373,865.99 0.21%
10.01 -- 20.00 ............................................. 1 46,898.24 0.03
20.01 -- 30.00 ............................................. 5 441,586.31 0.25
30.01 -- 40.00 ............................................. 17 3,609,038.76 2.04
40.01 -- 50.00 ............................................. 70 16,827,096.34 9.51
50.01 -- 60.00 ............................................. 54 18,183,521.35 10.28
60.01 -- 65.00 ............................................. 34 13,316,317.23 7.53
65.01 -- 70.00 ............................................. 186 66,725,489.53 37.72
70.01 -- 75.00 ............................................. 59 24,396,394.35 13.79
75.01 -- 80.00 ............................................. 96 29,111,708.34 16.46
80.01 -- 85.00 ............................................. 5 2,043,241.57 1.16
85.01 -- 90.00 ............................................. 5 1,314,823.74 0.74
90.01 -- 95.00 ............................................. 3 495,109.53 0.28
----- ---------------- -------
TOTAL .................................................. 538 $ 176,885,091.28 100.00%
===== ================ =======
- -----------------------
(1) As of the Cut-off Date, the weighted average Effective Loan-to-Value Ratio
of the Pool 3 Mortgage Loans is expected to be approximately 66.94%. See
"Description of the Mortgage Pools -- The Mortgage Loans" herein.
S-51
CREDIT SCORE (1) - POOL 3
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
CREDIT SCORE LOANS OUTSTANDING OUTSTANDING
------------ ----- ----------- -----------
Not Available .......................... 2 $ 660,986.64 0.37%
473 -- 479 ............................. 1 98,200.05 0.06
480 -- 499 ............................. 2 158,304.75 0.09
500 -- 519 ............................. 2 429,463.02 0.24
520 -- 539 ............................. 4 572,073.83 0.32
540 -- 559 ............................. 4 819,572.19 0.46
560 -- 579 ............................. 6 971,357.51 0.55
580 -- 599 ............................. 2 232,550.78 0.13
600 -- 619 ............................. 11 4,472,994.84 2.53
620 -- 639 ............................. 9 3,097,558.43 1.75
640 -- 659 ............................. 23 8,385,525.98 4.74
660 -- 679 ............................. 24 11,864,257.50 6.71
680 -- 699 ............................. 40 14,911,494.12 8.43
700 -- 719 ............................. 50 22,594,461.82 12.77
720 -- 739 ............................. 57 19,403,984.54 10.97
740 -- 759 ............................. 62 20,388,510.77 11.53
760 -- 779 ............................. 87 26,932,468.77 15.23
780 -- 799 ............................. 97 26,551,915.16 15.01
800 -- 819 ............................. 54 11,839,410.56 6.69
820 -- 837 ............................. 1 2,500,000.02 1.41
--- ------------------ -----------
TOTAL ............................... 538 $ 176,885,091.28 100.00%
==== ================== ===========
- ---------------------------
(1) The weighted average Credit Score of the Pool 3 Mortgage Loans (determined
at the Cut-off Date) is approximately 732. See "Description of the
Mortgage Pools -- The Mortgage Loans" herein.
S-52
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES - POOL 3
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
STATE LOANS OUTSTANDING OUTSTANDING
----- ----- ----------- -----------
California ............................... 54 $ 32,564,721.05 18.41%
New York ................................. 79 29,496,935.11 16.68
Florida .................................. 62 18,015,655.51 10.18
New Jersey ............................... 45 16,849,829.07 9.53
Connecticut .............................. 24 12,929,908.15 7.31
Texas .................................... 39 9,271,062.79 5.24
Other .................................... 235 57,756,979.60 32.65
--- ------------------ ------
TOTAL ............................... 538 $ 176,885,091.28 100.00%
=== ================== ======
- ----------------------
(1) Other includes 41 other states, the District of Columbia and the Virgin
Islands, with under 5% concentration, individually. No more than
approximately 1.78% the Pool 3 Mortgage Loans will be secured by Mortgage
Properties in any one postal zip code area.
OCCUPANCY TYPE (1) - POOL 3
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
OCCUPANCY TYPE LOANS OUTSTANDING OUTSTANDING
-------------- ----- ----------- -----------
Primary .................................. 448 $ 158,557,304.42 89.64%
Second Home .............................. 53 14,026,945.37 7.93
Investment ............................... 37 4,300,841.49 2.43
--- ------------------ -------
TOTAL ................................ 538 $ 176,885,091.28 100.00%
=== ================== =======
- ---------------------
(1) Based upon representations of the related borrowers at the time of
origination.
PROPERTY TYPE - POOL 3
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
PROPERTY TYPE LOANS OUTSTANDING OUTSTANDING
------------- ----- ----------- -----------
Single Family ............................ 352 $ 125,702,289.25 71.06%
Planned Unit Development ................. 90 32,235,524.79 18.22
Condominium .............................. 72 14,408,735.32 8.15
Two-to-Four Family ....................... 12 2,546,991.57 1.44
Cooperative .............................. 12 1,991,550.35 1.13
--- ------------------ -------
TOTAL ................................ 538 $ 176,885,091.28 100.00%
=== ================== ======
S-53
LOAN PURPOSE - POOL 3
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
LOAN PURPOSE LOANS OUTSTANDING OUTSTANDING
------------ ----- ----------- -----------
Purchase ................................. 351 $ 112,194,589.38 63.43%
Refinance (Cash-out) ..................... 124 41,956,325.87 23.72
Refinance (Rate-Term) .................... 63 22,734,176.03 12.85
--- ------------------ ------
TOTAL ................................ 538 $ 176,885,091.28 100.00%
=== ================== ======
LOAN DOCUMENTATION - POOL 3
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
DOCUMENTATION LOANS OUTSTANDING OUTSTANDING
------------- --------- ---------------- -----------
Full Documentation ....................... 530 $ 173,465,583.58 98.07%
Limited Documentation .................... 4 1,363,361.83 0.77
Streamlined Documentation ................ 2 1,289,994.14 0.73
Alternative Documentation ................ 2 766,151.73 0.43
--- ------------------ ------
TOTAL ................................ 538 $ 176,885,091.28 100.00%
=== ================== ======
MARGIN (1) - POOL 3
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
MARGIN (%) LOANS OUTSTANDING OUTSTANDING
---------- ----- ----------- -----------
0.875 .................................... 2 $ 1,730,870.75 0.98%
1.000 .................................... 1 1,100,000.00 0.62
1.125 .................................... 4 1,834,350.45 1.04
1.250 .................................... 3 1,318,435.00 0.75
1.375 .................................... 15 14,963,475.54 8.46
1.500 .................................... 33 20,936,934.09 11.84
1.625 .................................... 51 25,681,932.51 14.52
1.750 .................................... 71 37,751,515.86 21.34
1.875 .................................... 44 15,164,256.78 8.57
2.000 .................................... 64 20,273,807.47 11.46
2.125 .................................... 50 10,587,375.85 5.99
2.250 .................................... 98 12,224,769.25 6.91
2.375 .................................... 29 4,475,618.42 2.53
2.500 .................................... 18 3,639,591.39 2.06
2.625 .................................... 25 2,057,095.96 1.16
2.750 .................................... 30 3,145,061.96 1.78
----- ------------------ ------
TOTAL ................................. 538 $ 176,885,091.28 100.00%
===== ================== ======
- ----------------------
(1) As of the Cut-off Date, the weighted average margin of the Pool 3 Mortgage
Loans is expected to be approximately 1.803%.
S-54
MAXIMUM MORTGAGE RATE(1) - POOL 3
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
MAXIMUM MORTGAGE RATE (%) LOANS OUTSTANDING OUTSTANDING
------------------------- ----- ----------- -----------
12.000 ................................... 27 $ 21,105,611.90 11.93%
12.130 ................................... 23 13,748,060.97 7.77
12.250 ................................... 37 17,796,442.81 10.06
12.380 ................................... 44 27,027,965.60 15.28
12.500 ................................... 47 14,741,119.87 8.33
12.630 ................................... 47 23,191,645.78 13.11
12.750 ................................... 78 21,469,116.70 12.14
12.880 ................................... 35 8,978,247.81 5.08
13.000 ................................... 50 10,563,279.69 5.97
13.130 ................................... 41 6,909,412.95 3.91
13.250 ................................... 59 6,092,879.89 3.44
13.380 ................................... 15 2,256,104.02 1.28
13.500 ................................... 12 1,257,500.12 0.71
13.630 ................................... 12 730,203.55 0.41
13.750 ................................... 11 1,017,499.62 0.58
--- ------------------ ------
TOTAL ................................ 538 $ 176,885,091.28 100.00%
=== ================== ======
- -------------------------
(1) As of the Cut-off Date, the weighted average Maximum Mortgage Rate of the
Pool 3 Mortgage Loans is expected to be approximately 12.545% per annum.
NEXT NOTE RATE ADJUSTMENT DATE(1) - POOL 3
PERCENT OF
AGGREGATE AGGREGATE
NUMBER OF PRINCIPAL PRINCIPAL
MORTGAGE BALANCE BALANCE
NEXT NOTE RATE ADJUSTMENT DATE LOANS OUTSTANDING OUTSTANDING
------------------------------ ----- ----------- -----------
December 2004 ............................ 292 $ 104,679,229.45 59.18%
January 2005 ............................. 62 17,065,883.93 9.65
February 2005 ............................ 60 15,465,909.31 8.74
March 2005 ............................... 35 15,445,251.56 8.73
April 2005 ............................... 27 6,808,955.96 3.85
May 2005 ................................. 62 17,419,861.07 9.85
------ ------------------ ------
TOTAL ................................ 538 $ 176,885,091.28 100.00%
====== ================== ======
- -------------------------
(1) As of the Cut-off Date, the weighted average months to the next rate
adjustment date of the Pool 3 Mortgage Loans was approximately 2 months.
S-55
THE INDICES
The Mortgage Rate for all of the Mortgage Loans will be adjusted monthly
or semi-annually on the related adjustment date. The index for the Mortgage Rate
borne by all of the Mortgage Loans may be calculated as follows (in each case,
rounded to the nearest one-eighth of one percent):
ONE-MONTH LIBOR. The Mortgage Rate borne by approximately 43.88% of
the Mortgage Loans (by Aggregate Cut-off Date Balance) is adjusted every
month to equal the London interbank offered rate for one-month U.S. dollar
deposits as listed under "Money Rates" in The Wall Street Journal most
recently available as of 15, 30, 32 or 45 days, as applicable, prior to
the related adjustment date ("One-Month LIBOR") plus a margin ranging from
0.875% to 2.625%.
SIX-MONTH LIBOR. The Mortgage Rate borne by approximately 56.12% of
the Mortgage Loans (by Aggregate Cut-off Date Balance) is adjusted every
six months to equal the London interbank offered rate for six-month U.S.
dollar deposits as listed under "Money Rates" in The Wall Street Journal
most recently available as of 30 or 45 days, as applicable, prior to the
related adjustment date ("Six-Month LIBOR") plus a margin ranging from
1.000% to 3.125%.
ASSIGNMENT OF THE MORTGAGE LOANS
Under the Mortgage Loan Purchase Agreement, RWT Holdings, Inc. (the
"Seller") will sell the Mortgage Loans to the Depositor. The Seller will make
certain representations, warranties and covenants relating to, among other
things, certain characteristics of the Mortgage Loans. Subject to the
limitations described below, the Seller will be obligated as described herein to
purchase or substitute a similar mortgage loan for any Mortgage Loan as to which
there exists deficient documentation or as to which there has been an uncured
breach of any such representation or warranty relating to the characteristics of
the Mortgage Loan that materially and adversely affects the value of such
Mortgage Loan or the interests of the Certificateholders in such Mortgage Loan
(a "Defective Mortgage Loan"). See "Loan Program -- Representations by Sellers;
Repurchases" in the accompanying prospectus.
Pursuant to a pooling and servicing agreement (the "Pooling and Servicing
Agreement"), dated as of November 1, 2004, among Sequoia Residential Funding,
Inc., as depositor (the "Depositor"), Wells Fargo Bank, National Association, in
the capacities of master servicer (the "Master Servicer") and securities
administrator (the "Securities Administrator") and HSBC Bank USA, National
Association, as trustee (the "Trustee"), on the Closing Date the Depositor will
sell, transfer, assign, set over and otherwise convey without recourse to the
Trust Fund all of its rights to the Mortgage Loans and its rights under the
Mortgage Loan Purchase Agreement (including the right to enforce the Seller's
purchase obligation). The obligations of the Seller with respect to the
Certificates are limited to the Seller's obligation to purchase or substitute
for Defective Mortgage Loans.
In connection with such transfer and assignment of the Mortgage Loans, the
Depositor will deliver or cause to be delivered to the Trustee or its custodian,
among other things, the original promissory note (the "Mortgage Note") (and any
modification or amendment thereto)
S-56
endorsed in blank without recourse, the original instrument creating a first
lien on the related Mortgaged Property (the "Mortgage") with evidence of
recording indicated thereon, an assignment in recordable form of the Mortgage,
the title policy with respect to the related Mortgaged Property and, if
applicable, all recorded intervening assignments of the Mortgage and any riders
or modifications to such Mortgage Note and Mortgage (except for any such
document other than Mortgage Notes not available on the Closing Date, which will
be delivered to the Trustee as soon as the same is available to the Depositor)
(collectively, the "Mortgage File"). Assignments of the Mortgage Loans to the
Trustee (or its nominee) will be recorded in the appropriate public office for
real property records, except in states where, in the opinion of counsel, such
recording is not required to protect the Trustee's interest in the Mortgage
Loans against the claim of any subsequent transferee or any successor to or
creditor of the Depositor.
The custodian, on behalf of the Trustee, will review each Mortgage File
within 270 days of the Closing Date (or promptly after the custodian's receipt
of any document permitted to be delivered after the Closing Date) and will hold
such Mortgage Files in trust for the benefit of the Certificateholders. If at
the end of such 270-day period, any document in a Mortgage File is found to be
missing or defective in a material respect and the Seller does not cure such
omission or defect within 180 days after its receipt of notice from the
custodian, then the Seller is obligated to purchase the related Defective
Mortgage Loan from the Trust Fund at a price equal to the sum of (a) 100% of the
Stated Principal Balance thereof, (b) unpaid accrued interest thereon from the
Due Date to which interest was last paid by the mortgagor to the Due Date
immediately preceding the repurchase and (c) any unreimbursed Monthly Advances
and servicing advances not included in clauses (a) and (b) above. Rather than
purchase the Defective Mortgage Loan as provided above, the Seller may remove
such Mortgage Loan (a "Deleted Mortgage Loan") from the Mortgage Pool and
substitute in its place one or more mortgage loans of like kind (such loan a
"Replacement Mortgage Loan"); provided, however, that such substitution is
permitted only within two years after the Closing Date and may not be made
unless an opinion of counsel is provided to the effect that such substitution
would not disqualify the REMIC elections or result in the imposition of a REMIC
related prohibited transaction tax under the Code.
Any Replacement Mortgage Loan generally will, on the date of substitution,
among other characteristics set forth in the Mortgage Loan Purchase Agreement,
(i) have an outstanding principal balance, after deduction of all Scheduled
Payments due in the month of substitution, not in excess (and not less than 90%)
of the Stated Principal Balance of the Deleted Mortgage Loan (the amount of any
shortfall to be deposited in the Distribution Account by the Seller not later
than the succeeding Determination Date and held for distribution to the
Certificateholders on the related Distribution Date), (ii) have a maximum
Mortgage Rate not less than (and not more than two percentage points greater
than) the maximum mortgage rate of the Deleted Mortgage Loan, (iii) have a gross
margin not less than that of the Deleted Mortgage Loan and, if Mortgage Loans of
a Mortgage Pool equal to 1% or more of the Cut-off Date balance of such Mortgage
Pool have become Deleted Mortgage Loans, not more than two percentage points
more than that of the Deleted Mortgage Loan, (iv) have an Effective
Loan-to-Value Ratio not higher than that of the Deleted Mortgage Loan, (v) have
a remaining term to maturity not greater than (and not more than one year less
than) that of the Deleted Mortgage Loan, (vi) not permit conversion of the
related Mortgage Rate to a permanent fixed Mortgage Rate, (vii) have the same or
higher credit score, (viii) have an initial interest adjustment date no earlier
than five months before (and no later than five months after) the initial
interest adjustment date of the Deleted
S-57
Mortgage Loan, (ix) be a "qualified replacement mortgage" within the meaning of
Section 860G(a)(4) of the Code and (x) comply with all of the representations
and warranties set forth in the Mortgage Loan Purchase Agreement. This cure,
repurchase or substitution obligation constitutes the sole remedy available to
the Certificateholders or the Trustee for omission of, or a material defect in,
a Mortgage File.
UNDERWRITING STANDARDS
GreenPoint, MLCC, MSDWCC, RBC Mortgage Company and Bank of America
originated approximately 31.89%, 24.17%, 21.81%, 8.46% and 7.33% of the Mortgage
Loans, respectively, and the remaining Mortgage Loans were originated by various
mortgage lending institutions (collectively with GreenPoint, MLCC, MSDWCC, RBC
Mortgage Company and Bank of America, the "Originators"). Each Originator will
represent and warrant that each of the Mortgage Loans originated and/or sold by
it was underwritten in accordance with standards consistent with those utilized
by mortgage lenders generally during the period of origination.
Underwriting standards are applied by or on behalf of a lender to evaluate
a borrower's credit standing and repayment ability, and the value and adequacy
of the related Mortgaged Property as collateral. In general, a prospective
borrower applying for a loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information. 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, the current salary, and whether it is
expected that the borrower will continue such employment in the future. 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. See "Loan Program--Underwriting Standards" in the
prospectus.
A lender may also originate mortgage loans pursuant to alternative sets of
underwriting criteria under reduced or limited documentation programs. These
programs are designed to facilitate the loan approval process. Under these
programs, certain documentation concerning income/employment and asset
verification is reduced or excluded. Loans underwritten under these programs are
generally limited to borrowers who have demonstrated an established ability and
willingness to repay the mortgage loans in a timely fashion. Permitted maximum
loan-to-value ratios under these programs are generally more restrictive than
those under the lender's standard underwriting criteria.
From time to time, exceptions to a lender's underwriting policies may be
made. Such exceptions may be made on a loan-by-loan basis at the discretion of
the lender's underwriter. Exceptions may be made after careful consideration of
certain mitigating factors such as borrower liquidity, employment and
residential stability and local economic conditions.
MLCC UNDERWRITING GUIDELINES. MLCC, a wholly owned direct subsidiary of
Merrill Lynch Bank USA, an indirect subsidiary of Merrill Lynch & Co., Inc.
("Merrill Lynch" ), and an
S-58
affiliate of one of the underwriters, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, is a Delaware corporation qualified to do business (to the extent
qualification is required) in each jurisdiction where its mortgage program is
offered. It maintains licenses in various jurisdictions as a real estate or
mortgage broker, and/or as a mortgage banker, and/or as a first or second
mortgage lender, as applicable.
MLCC's offices are located in Jacksonville, Florida. MLCC generally does
not establish local offices in the jurisdictions where its loans are offered,
but has, in the past, and where required, appointed employees of other Merrill
Lynch companies which do have local offices as officers or agents of MLCC, and
has used the other Merrill Lynch companies' local offices as MLCC's local
offices for licensing purposes.
MLCC is primarily in the business of originating conforming and
nonconforming fixed and adjustable rate mortgage loans and other loan products.
MLCC also originates home equity lines of credit to individuals. MLCC currently
originates loans in fifty states, the District of Columbia and the U.S. Virgin
Islands. The Mortgage Loans are secured by first liens on one- to four-family
residences, condominiums, and cooperative apartments (New York State only), most
of which are owner-occupied.
MLCC's mortgage programs are marketed primarily to Merrill Lynch clients
through Merrill Lynch, Pierce, Fenner & Smith Incorporated's financial advisors
and mortgage and credit specialists employed by MLCC, as well as through
newspaper and other print advertising and direct marketing campaigns.
As of January 2001, MLCC retained Cendant Mortgage Corporation ("Cendant")
to originate, process, and underwrite MLCC's real estate based loan products
on a "private-label" basis. Substantially all of the Mortgage Loans were either
originated on MLCC's behalf pursuant to this private-label relationship or
acquired by MLCC pursuant to its Correspondent Lending Program (as hereinafter
described). All first-lien closed-end residential mortgage loans originated or
acquired on this basis are serviced by Cendant Mortgage Corporation at its
servicing headquarters located in Mt. Laurel, New Jersey.
MLCC underwriting guidelines are applied to evaluate an applicant's credit
standing, financial condition, and repayment ability, as well as the value and
adequacy of the mortgaged property and Additional Collateral, if any, as
collateral for any loan made by MLCC. As part of the loan application process,
the applicant is required to provide information concerning his or her assets,
liabilities, income, and expenses (except as described below), along with an
authorization permitting MLCC to obtain any necessary third-party verifications,
including a credit report summarizing the applicant's credit history. Unless
prohibited by applicable state law, the applicant is typically required to pay
an application fee to MLCC.
In evaluating the applicant's ability and willingness to repay the
proposed loan, MLCC reviews the applicant's credit history and outstanding
debts, as reported on the credit report. If an existing mortgage or other
significant debt listed on the loan application is not adequately reported on
the credit report, MLCC generally requests a written or oral verification of the
balance and payment history of such debt from the servicer of such debt.
S-59
MLCC verifies the applicant's liquid assets to ensure that the client has
adequate liquid assets to apply toward any required down payment, closing costs,
prepaid interest, and at least two months' worth of cash reserves.
Except as described below, MLCC also evaluates the applicant's income to
determine its stability, probability of continuation, and adequacy to service
the proposed MLCC debt payment. MLCC's guidelines for verifying an applicant's
income and employment are generally as follows. For salaried applicants, MLCC
typically requires a written verification of employment from the applicant's
employer, or a copy of the applicant's two most recent IRS forms 1040 or W-2, a
current pay stub, and oral verification of employment. Oral verification of
employment is typically obtained directly from the applicant's employer, but in
certain circumstances, may be fulfilled by contacting the applicant at his or
her place of business. For non-salaried applicants, including self-employed
applicants, MLCC requires copies of the applicant's two most recent federal
income tax returns, along with all supporting schedules. In some cases, MLCC may
waive submission of such supporting schedules if this income is insignificant in
relation to the applicant's overall income, or does not affect the applicant's
ability to qualify for the proposed loan. A self-employed applicant is generally
required to submit a signed profit and loss statement if the applicant's income
shows significant variations from year to year.
In determining the adequacy of the property as collateral for the loan, a
Fannie Mae/Freddie Mac conforming appraisal of the property is performed by an
independent appraiser selected by Cendant Mortgage Corporation on MLCC's behalf,
except as noted below. The appraiser is required to inspect the property and
verify that it is in good condition and that renovation or construction, if new,
has been completed. The appraisal report indicates a value for the property and
provides information concerning marketability, the neighborhood, the property
site, interior and exterior improvements, and the condition of the property. For
certain re-finance transactions, MLCC typically will accept (a) the
re-certification or appraisal update of a previously prepared appraisal if the
applicant can produce an appraisal that was prepared approximately twelve months
or less from the date of the application for the MLCC loan; or (b) an FNMA Form
2055 "short form" appraisal (e.g., no interior inspection) if the applicant can
produce an appraisal that was prepared roughly between twelve and twenty-four
months from the date of the application for the MLCC loan. Most of the
aforementioned appraisals may have been procured by either Lender's Service,
Inc., in which MLCC, until recently, held a minority interest, or STARS, in
which Cendant Mortgage Corporation holds a majority interest.
The applicant has the option of directly obtaining a title report or may
choose to have MLCC obtain the report. Generally, all liens must be satisfied
and removed prior to or upon the closing of the loan. Title insurance is
required to be obtained for all first lien Mortgage Loans. Where applicable, in
addition to providing proof of standard hazard insurance on the property, the
applicant is required to obtain, to the extent available, flood insurance when
the subject property is identified as being in a federally designated flood
hazard area.
Once sufficient employment, credit, and property information is obtained,
the decision as to whether to approve the loan is based upon the applicant's
income and credit history, the status of title to the mortgaged property, and
the appraised value of the mortgaged property. MLCC also reviews the level of an
applicant's liquid assets as an indication of creditworthiness. The approval
process generally requires that the applicant have a good credit history and a
total debt-service-to-income ("DTI") ratio that generally does not exceed 38%;
however, this limit may be
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raised to 50% or greater if the borrower demonstrates satisfactory disposable
income and/or other mitigating factors are present. Generally, the DTI ratio is
calculated as the ratio of the borrower's total monthly debt obligations
(including the interest-only payment that will be due on the requested loan
calculated at the initial interest rate for such loan plus an additional 0.25%
to 2.50%, depending upon the particular loan product requested by the applicant
(with the qualifying rate never being less than 8%)), divided by the borrower's
total verified monthly income. In general, it is MLCC's belief that the DTI
ratio is only one of several factors, such as loan-to-value ("LTV") ratio,
credit history, and reserves, that should be considered in making a
determination of an applicant's ability to repay the proposed loan. As part of
the underwriting process, MLCC typically reviews an applicant's credit score.
MLCC considers an applicant's credit score in connection with other factors,
including the applicant's overall credit payment history, level of income,
debts, and assets. It is not MLCC's practice to accept or reject an application
solely on the basis of the applicant's credit score.
Certain loans originated by MLCC were originated under loan programs that
do not require verification of borrower income. In certain limited cases, MLCC
may accept verification of borrower assets and/or status of credit history in
addition to or in lieu of income verification, provided that the borrower meets
certain standards with regard to the ratio of liquid assets to the loan amount
and other compensating factors are present. MLCC's loan origination process
allows for expedited processing on certain loans based on the risk profile of
the loan. During the origination process, MLCC conducts an assessment of the
risk profile of the prospective borrower and subject property to determine the
level of income verification required to process the loan. MLCC categorizes
loans into different processing tracks based upon the overall risk profile of
the loan, as evidenced by the LTV ratio, borrower credit profile, the liquidity
ratio (as described below), type of property, occupancy status, and proposed
loan amount. For loans that demonstrate the lowest level of risk based upon this
categorization, the borrower may not be required to disclose his or her income
in order for MLCC to process the loan.
MLCC uses a "liquidity ratio" as part of its underwriting criteria. The
liquidity ratio is defined as the total amount of a borrower's liquid assets, as
verified by MLCC, divided by the total amount of the proposed loan. For example,
a borrower with $500,000 in verified liquid assets who requests a $250,000 loan
amount would have a 2:1 liquidity ratio. Liquid assets are generally defined as
cash and cash equivalents, marginable marketable securities, and retirement
accounts. Business assets are generally not considered part of a borrower's
liquid assets unless the business is 100% owned by the borrower. The liquidity
ratio generally excludes all assets that are pledged or margined, estimated
funds required for closing, concentrated equity positions if the share price is
less than $10, and any stock options or unvested shares of stock. MLCC believes
that the accumulation of net worth, particularly in the form of liquid assets,
is a strong indication of creditworthiness. A borrower who accumulates net worth
from earnings and savings demonstrates a strong ability to manage his or her
financial affairs. If the net worth is in liquid form, it can potentially be
used to service the proposed debt, to pay unexpected debts that may occur, and
to protect against short-term interruptions of income.
The level of income documentation required by MLCC is determined by the
combination of the borrower's credit score and overall credit profile, liquidity
ratio, and the LTV ratio of the proposed loan. Using predetermined parameters
based upon the combination of these factors, adjusted for the property type and
occupancy status, MLCC may require the following different levels of income
disclosure and verification: (1) no income disclosure, (2) debt-to-income ratio
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calculated based on stated income from the borrower, with no verification of
income required, (3) verification of income using streamlined/alternate
documentation, or (4) full income disclosure and verification.
MLCC also requires that the proposed loan have an LTV ratio that generally
does not exceed 80%, but under certain circumstances may exceed 100%. MLCC's
practice is to continuously review LTV ratio limits and to adjust such limits
where economic conditions dictate that such adjustments are appropriate. Any
negative comments concerning the quality, condition, and current market
conditions as noted in the appraisal report may result in a reduction of the
maximum LTV ratio permitted for the loan. In the case of a loan which is a
purchase money mortgage, MLCC computes the loan's LTV ratio as the original loan
balance divided by the appraised value of the property or the contract sales
price, whichever is lower.
Loans that have an LTV ratio in excess of 80% are, in general also either
covered by primary mortgage insurance or secured by Additional Collateral. See
"Description of the Mortgage Pools -- The Additional Collateral Loans" in this
prospectus supplement.
Loans may be made to corporations, partnerships, and trustees of certain
trusts in connection with applications that have been received from individuals.
Such loans are generally structured as follows: (i) the loan is to the
individual and the entity which owns the real property, and is secured by a
mortgage or deed of trust executed solely by the entity; or (ii) the loan is to
the entity, secured by a mortgage from the entity and guaranteed by the
individual applicant; or (iii) the loan is made jointly to the individual
applicant and the entity, and secured by a mortgage from the entity. In such
cases, MLCC applies its standard underwriting criteria to the property and the
individual applicant. Such loans are categorized as owner-occupied in this
prospectus supplement if the individual applicant states in the application
that, as of the closing of the related loan, he or she will occupy the property
as his or her primary residence.
MLCC originates loans through mortgage brokers that are not affiliated
with MLCC under its Mortgage Broker Program. The mortgage brokers solicit the
prospective borrower and process the documentation described above for such
borrower's loan. Personnel of Cendant Mortgage Corporation review such
documentation and underwrite the loan in accordance with the above-described
underwriting standards. In that regard, the related appraisals are either
conducted or reviewed by appraisers who are approved by Cendant Mortgage
Corporation on MLCC's behalf. Such loans are closed in the name of, and funded
by, MLCC.
In 1995, MLCC began purchasing mortgage loans from mortgage banking
related entities under its Correspondent Lending program. In order for MLCC to
approve a lender as a seller under its Correspondent Lending program, a lender
must meet certain qualifying criteria. These criteria include requirements that
the lender must (a) be a bank, savings and loan, or HUD-approved mortgagee which
is a Fannie Mae or Freddie Mac seller in good standing; (b) demonstrate at least
three years' experience in mortgage originations; (c) have a quality control
plan in place which is acceptable to MLCC; (d) show profitability for the prior
two years; (e) demonstrate a residential loan portfolio with delinquency rates
at or below national averages, as published by the Mortgage Bankers Association;
and (f) have a corporate net worth of at least $2.5 million and/or a corporate
credit history acceptable to MLCC.
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Under MLCC's Correspondent Lending program, the correspondent lender
processes and closes the mortgage loans in its name and thereafter funds the
mortgage loans from its own funds. Personnel of Cendant Mortgage Corporation, or
in certain cases, the correspondent lender, underwrite the loans in accordance
with MLCC's standard underwriting guidelines, as published in the MLCC Seller
Guide. Additionally, Cendant Mortgage Corporation conducts a post-closing review
on each loan prior to MLCC purchasing the loan from the correspondent lender.
The purchase price that MLCC pays for correspondent mortgage loans is
typically an amount equal to the principal balance of the loans plus a premium,
which is paid at the time the correspondent lender assigns the loans to MLCC.
In 1995, MLCC began originating mortgage loans under its construction to
permanent financing program. Such loans have the same terms as other loans under
MLCC's mortgage program but include certain requirements for the completion of
construction, at which time such loans become permanent loans, as evidenced by a
certificate of occupancy and/or appraiser's certification of completion.
Upon the approval of a loan, the borrower obtains the loan by paying an
origination fee (employees of Merrill Lynch & Co., Inc., MLCC's ultimate parent,
and its affiliates generally pay a lower origination fee) and reimbursing MLCC
for all out-of-pocket closing costs incurred by MLCC, all or part of which fees
or costs may be waived by MLCC from time to time.
The above described underwriting guidelines may be varied in certain
cases, on the basis of compensating factors, as deemed appropriate by MLCC's
underwriting personnel.
The information set forth above with respect to MLCC and its mortgage
programs has been provided by MLCC, and neither the Seller, the Depositor, the
Trustee nor any Underwriter makes representations or warranties as to the
accuracy or completeness of such information. In addition, the Pool 3 Mortgage
Loans are seasoned loans and were originated by MLCC pursuant to underwriting
guidelines in effect at the time of origination of such Mortgage Loans, which
may differ in certain respects from the guidelines described above.
DESCRIPTION OF THE CERTIFICATES
GENERAL
On or about November 23, 2004 (the "Closing Date"), the Certificates will
be issued pursuant to the Pooling and Servicing Agreement. Set forth below are
summaries of the specific terms and provisions of the Pooling and Servicing
Agreement. The following summaries are subject to, and are qualified in their
entirety by reference to, the provisions of the Pooling and Servicing Agreement.
When particular provisions or terms used in the Pooling and Servicing Agreement
are referred to, the actual provisions (including definitions of terms) are
incorporated by reference.
The Certificates will consist of the Class A-1, Class A-2, Class A-3,
Class X-A1, Class X-A2, Class X-B, Class A-R and Class LT-R Certificates (the
"Senior Certificates") and the Class B-1, Class B-2, Class B-3, Class B-4, Class
B-5 and Class B-6 Certificates (the
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"Subordinate Certificates" or the "Subordinate Classes"). The Senior
Certificates (other than the Class LT-R Certificate) and the Class B-1, Class
B-2 and Class B-3 Certificates are sometimes collectively referred to herein as
the "Offered Certificates." Only the Offered Certificates are offered under this
prospectus supplement. The Class LT-R, Class B-4, Class B-5 and Class B-6
Certificates are collectively referred to as the "Privately-Offered
Certificates." The Class X-A1, Class X-A2 and Class X-B Certificates are
collectively referred to as the "Class X Certificates." The Privately-Offered
Certificates are not offered under this prospectus supplement. Accordingly, the
description of the Privately-Offered Certificates provided in this prospectus
supplement is solely for informational purposes. The Class A-1, Class A-2, Class
A-3, Class B-1 and Class B-2 Certificates are sometimes collectively referred to
herein as the "LIBOR Certificates" for the purposes of describing interest
payments with respect to such classes.
The Offered Certificates will be issued in the initial Class Principal
Amounts set forth in the table under "Summary -- Offered Certificates." The
Class X-A1 Certificates consist of two components, the "Pool 1 Component" and
the "Pool 2 Component." The holder of a Class X-A1 Certificate may not transfer
the components separately. The Class B-4, Class B-5 and Class B-6 Certificates
will be issued in the approximate initial Class Principal Amounts of $1,431,000,
$1,431,000 and $2,865,426 respectively. The Class LT-R Certificate will not have
a Class Principal Amount. The initial Class Principal Amounts and Class Notional
Amounts of each class may be increased or decreased by up to 5% to the extent
that the Stated Principal Balance of the Mortgage Loans is increased or
decreased as described at "Description of the Mortgage Pools."
The Offered Certificates (other than the Class A-R, Class X-A1, Class X-A2
and Class X-B Certificates) will be issued in minimum denominations of $25,000
initial principal amount each and integral multiples of $1 in excess thereof.
The Class A-R Certificate will be issued as a single instrument in fully
registered, definitive form, representing the entire principal amount of such
Certificate. Each of the Class X-A1, Class X-A2 and Class X-B Certificates will
be issued as a single instrument evidencing a 100% percentage interest in each
such class.
The Certificates represent beneficial ownership interests in a trust fund
(the "Trust Fund"), the assets of which on the Closing Date will consist
primarily of (1) the Pool 1 Mortgage Loans, the Pool 2 Mortgage Loans and the
Pool 3 Mortgage Loans; (2) such assets as from time to time are identified as
deposited in respect of the Mortgage Loans in the Custodial Accounts and the
Distribution Account (see "-- Payments on Mortgage Loans; Accounts" below); (3)
funds on deposit in the Reserve Fund maintained for the benefit of the LIBOR
Certificates; (4) the Trust Fund's rights under various assignment, assumption
and recognition agreements pursuant to which the Seller and the Depositor
assigned their respective interests in the various underlying mortgage loan
purchase agreements and servicing agreements with respect to the Mortgage Loans
originally entered into between the Seller and the Originators; (5) the Trust
Fund's rights under the Mortgage Loan Purchase Agreement, as described above
under "Description of the Mortgage Pools -- Assignment of the Mortgage Loans,"
(6) property acquired by foreclosure of the Mortgage Loans or deed in lieu of
foreclosure; (7) any applicable insurance policies; and (8) the proceeds of all
of the foregoing. In addition, the rights under certain pledged collateral
accounts and the Limited Purpose Surety Bonds with respect to the Additional
Collateral Loans will be assigned to the Trustee for the benefit of the
Certificateholders. See "Description of the Mortgage Pools -- The Additional
Collateral
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Loans." Neither the rights in the Additional Collateral nor the Reserve Fund
will be part of any REMIC.
Solely for purposes of determining distributions of interest and principal
on the Senior Certificates, the Senior Certificates (other than the Class X
Certificates) have been divided into the following payment groups (each a
"Certificate Group"):
THE GROUP 1 CERTIFICATES: The Class A-1, Class A-R and Class LT-R
Certificates are referred to herein as the "Group 1 Certificates." With the
limited exception described at "-- Limited Cross-Collateralization,"
distributions of interest and principal on the Group 1 Certificates will be
based solely on interest and principal received on, or advanced with respect to,
the Pool 1 Mortgage Loans.
THE GROUP 2 CERTIFICATES: The Class A-2 Certificates are referred to
herein as the "Group 2 Certificates." With the limited exception described at
"-- Limited Cross-Collateralization," distributions of interest and principal on
the Group 2 Certificates will be based solely on interest and principal received
on, or advanced with respect to, the Pool 2 Mortgage Loans.
THE GROUP 3 CERTIFICATES: The Class A-3 and Class X-A2 Certificates are
referred to herein as the "Group 3 Certificates." With the limited exception
described at "-- Limited Cross-Collateralization," distributions of interest
and principal on the Group 3 Certificates will be based solely on interest and
principal received on, or advanced with respect to, the Pool 3 Mortgage Loans.
Distributions of interest on the Class X-A1 Certificates will be based on
distributions made in respect of the Pool 1 Component and the Pool 2 Component.
With the limited exception described at "-- Limited Cross-Collateralization,"
distributions on the Pool 1 Component will be based solely on interest received
on, or advanced with respect to, the Pool 1 Mortgage Loans, and distributions on
the Pool 2 Component will be based solely on interest received on, or advanced
with respect to, the Pool 2 Mortgage Loans.
Distributions of interest on the Class X-B Certificates and of interest
and principal on the Class B-1, Class B-2, Class B-3 and the other Subordinate
Classes will be based on interest and principal, as applicable, received on, or
advanced with respect to, the Pool 1, Pool 2 and Pool 3 Mortgage Loans in the
aggregate.
Distributions on the Certificates will be made by the Securities
Administrator, on behalf of the Trustee, on the 20th day of each month, or if
such day is not a Business Day, on the first Business Day thereafter commencing
in December 2004 (each, a "Distribution Date"), to the persons in whose names
such Certificates are registered on the applicable Record Date. For this
purpose, a "Business Day" is any day other than (i) a Saturday or Sunday, or
(ii) a day on which banking institutions in the City of New York, New York, the
states of Maryland or Minnesota or the city in which the Corporate Trust Office
of the Trustee is located are authorized or obligated by law or Executive Order
to be closed. A "Record Date" with respect to the LIBOR Certificates and any
Distribution Date is the last Business Day preceding that Distribution Date (or
the Closing Date, in the case of the first Distribution Date) or, in the case of
all other Offered Certificates (including LIBOR Certificates that are
subsequently reissued as Definitive
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Certificates (as described below at "-- Book Entry Certificates")), the last
Business Day of the month preceding the month of that Distribution Date.
Payments on each Distribution Date will be made by check mailed to the
address of the holder of the certificate (the "Certificateholder") entitled
thereto as it appears on the applicable certificate register or, in the case of
a Certificateholder who holds 100% of a notional class of Certificates or the
Class A-R Certificate or who holds Certificates with an aggregate initial Class
Principal Amount of $1,000,000 or more and who has so notified the Securities
Administrator in writing in accordance with the Pooling and Servicing Agreement,
by wire transfer in immediately available funds to the account of such
Certificateholder at a bank or other depository institution having appropriate
wire transfer facilities; provided, however, that the final payment in
retirement of the Certificates will be made only upon presentment and surrender
of such Certificates at the Corporate Trust Office of the Securities
Administrator. See "-- Book Entry Certificates" below for the method of payment
to Beneficial Owners of Book-Entry Certificates.
BOOK-ENTRY CERTIFICATES
GENERAL. The Offered Certificates (other than the Class A-R Certificate)
will be book-entry certificates (each, a class of "Book-Entry Certificates")
issued, maintained and transferred on the book-entry records of The Depository
Trust Company ("DTC") and its Participants.
Each class of Book-Entry Certificates will be represented by one or more
global certificates which equal the initial principal balance of such class
registered in the name of the nominee of DTC. The Depositor has been informed by
DTC that DTC's nominee will be Cede & Co. No person acquiring an interest in a
Book-Entry Certificate (each, a "Beneficial Owner") will be entitled to receive
a physical certificate instrument evidencing such person's interest (a
"Definitive Certificates"), except as set forth in the prospectus under
"Description of the Securities -- Book-Entry Registration of Securities." Unless
and until Definitive Certificates are issued for the Book-Entry Certificates
under the limited circumstances described in the prospectus, all references to
actions by Certificateholders with respect to the Book-Entry Certificates will
refer to actions taken by DTC upon instructions from its Participants, and all
references herein to distributions, notices, reports and statements to
Certificateholders with respect to the Book-Entry Certificates will refer to
distributions, notices, reports and statements to DTC or Cede & Co., as the
registered holder of the Book-Entry Certificates, for distribution to Beneficial
Owners by DTC in accordance with DTC procedures. Beneficial Owners are only
entitled to exercise their rights indirectly through Participants in the DTC.
REGISTRATION. Beneficial Owners will hold their interests in their Offered
Certificates through DTC in the United States, or, upon request, through
Clearstream Banking, societe anonyme (formerly Cedelbank) (hereafter,
"Clearstream Luxembourg") or the Euroclear System ("Euroclear") in Europe if
they are participants of such systems, or indirectly through organizations which
are participants in such systems. Clearstream Luxembourg and Euroclear will hold
omnibus positions on behalf of their participants through customers' securities
accounts in Clearstream Luxembourg's and Euroclear's names on the books of their
respective depositaries which in turn will hold such positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank,
N.A. generally, but not exclusively, will act as depositary for Clearstream
Luxembourg and JPMorgan Chase Bank generally, but not
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exclusively, will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively, the "European
Depositaries").
The Beneficial Owner's ownership interest in a Book-Entry Certificate will
be recorded on the records of the brokerage firm, bank, thrift institution or
other financial intermediary (each, a "Financial Intermediary") that maintains
the Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm (a "Participant") that acts as agent
for the Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, if the Beneficial Owner's Financial Intermediary is not a DTC
participant and on the records of Clearstream Luxembourg or Euroclear, as
appropriate).
Beneficial Owners will receive all payments of principal of, and interest
on, the Offered Certificates from the Trustee through DTC and DTC participants.
While the Book-Entry Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
payments of principal of, and interest on, the Book-Entry Certificates.
Participants and indirect participants with whom Beneficial Owners have accounts
with respect to Book-Entry Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Beneficial Owners. Accordingly, although Beneficial Owners will
not possess physical certificates, the Rules provide a mechanism by which
Beneficial Owners will receive payments and will be able to transfer their
interest.
Beneficial Owners will not receive or be entitled to receive Definitive
Certificates representing their respective interests in the Book-Entry
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial Owners who are not
Participants may transfer ownership of Book-Entry Certificates only through
Participants and indirect participants by instructing such Participants and
indirect participants to transfer their interest by book-entry transfer, through
DTC for the account of the purchasers of such Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfer of ownership of Book-Entry Certificates
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Beneficial Owners.
Because of time zone differences, 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. Such credits or any
transactions in such securities settled during such processing will be reported
to the relevant Euroclear or Clearstream Luxembourg Participants on such
business day. 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
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relating to the Certificates, refer to "Federal Income Tax Consequences --
Withholding with Respect to Certain Foreign Investors" and "-- Backup
Withholding" in the accompanying prospectus and "Global Clearance, Settlement
and Tax Documentation Procedures -- Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
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 the DTC rules on behalf of the relevant
European international clearing system by the Relevant Depositary; however, such
cross market transactions will require delivery of instructions to the relevant
European international clearing system by the counterparty in such system in
accordance with its rules and procedures and within its established deadlines
(European time). The relevant European international clearing system 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 Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Clearstream Luxembourg is incorporated under the laws of Luxembourg as a
professional depository. Clearstream Luxembourg holds securities for its
participating organizations ("Clearstream Luxembourg Participants") 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 certificates. Transactions may be settled in
Clearstream Luxembourg in any of various currencies, including United States
dollars. Clearstream Luxembourg provides to its Clearstream Luxembourg
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally-traded securities and securities
lending and borrowing. Clearstream Luxembourg interfaces with domestic markets
in several countries. As a professional depository, Clearstream Luxembourg is
subject to regulation by the Luxembourg Monetary Institute. Clearstream
Luxembourg Participants are recognized financial institutions around the world,
including underwriters, securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Indirect access to
Clearstream Luxembourg is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Clearstream Luxembourg Participant, either directly or
indirectly.
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Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of various currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing, and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by Euroclear Bank, S.A./N.V. (the
"Euroclear Operator"). All operations are conducted by the Euroclear Operator,
and all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear Operator. Euroclear Participants include banks
(including central banks), securities brokers and dealers and other professional
financial intermediaries. Indirect access to Euroclear is also available to
other firms that clear through or maintain a custodial relationship with a
Euroclear Participant, either directly or indirectly.
Securities clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of the Euroclear System and applicable Belgian
law (collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Payments on the Book-Entry Certificates will be made on each Distribution
Date by the Securities Administrator, on behalf of the Trustee to DTC. DTC will
be responsible for crediting the amount of such payments to the accounts of the
applicable DTC participants in accordance with DTC's normal procedures. Each DTC
participant will be responsible for disbursing such payment to the Beneficial
Owners of the Book-Entry Certificates that it represents and to each Financial
Intermediary for which it acts as agent. Each such Financial Intermediary will
be responsible for disbursing funds to the beneficial owners of the Book-Entry
Certificates that it represents.
Under a book-entry format, Beneficial Owners of the Book-Entry
Certificates may experience some delay in their receipt of payments, since such
payments will be made by the Securities Administrator to Cede & Co. Payments
with respect to Certificates 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. Such payments
will be subject to tax reporting in accordance with relevant United States tax
laws and regulations. See "Federal Income Tax Consequences -- Withholding with
Respect to Certain Foreign Investors" and " -- Backup Withholding" in the
accompanying prospectus.
Because DTC can only act on behalf of Financial Intermediaries, the
ability of a Beneficial Owner to pledge Book-Entry Certificates to persons or
entities that do not participate in the Depository system, or otherwise take
actions in respect of such Book-Entry Certificates, may be limited due to the
lack of physical certificates for such Book-Entry Certificates. In
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addition, issuance of the Book-Entry Certificates in book-entry form may reduce
the liquidity of such Certificates in the secondary market since certain
potential investors may be unwilling to purchase Certificates for which they
cannot obtain physical certificates.
Monthly and annual reports will be provided to Cede & Co., as nominee of
DTC, and may be made available by Cede & Co. to Beneficial Owners upon request,
in accordance with the rules, regulations and procedures creating and affecting
the Depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates. Clearstream
Luxembourg or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by a Certificateholder under the Pooling and
Servicing Agreement on behalf of a Clearstream 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 such actions on
its behalf through DTC. DTC may take actions, at the direction of the related
Participants, with respect to some Book-Entry Certificates which conflict with
actions taken with respect to other Certificates.
Although DTC, Clearstream Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Book-Entry Certificates
among participants of DTC, Clearstream Luxembourg and Euroclear, they are under
no obligation to perform or continue to perform such procedures and such
procedures may be discontinued at any time.
None of the Seller, the Depositor, the Securities Administrator, the
Master Servicer, the Servicers or the Trustee will have any responsibility for
any aspect of the records relating to or payments made on account of beneficial
ownership interests of the Book-Entry Certificates held by Cede & Co., as
nominee of DTC, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests or transfers thereof.
Definitive Certificates will be issued to Beneficial Owners or their
nominees, respectively, rather than to DTC or its nominee, only under the
limited conditions set forth in the accompanying prospectus under "Description
of the Securities -- Book-Entry Registration of Securities." Upon the occurrence
of an event described in the penultimate paragraph thereunder, the Securities
Administrator, on behalf of the Trustee, is required to direct DTC to notify
Participants that have ownership of Book-Entry Certificates as indicated on the
records of DTC of the availability of Definitive Certificates for the Book-Entry
Certificates. Upon surrender by DTC of the Definitive Certificates representing
the Book-Entry Certificates, and upon receipt of instruction from DTC for
re-registration, the Securities Administrator, on behalf of the Trustee, will
re-issue the Book-Entry Certificates as Definitive Certificates in the
respective principal balances owned by the individual Beneficial Owner and
thereafter the Trustee will recognize the holders of such Definitive
Certificates as Certificateholders under the Pooling and Servicing Agreement.
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For a description of the procedures generally applicable to the Book-Entry
Certificates, see "Description of the Securities -- Book-Entry Registration of
Securities" in the accompanying prospectus.
PAYMENTS ON MORTGAGE LOANS; ACCOUNTS
On or prior to the Closing Date, each Servicer will establish and maintain
or cause to be established and maintained an account or accounts for the
collection of payments on the Mortgage Loans which will be separate from such
Servicer's other assets (each, a "Custodial Account"). On or prior to the
Closing Date, the Securities Administrator will establish an account (the
"Distribution Account"), which will be maintained with the Securities
Administrator in trust for the benefit of the Certificateholders. On the 18th
day of each month (or, if such 18th day is not a Business Day, on the
immediately preceding Business Day), each Servicer will remit all amounts on
deposit in the related Custodial Account to the Distribution Account. On each
Distribution Date, to the extent of the Available Distribution Amount on deposit
in the Distribution Account, the Securities Administrator, on behalf of the
Trustee, will withdraw the Certificate Distribution Amount to pay the
Certificateholders. The "Certificate Distribution Amount" for any Distribution
Date will equal the sum of the (i) respective Interest Distribution Amounts with
respect to each class of Certificates, (ii) the related Senior Principal
Distribution Amount and (iii) the related Subordinate Principal Distribution
Amount (as each such term is defined herein).
As further compensation, funds credited to the Custodial Account
established by each Servicer may be invested at the discretion of such Servicer
for its own benefit in Permitted Investments (as defined in the related
Servicing Agreement).
AVAILABLE DISTRIBUTION AMOUNT
Distributions of interest and principal on the Certificates will be made
on each Distribution Date from the "Available Distribution Amount" of the
related Mortgage Pool (in the case of the Class A-1, Class A-2, Class A-3 and
Class X-A2 Certificates and the components of the Class X-A1 Certificates) and
from the Available Distribution Amount of the Mortgage Pools in the aggregate
(in the case of the Class X-B Certificates and the Subordinate Certificates) in
the order of priority set forth below at "-- Priority of Distributions." The
"Available Distribution Amount" with respect to each Mortgage Pool and any
Distribution Date, as more fully described in the Pooling and Servicing
Agreement, will generally equal the following amounts:
(1) all scheduled installments of interest (net of the Master
Servicing Fee and the Servicing Fees) and principal collected on the
related Mortgage Loans and due during the related Due Period, together
with any Monthly Advances in respect thereof;
(2) all proceeds of any primary mortgage guaranty insurance policies
or any other insurance policies with respect to the related Mortgage
Loans, to the extent such proceeds are not applied to the restoration or
repair of the related mortgaged property or released to the related
mortgagor in accordance with the Servicer's normal servicing procedures
(collectively, "Insurance Proceeds");
(3) all other amounts received and retained in connection with the
liquidation of defaulted Mortgage Loans in such Mortgage Pool, by
foreclosure or otherwise
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("Liquidation Proceeds") during the month preceding the month of such
Distribution Date, including any Subsequent Recoveries, with respect to
any Additional Collateral Loans in such Mortgage Pool, all proceeds of the
related Additional Collateral, to the extent payable;
(4) all partial or full prepayments of principal, together with any
accrued interest thereon, identified as having been received on the
related Mortgage Loans during the calendar month immediately preceding the
Distribution Date (the "Prepayment Period"), plus any amounts received
from the Master Servicer or the Servicers in respect of Prepayment
Interest Shortfalls (as defined at " -- Distributions of Interest") on
such Mortgage Loans; and
(5) amounts received with respect to such Distribution Date as the
purchase price or a price adjustment in respect of a defective Mortgage
Loan in such Mortgage Pool purchased or replaced by the Seller as of such
Distribution Date as a result of a breach of a representation or warranty
or a document defect;
minus:
- an amount equal to the product of (a) the applicable Pool Percentage
and (b) the sum of (i) all charges and other amounts payable or
reimbursable to the Master Servicer, the Securities Administrator
and the Trustee under the Pooling and Servicing Agreement (subject
to an aggregate maximum amount of $300,000 annually to be paid to
such parties collectively, whether from collections from Pool 1,
Pool 2 or Pool 3) and (ii) all charges and other amounts payable to
the Servicers under the Servicing Agreements;
- in the case of paragraphs (2) through (5) above with respect to the
related Mortgage Loans, any unreimbursed expenses incurred in
connection with a liquidation or foreclosure and any unreimbursed
Monthly Advances or servicing advances due to the Master Servicer or
the Servicers;
- with respect to the related Mortgage Loans, any unreimbursed Monthly
Advances or servicing advances determined to be nonrecoverable; and
- in the case of paragraphs (1) through (4) above with respect to the
related Mortgage Loans, any amounts collected which are determined
to be attributable to a subsequent Due Period or Prepayment Period.
The "Pool Percentage" for each Mortgage Pool and any Distribution Date
will be a fraction, expressed as a percentage, the numerator of which is the
aggregate Stated Principal Balance of the Mortgage Loans in such Mortgage Pool
as of such date and the denominator of which is the sum of the aggregate Stated
Principal Balance of all of the Mortgage Loans (in the aggregate) as of such
date.
DISTRIBUTIONS OF INTEREST
General. The "Interest Distribution Amount" on each Distribution Date with
respect to each class of Certificates and any component thereof, will equal the
Current Interest for that class
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on that Distribution Date as reduced by such class' share of Net Interest
Shortfalls (as described below).
- "CURRENT INTEREST" for (i) any Component on any Distribution Date
will equal the amount of interest accrued during the related Accrual
Period on the related Component Notional Amount for that
Distribution Date at the applicable Component Interest Rate, (ii)
each class of Certificates (other than the Class X-A1 Certificates)
on any Distribution Date will equal the amount of interest accrued
during the related Accrual Period on the related Class Principal
Amount immediately prior to that Distribution Date (or, in the case
of the Class X-A2 and Class X-B Certificates, the related Class
Notional Amount thereof for that Distribution Date) at the
applicable Certificate Interest Rate and (iii) the Class X-A1
Certificates on any Distribution Date will equal the sum of Current
Interest on the Components thereof for such date.
- The "ACCRUAL PERIOD" applicable to the LIBOR Certificates with
respect to any Distribution Date, will be the period commencing on
the 20th day of the month immediately preceding the month in which
such Distribution Date occurs (or in the case of the first
Distribution Date, beginning on the Closing Date of this
transaction) and ending on the 19th day of the month in which such
Distribution Date occurs. The "Accrual Period" applicable to all
other classes of Certificates will be the calendar month immediately
preceding the month in which the related Distribution Date occurs.
For each Distribution Date and each related Accrual Period, interest
on all classes of Certificates will be calculated and payable on the
basis of a 360-day year consisting of twelve 30-day months, except
that for the first Accrual Period only, interest on each class of
LIBOR Certificates will be calculated and payable on the basis of a
27-day Accrual Period and a year assumed to consist of 360 days.
- The "CLASS PRINCIPAL AMOUNT" of each class of Certificates will be
equal to the aggregate Certificate Principal Amounts of the
Certificates of that class.
- The "CERTIFICATE PRINCIPAL AMOUNT" of any Certificate will equal its
Certificate Principal Amount as of the Closing Date of this
transaction as reduced by all amounts previously distributed on that
Certificate in respect of principal and the principal portion of any
Realized Losses (as defined at " -- Allocation of Realized Losses")
previously allocated to that Certificate; provided, however, that on
any Distribution Date on which a Subsequent Recovery is distributed,
the Certificate Principal Amount of any class of Certificates then
outstanding to which a Realized Loss amount has been applied will be
increased, in order of seniority, by an amount equal to the total
amount of any Subsequent Recovery distributed on such date to
Holders of the Certificates, after application (for this purpose) to
more senior classes of Certificates. The Certificate Principal
Amount of a class of Subordinate Certificates may be additionally
reduced by allocation of any Subordinate Certificate Writedown
Amount (as defined at " -- Allocation of Realized Losses").
Class X Certificates. The Class X-A1 Certificates will be entitled to
receive on each Distribution Date, the amount payable in respect of the Pool 1
Component and the Pool 2 Component, subject to (i) the payment of any related
Required Reserve Fund Deposit from amounts otherwise payable to the Class X-A1
Certificates and attributable to the Pool 1
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Component and (ii) the payment of any related Required Reserve Fund Deposit from
amounts otherwise payable to the Class X-A1 Certificates and attributable to the
Pool 2 Component. The holders of the Class X-A1 Certificates will not be
reimbursed for amounts deposited in the Reserve Fund and distributed on the
Class A-1 Certificates or the A-2 Certificates from amounts otherwise
distributable on the Class X-A1 Certificates.
On each Distribution Date, the Pool 1 Component will be entitled to
Current Interest based on (i) the Pool 1 Component Interest Rate on a per annum
basis and (ii) the Pool 1 Component Notional Amount. The "POOL 1 COMPONENT
INTEREST RATE" for any Distribution Date equals the excess, if any, of the Pool
1 Net WAC for such Distribution Date over the Certificate Interest Rate of the
Class A-1 Certificates for such Distribution Date (for the first Distribution
Date only, adjusted to reflect the actual number of days in the Accrual Period).
For any Distribution Date, the "POOL 1 COMPONENT NOTIONAL AMOUNT" shall equal
the Class Principal Amounts of the Class A-1 Certificates immediately prior to
such Distribution Date.
On each Distribution Date, the Pool 2 Component will be entitled to
Current Interest based on (i) the Pool 2 Component Interest Rate on a per annum
basis and (ii) the Pool 2 Component Notional Amount. The "POOL 2 COMPONENT
INTEREST RATE" for any Distribution Date equals the excess, if any, of the Pool
2 Net WAC for such Distribution Date over the Certificate Interest Rate of the
Class A-2 Certificates for such Distribution Date (for the first Distribution
Date only, adjusted to reflect the actual number of days in the Accrual Period).
For any Distribution Date, the "POOL 2 COMPONENT NOTIONAL AMOUNT" shall equal
the Class Principal Amount of the Class A-2 Certificates immediately prior to
such Distribution Date.
The "CLASS NOTIONAL AMOUNT" of the Class X-A1 Certificates with respect to
any Distribution Date will equal the sum of the Pool 1 Component Notional Amount
and the Pool 2 Component Notional Amount for such date. The initial Class
Notional Amount of the Class X-A1 Certificates is $520,021,000.
The "CLASS NOTIONAL AMOUNT" of the Class X-A2 Certificates with respect to
any Distribution Date will equal the Class Principal Amount of the Class A-3
Certificates immediately prior to such Distribution Date. The initial Class
Notional Amount of the Class X-A2 Certificates is $170,694,000.
The "CLASS NOTIONAL AMOUNT" of the Class X-B Certificates with respect to
any Distribution Date will equal the sum of the Class Principal Amounts of the
Class B-1 and Class B-2 Certificates immediately prior to such Distribution
Date. The initial Class Notional Amount of the Class X-B Certificates is
$15,031,000.
Net Interest Shortfalls. As described above, the Current Interest for each
class of Certificates for any Distribution Date will be reduced by the amount of
Net Interest Shortfalls experienced by (a) the related Mortgage Pool, in the
case of the Class A-1, Class A-2, Class A-3 and Class X-A2 Certificates and the
Pool 1 Component and the Pool 2 Component of the Class X-A1 Certificates and (b)
all three Mortgage Pools, in the case of the Subordinate Certificates and the
Class X-B Certificates. With respect to any Distribution Date and any Mortgage
Pool, the "NET INTEREST SHORTFALL" is equal to the sum of:
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- any Net Prepayment Interest Shortfalls for that Mortgage Pool
and Distribution Date; and
- the amount of interest that would otherwise have been received
with respect to any Mortgage Loan in such Mortgage Pool which
was subject to a reduction in the amount of interest
collectible as a result of application of the Servicemembers
Civil Relief Act, formerly known as the Soldiers' and Sailors'
Relief Act of 1940 (the "Relief Act") or similar state law
(any such reduction, a "Relief Act Reduction") (see "Certain
Legal Aspects of the Loans -- Servicemembers Civil Relief Act"
in the accompanying prospectus.
- "NET PREPAYMENT INTEREST SHORTFALLS" with respect to a Mortgage Loan
and any Distribution Date is the amount by which a Prepayment
Interest Shortfall for the related Due Period exceeds the amount
that the Master Servicer is obligated to remit pursuant to the
Pooling and Servicing Agreement and/or each Servicer is obligated to
remit pursuant to the applicable Servicing Agreement, to cover such
shortfall for such Due Period.
- A "PREPAYMENT INTEREST SHORTFALL" with respect to a Mortgage Loan
and any Distribution Date is the amount by which one month's
interest at the applicable Mortgage Rate on a Mortgage Loan as to
which a voluntary prepayment in full has been made, exceeds the
amount of interest actually received in connection with such
prepayment.
- The "DUE PERIOD" with respect to a Mortgage Loan and any
Distribution Date is the period beginning on the second day of the
calendar month preceding the month in which such Distribution Date
occurs and ending on the first day of the calendar month in which
such Distribution Date occurs.
Net Interest Shortfalls for a Mortgage Pool and any Certificate Group on
any Distribution Date will be allocated among the Class A-1, Class A-R, Class
A-2, Class A-3 and Class X-A2 Certificates and the Pool 1 Component and the Pool
2 Component of the Class X-A1 Certificates, as applicable, to the Class X-B
Certificates and to all classes of Subordinate Certificates proportionately
based on (1) in the case of the Class A-1, Class A-R, Class A-2, Class A-3 and
Class X-A2 Certificates, the amount of Net Interest Shortfalls experienced by
the related Mortgage Pool and Current Interest otherwise distributable thereon
on such Distribution Date, (2) in the case of the Pool 1 Component and the Pool
2 Component of the Class X-A1 Certificates, the amount of Net Interest
Shortfalls experienced by Pool 1 and Pool 2, respectively, and Current Interest
otherwise distributable thereon on such Distribution Date, (3) in the case of
the Class X-B Certificates, the amount of Net Interest Shortfalls experienced by
all the Mortgage Loans and Current Interest distributable thereon on such
Distribution Date and (4) in the case of Subordinate Certificates, the amount of
Net Interest Shortfalls experienced by all the Mortgage Loans and interest
accrued on the Apportioned Principal Balances of the Subordinate Certificates
before taking into account any reductions in such amounts from Net Interest
Shortfalls for that Distribution Date.
For purposes of allocating Net Interest Shortfalls for a Mortgage Pool to
the Subordinate Certificates on any Distribution Date, the "APPORTIONED
PRINCIPAL BALANCE" of any class of
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Subordinate Certificates for any Distribution Date will be equal to the Class
Principal Amount of that class immediately prior to that Distribution Date
multiplied by a fraction, the numerator of which is the applicable Pool
Subordinate Amount for that date and the denominator of which is the sum of the
Pool Subordinate Amounts (in the aggregate) for that date; provided, however,
that on any Distribution Date when all Certificates of a Certificate Group have
been reduced to zero, the Net Interest Shortfalls for the related Mortgage Pool
will be allocated to the classes of Subordinate Certificates based on the amount
of interest each such class of Subordinate Certificates would otherwise be
entitled to receive on that Distribution Date.
- The "POOL SUBORDINATE AMOUNT" for each Mortgage Pool is as follows:
- The "POOL 1 SUBORDINATE AMOUNT" for any Distribution
Date will equal the excess of the Stated Principal
Balance of the Pool 1 Mortgage Loans as of the first day
of the month preceding the month in which such
Distribution Date occurs over the sum of the Class
Principal Amounts of the Class A-1 and Class A-R
Certificates immediately before such Distribution Date.
- The "POOL 2 SUBORDINATE AMOUNT" for any Distribution
Date will equal the excess of the Stated Principal
Balance of the Pool 2 Mortgage Loans as of the first day
of the month preceding the month in which such
Distribution Date occurs over the Class Principal Amount
of the Class A-2 Certificates immediately before such
Distribution Date.
- The "POOL 3 SUBORDINATE AMOUNT" for any Distribution
Date will equal the excess of the Stated Principal
Balance of the Pool 3 Mortgage Loans as of the first day
of the month preceding the month in which such
Distribution Date occurs over the Class Principal Amount
of the Class A-3 Certificates immediately before such
Distribution Date.
If on a particular Distribution Date, the Available Distribution Amount
for a Mortgage Pool applied in the order described below under " -- Priority of
Distributions" is not sufficient to make a full distribution of Current Interest
on the Certificates in the related Certificate Group or to the related component
of the Class X-A1 Certificate (an "Interest Shortfall"), interest will be
distributed on each Certificate of equal priority within such Certificate Group
and on each such component based on the pro rata amount of interest it would
otherwise have been entitled to receive in the absence of such shortfall. Any
unpaid interest amount will be carried forward and added to the amount which
holders of each such class of Certificates or such component will be entitled to
receive on the next Distribution Date. An Interest Shortfall could occur, for
example, if losses realized on the Mortgage Loans in that Mortgage Pool were
exceptionally high or were concentrated in a particular month. Any unpaid
interest amount so carried forward will not bear interest.
Certificate Interest Rates. The Certificate Interest Rate and Component
Interest Rate for each Accrual Period for each class of Certificates and
components is as follows:
(A) CERTIFICATE INTEREST RATES FOR LIBOR CERTIFICATES. The
"Certificate Interest Rate" for each class of LIBOR Certificates will be
the applicable annual rate described below:
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- CLASS A-1 CERTIFICATES: the least of (i) One-Month LIBOR plus
0.30% (the "A-1 Margin"), (ii) the Pool 1 Net WAC and (iii)
11.50%.
- CLASS A-2 CERTIFICATES: the least of (i) Six-Month LIBOR plus
0.32% (the "A-2 Margin"), (ii) the Pool 2 Net WAC and (iii)
11.50%.
- CLASS A-3 CERTIFICATES: the least of (i) One-Month LIBOR plus
0.30% (the "A-3 Margin"), (ii) the Pool 3 Net WAC and (iii)
11.50%.
- CLASS B-1 CERTIFICATES: the least of (i) One-Month LIBOR plus
0.50% (the "B-1 Margin"), (ii) the Subordinate Net WAC and
(iii) 11.50%.
- CLASS B-2 CERTIFICATES: the least of (i) One-Month LIBOR plus
0.85% (the "B-2 Margin"), (ii) the Subordinate Net WAC and
(iii) 11.50%.
As described at " -- Optional Clean-Up Redemption of the Certificates," if
the option to sell the Mortgage Loans and redeem the Certificates is not
exercised by the Master Servicer on the initial Clean-Up Call Date, then on the
immediately following Distribution Date, the A-1 Margin will be increased to
0.60%, the A-2 Margin will be increased to 0.64%, the A-3 Margin will be
increased to 0.60%, the B-1 Margin will be increased to 0.75%, and the B-2
Margin will be increased to 1.275% and such increased margins will remain in
effect on all subsequent Distribution Dates.
(B) COMPONENT INTEREST RATES FOR EACH COMPONENT. The "Component
Interest Rate" for each of the Pool 1 Component and the Pool 2 Component
will be the Pool 1 Component Interest Rate and the Pool 2 Component
Interest Rate, respectively.
Notwithstanding the foregoing, on each Distribution Date, the Interest
Distribution Amount that would otherwise be distributable to the holders of the
Class X-A1 Certificates, based on the applicable Component Interest Rates
described above, may be reduced by the amount, if any, that is necessary to fund
payment of any Net WAC Shortfalls to the holders of the Class A-1 and Class A-2
Certificates (see "-- Reserve Fund" below). The holders of the Class X-A1
Certificates will not be reimbursed for amounts deposited in the Reserve Fund
and distributed on the Class A-1 or Class A-2 Certificates.
(C) CERTIFICATE INTEREST RATE FOR THE CLASS X-A2 CERTIFICATES. The
"Certificate Interest Rate" applicable to each of the Class X-A2
Certificates will be a per annum rate equal to the excess of the Pool 3
Net WAC over the Certificate Interest Rate of the Class A-3 Certificates
(for the first Distribution Date only, adjusted to reflect the actual
number of days in the Accrual Period).
Notwithstanding the foregoing, on each Distribution Date, the Interest
Distribution Amount that would otherwise be distributable to the holders of the
Class X-A2 Certificates, based on the applicable Certificate Interest Rate
described above, may be reduced by the amount, if any, that is necessary to fund
payment of any Net WAC Shortfalls to the holders of the Class A-3 Certificates
(see "c Reserve Fund" below). The holders of the Class X-A2 Certificates will
not be reimbursed for amounts deposited in the Reserve Fund and distributed on
the Class A-3 Certificates.
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(D) CERTIFICATE INTEREST RATE FOR THE CLASS X-B CERTIFICATES. The
"Certificate Interest Rate" applicable to each of the Class X-B
Certificates will be a per annum rate equal to the excess of the
Subordinate Net WAC over the weighted average of the Certificate Interest
Rates of the Class B-1 and Class B-2 Certificates (for the first
Distribution Date only, adjusted to reflect the actual number of days in
the Accrual Period).
Notwithstanding the foregoing, on each Distribution Date, the Interest
Distribution Amount that would otherwise be distributable to the holders of the
Class X-B Certificates, based on the applicable Certificate Interest Rate
described above, may be reduced by the amount, if any, that is necessary to fund
payment of any Net WAC Shortfalls to the holders of the Class B-1 and Class B-2
Certificates (see "-- Reserve Fund" below). The holders of the Class X-B
Certificates will not be reimbursed for amounts deposited in the Reserve Fund
and distributed on the Class B-1 or Class B-2 Certificates.
(E) CERTIFICATE INTEREST RATES FOR THE CLASS B-3, CLASS B-4, CLASS
B-5, CLASS B-6 AND CLASS LT-R CERTIFICATES. The Certificate Interest Rate
applicable to each of the Class B-3, Class B-4, Class B-5 and Class B-6
Certificates will equal the Subordinate Net WAC. The Class LT-R
Certificate will not have a Certificate Interest Rate.
(F) CERTIFICATE INTEREST RATE FOR THE CLASS A-R CERTIFICATES. The
Certificate Interest Rate applicable to the Class A-R Certificates will
equal the Pool 1 Net WAC.
- The "POOL 1 NET WAC", the "POOL 2 NET WAC and the "POOL 3 NET
WAC" as of any Distribution Date will in each case be the
weighted average of the Net Mortgage Rates of the Mortgage
Loans in the related Mortgage Pool as of the Due Date of the
calendar month immediately preceding the calendar month of
such Distribution Date, weighted on the basis of their Stated
Principal Balances.
- The "SUBORDINATE NET WAC" as of any Distribution Date will
equal the weighted average of the Pool 1 Net WAC, the Pool 2
Net WAC and the Pool 3 Net WAC, in each case weighted on the
basis of the relative Pool Subordinate Amounts for Pool 1,
Pool 2 and Pool 3, respectively, immediately prior to such
Distribution Date.
- The "MORTGAGE RATE" with respect to any Mortgage Loan is the
annual rate of interest borne by the related mortgage note
from time to time, as of the related due date.
- The "NET MORTGAGE RATE" as to any Mortgage Loan and any
Distribution Date will equal the Mortgage Rate, reduced by the
related Expense Rate.
- The "EXPENSE RATE" as to each Mortgage Loan is equal to the
sum of the Master Servicing Fee Rate and the applicable
Servicing Fee Rate.
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- The "STATED PRINCIPAL BALANCE" of a Mortgage Loan at any Due
Date is equal to the unpaid principal balance of such Mortgage
Loan as of such Due Date as specified in the amortization
schedule at the time relating thereto (before any adjustment
to such amortization schedule by reason of any moratorium or
similar waiver or grace period) after giving effect to any
previous principal prepayments and Liquidation Proceeds
allocable to principal and to the payment of principal due on
such Due Date and irrespective of any delinquency in payment
by the related mortgagor.
- The "DUE DATE" of a Mortgage Loan is the date specified in the
related Mortgage Note on which the monthly scheduled payment
of interest and principal (or interest only during the
applicable interest-only period following origination) is due,
which is the first day of the calendar month in the case of
the Mortgage Loans.
Net WAC Shortfalls. For any class of LIBOR Certificates and any
Distribution Date, the "Net WAC Shortfall" for such class will equal the sum of:
(i) the excess, if any, of an amount that would have been the Current
Interest for such class if the Certificate Interest Rate for such
class were calculated without regard to clause (ii) in the
definition thereof, over the actual Current Interest for such class
for such Distribution Date;
(ii) any excess described in clause (i) above remaining unpaid from prior
Distribution Dates; and
(iii) interest for the applicable Accrual Period on the amount described
in clause (ii) above based on the applicable Certificate Interest
Rate (determined without regard to clause (ii) in the definition
thereof).
Reserve Fund. Pursuant to the terms of the Pooling and Servicing
Agreement, the Securities Administrator will establish an account (the "Reserve
Fund"), which will be held in trust by the Securities Administrator on behalf of
the holders of the LIBOR Certificates and the Class X-A1, Class X-A2 and Class
X-B Certificates. The Reserve Fund will not be an asset of any REMIC. The
Reserve Fund will be the sole source of payments to the holders of the LIBOR
Certificates with respect to any Net WAC Shortfalls on such Certificates.
The Reserve Fund will comprise four sub accounts: the "Class X-A1 Pool 1
Component Sub Account," the "Class X-A1 Pool 2 Component Sub Account", "Class
X-A2 Sub Account" and the "Class X-B Sub Account" (each, a "Sub Account"). On
each Distribution Date, (i) Current Interest that would otherwise be
distributable in respect of the Pool 1 Component of the Class X-A1 Certificates
will be deposited instead in the Class X-A1 Pool 1 Component Sub Account, (ii)
Current Interest that would otherwise be distributable in respect of the Pool 2
Component of the Class X-A1 Certificates will be deposited instead in the Class
X-A1 Pool 2 Component Sub Account, (iii) Current Interest that would otherwise
be distributable with respect to the Class X-A2 Certificates will be deposited
instead in the Class X-A2 Sub Account and (iv) Current Interest that would
otherwise be distributable with respect to the Class X-B Certificates
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will be deposited instead in the Class X-B Sub Account, in each case, to the
extent of the applicable "Required Reserve Fund Deposit" for such class in the
manner described below.
For any Distribution Date, the "Required Reserve Fund Deposit" for the
Class X-A1 Certificates will be the sum of the Required Reserve Fund Deposit for
the Pool 1 Component and the Pool 2 Component, as described below.
For any Distribution Date, the "Required Reserve Fund Deposit" for the
Pool 1 Component will be an amount equal to the lesser of (i) the Current
Interest for the Pool 1 Component for such Distribution Date and (ii) the amount
required to bring the balance on deposit in the Class X-A1 Pool 1 Component Sub
Account up to an amount equal to the sum of (a) Net WAC Shortfalls for such
Distribution Date with respect to the Class A-1 Certificates and (b) $3,000.
For any Distribution Date, the "Required Reserve Fund Deposit" for the
Pool 2 Component will be an amount equal to the lesser of (i) the Current
Interest for the Pool 2 Component for such Distribution Date and (ii) the amount
required to bring the balance on deposit in the Class X-A1 Pool 2 Component Sub
Account up to an amount equal to the sum of (a) Net WAC Shortfalls for such
Distribution Date with respect to the Class A-2 Certificates and (b) $3,000.
For any Distribution Date, the "Required Reserve Fund Deposit" for the
Class X-A2 Certificates will be an amount equal to the lesser of (i) the Current
Interest for the Class X-A2 Certificates for such Distribution Date and (ii) the
amount required to bring the balance on deposit in the Class X-A2 Sub Account up
to an amount equal to the sum of (a) the Net WAC Shortfalls for such
Distribution Date with respect to the Class A-3 Certificates and (b) $3,000.
For any Distribution Date, the "Required Reserve Fund Deposit" for the
Class X-B Certificates will be an amount equal to the lesser of (i) the Current
Interest for the Class X-B Certificates for such Distribution Date and (ii) the
amount required to bring the balance on deposit in the Class X-B Sub Account up
to an amount equal to the sum of (a) the Net WAC Shortfalls for such
Distribution Date with respect to the Class B-1 and Class B-2 Certificates and
(b) $1,000.
The holders of the Class X-A1, Class X-A2 and Class X-B Certificates will
not be entitled to reimbursement for any related Required Reserve Fund Deposit.
For any Distribution Date, the Securities Administrator will deposit into
the appropriate Sub Account of the Reserve Fund, any Required Reserve Fund
Deposit for such date.
On any Distribution Date for which a Net WAC Shortfall exists with respect
to the Class A-1 Certificates, the Securities Administrator will withdraw from
the Class X-A1 Pool 1 Component Sub Account, the amount of such Net WAC
Shortfall for distribution on such Distribution Date as described herein under
"-- Priority of Distributions."
On any Distribution Date for which a Net WAC Shortfall exists with respect
to the Class A-2 Certificates, the Securities Administrator will withdraw from
the Class X-A1 Pool 2 Component Sub Account, the amount of such Net WAC
Shortfall for distribution on such Distribution Date as described herein under
"-- Priority of Distributions."
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On any Distribution Date for which a Net WAC Shortfall exists with respect
to the Class A-3 Certificates, the Securities Administrator will withdraw from
the Class X-A2 Sub Account the amount of such Net WAC Shortfall for distribution
on such Distribution Date as described herein under "-- Priority of
Distributions."
On any Distribution Date for which a Net WAC Shortfall exists with respect
to the Class B-1 or Class B-2 Certificates, the Securities Administrator will
withdraw from the Class X-B Sub Account the amount of such Net WAC Shortfall for
distribution on such Distribution Date as described herein under " -- Priority
of Distributions."
If, immediately after any Distribution Date, the amount on deposit in any
Sub Account of the Reserve Fund exceeds the initial deposit therein, the
Securities Administrator will distribute such excess to the Holders of the
Certificates that deposited such amounts in the relevant Sub Account.
Determination of LIBOR. In the case of the Class A-1, Class A-3, Class B-1
and Class B-2 Certificates, on the second LIBOR Business Day preceding the
commencement of each Accrual Period (each such date, a "One-Month LIBOR
Determination Date"), the Securities Administrator will determine One-Month
LIBOR based on the "Interest Settlement Rate" for U.S. dollar deposits of
one-month maturity set by the British Bankers' Association (the "BBA") as of
11:00 a.m. (London time) on the One-Month LIBOR Determination Date.
In the case of the Class A-2 Certificates, on the second LIBOR Business
Day preceding the commencement of each Accrual Period relating to the
Distribution Dates falling in December and June of each year (other than
December 2004) prior to the retirement of the Class A-2 Certificates (each such
date a "Six-Month LIBOR Determination Date"), the Securities Administrator will
determine Six-Month LIBOR based on the "Interest Settlement Rate" for U.S.
dollar deposits of six-month maturity set by the BBA as of 11:00 a.m. (London
time) on the Six-Month LIBOR Determination Date.
The BBA's Interest Settlement Rates are currently displayed on the Dow
Jones Telerate Service page 3750 (such page, or such other page as may replace
page 3750 on that service or such other service as may be nominated by the BBA
as the information vendor for the purpose of displaying the BBA's Interest
Settlement Rates for deposits in U.S. dollars, the "Designated Telerate Page").
Such Interest Settlement Rates are also currently available on Reuters Monitor
Money Rates Service page "LIBOR01" and Bloomberg L.P. page "BBAM." The BBA's
Interest Settlement Rates currently are rounded to five decimal places.
A "LIBOR Business Day" is any day on which banks in London and New York
are open for conducting transactions in foreign currency and exchange.
With respect to any One-Month LIBOR Determination Date or Six-Month LIBOR
Determination Date, if the BBA's Interest Settlement Rate does not appear on the
Designated Telerate Page as of 11:00 a.m. (London time) on such date, or if the
Designated Telerate Page is not available on such date, the Securities
Administrator will obtain such rate from the Reuters or Bloomberg page. If
either such rate is not published for the applicable One-Month LIBOR
Determination Date or Six-Month LIBOR Determination Date, One-Month LIBOR or
Six-Month LIBOR, as the case may be, for such date will be the most recently
published Interest
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Settlement Rate. In the event that the BBA no longer sets an Interest Settlement
Rate for either One-Month LIBOR or Six-Month LIBOR, the Securities Administrator
will designate an alternative index that has performed, or that the Securities
Administrator expects to perform, in a manner substantially similar to the BBA's
Interest Settlement Rate for One-Month LIBOR or Six-Month LIBOR, as applicable.
The Securities Administrator will select a particular index as the alternative
index only if it receives an opinion of counsel (furnished at the Trust Fund's
expense) that the selection of such index will not cause any REMIC to lose its
classification as a REMIC for federal income tax purposes.
The establishment of One-Month LIBOR and Six-Month LIBOR on each One-Month
or Six-Month LIBOR Determination Date by the Securities Administrator and the
Securities Administrator's calculation of the Certificate Interest Rate
applicable to each class of LIBOR Certificates for the related Accrual Period
will (in the absence of manifest error) be final and binding.
Notwithstanding the foregoing, One-Month LIBOR and Six-Month LIBOR for the
first Distribution Date will be determined two Business Days prior to the
Closing Date.
DISTRIBUTIONS OF PRINCIPAL
General. All payments and other amounts received in respect of principal
of the Mortgage Loans will be allocated between the Senior Certificates and the
Subordinate Certificates as follows:
Senior Principal Distribution Amount. On each Distribution Date, the
related Mortgage Pool's Available Distribution Amount remaining after the
payment of the applicable Interest Distribution Amount for the related
Certificate Group and the related components of the Class X -A Certificates, up
to the amount of such Senior Principal Distribution Amount, will be distributed
as principal on the Senior Certificates of such Certificate Group.
- The "SENIOR PRINCIPAL DISTRIBUTION AMOUNT" for a Certificate Group
for each Distribution Date is equal to the sum of:
(1) the product of (a) the related Senior Percentage and (b) the
principal portion of each Scheduled Payment on each Mortgage Loan in the
related Mortgage Pool due during the related Due Period;
(2) the product of (a) the related Senior Prepayment Percentage and
(b) each of the following amounts: (i) the principal portion of each full
and partial principal prepayment made by a borrower on a Mortgage Loan in
the related Mortgage Pool during the related Prepayment Period; (ii) each
other unscheduled collection, including Subsequent Recoveries, Insurance
Proceeds and net Liquidation Proceeds (other than with respect to any
Mortgage Loan in the related Mortgage Pool that was finally liquidated
during the related Prepayment Period) representing or allocable to
recoveries of principal of the related Mortgage Loans received during the
related Prepayment Period; and (iii) the principal portion of the purchase
price of each Mortgage Loan purchased by the Seller or any other person
pursuant to the applicable Mortgage Loan Purchase Agreement due to a
defect in documentation or a material breach of a
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representation and warranty with respect to such Mortgage Loan or, in the
case of a permitted substitution of a defective Mortgage Loan in the
related Mortgage Pool, the amount representing any principal adjustment in
connection with any such replaced Mortgage Loan in the related Mortgage
Pool with respect to the related Prepayment Period;
(3) with respect to unscheduled recoveries allocable to principal of
any Mortgage Loan in the related Mortgage Pool that was fully liquidated
during the related Prepayment Period, the lesser of (a) the net
Liquidation Proceeds allocable to principal and (b) the product of (i) the
related Senior Prepayment Percentage for that date and (ii) the related
remaining Stated Principal Balance of the related Mortgage Loan at the
time of liquidation; and
(4) any amounts described in clauses (1) through (3) above that
remain unpaid with respect to the Certificate Group from prior
Distribution Dates.
On any Distribution Date after a Senior Termination Date has occurred with
respect to a Mortgage Pool, the Senior Principal Distribution Amount will be
calculated pursuant to the above formula based on all of the Mortgage Loans, as
opposed to the Mortgage Loans in the related Mortgage Pool.
- A "SCHEDULED PAYMENT" with respect to a Mortgage Loan means the
scheduled monthly payment on a Mortgage Loan on any Due Date
allocable to principal or interest which, unless otherwise specified
in the related Servicing Agreement, will give effect to any related
debt service reduction and any related deficient valuation that is
ordered by a court in bankruptcy and that has the effect of reducing
the monthly payment due on such Mortgage Loan.
- Except as provided below, the "SENIOR PERCENTAGE" for each Mortgage
Pool for any Distribution Date occurring prior to the Distribution
Date in December 2014 is 100%. For any Distribution Date (i)
occurring before the Distribution Date in December 2014 but in or
after December 2007 on which the "Two Times Test" is satisfied or
(ii) in or after December 2014, the related Senior Percentage will
be the related "Pro Rata Senior Percentage." For any Distribution
Date occurring prior to December 2007 on which the Two Times Test is
satisfied, the related Senior Percentage for each Mortgage Pool will
be equal to the related Pro Rata Senior Percentage plus 50% of an
amount equal to 100% minus the related Pro Rata Senior Percentage.
With respect to any Distribution Date after the Senior Termination
Date, the related Senior Percentage for such Mortgage Pool will be
0%. Since all of the Mortgage Loans provide for payments solely of
interest (and not scheduled principal) for the first five or ten
years following origination, Certificateholders of the related
Certificate Group are not expected to receive any payments of
scheduled principal during the first five-year period and only
limited payments of scheduled principal for the next five-year
period, notwithstanding the calculation of the Senior Percentage
above.
- The "SENIOR TERMINATION DATE" is the date on which the aggregate
Class Principal Amount of the Senior Certificates related to a
Mortgage Pool is reduced to zero.
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- The "TWO TIMES TEST" will be satisfied on any Distribution Date if
all the following conditions are met:
- the Aggregate Subordinate Percentage is at least two
times the Aggregate Subordinate Percentage as of the
Closing Date;
- the condition described in clause first of the
definition of "Step-Down Test" (described below) is
satisfied; and
- on or prior to the Distribution Date in November 2007,
cumulative Realized Losses with respect to the Mortgage
Loans do not exceed 20% of the aggregate Class Principal
Amount of the Subordinate Certificates as of the Closing
Date and on or after the Distribution Date in December
2007, cumulative Realized Losses with respect to the
Mortgage Loans do not exceed 30% of the aggregate Class
Principal Amount of the Subordinate Certificates as of
the Closing Date.
- The "AGGREGATE SUBORDINATE PERCENTAGE" for any Distribution Date is
the percentage equivalent of a fraction, the numerator of which is
the aggregate Class Principal Amount of the Subordinate Certificates
immediately prior to that date, and the denominator of which is the
Pool Balance for such Distribution Date.
- The "POOL BALANCE" for any Distribution Date will equal the
aggregate of the Stated Principal Balances of the Mortgage Loans
outstanding on the Due Date of the month preceding the month of that
Distribution Date.
- The "PRO RATA SENIOR PERCENTAGE" for each Distribution Date and each
Mortgage Pool is the percentage equivalent of a fraction, the
numerator of which is the aggregate Class Principal Amount of the
class or classes of Senior Certificates of the related Certificate
Group immediately prior to such Distribution Date, and the
denominator of which is the aggregate Stated Principal Balance of
all Mortgage Loans in that Mortgage Pool and for such Distribution
Date; provided, however, that on any Distribution Date after a
Senior Termination Date has occurred with respect to a Mortgage
Pool, the Pro Rata Senior Percentage of the remaining Senior
Certificates is the percentage equivalent of a fraction, the
numerator of which is the aggregate of the Class Principal Amount of
the remaining class or classes of Senior Certificates immediately
prior to such date and the denominator of which is the aggregate
Class Principal Amount of all classes of Certificates, immediately
prior to such date.
- The "SENIOR PREPAYMENT PERCENTAGE" for any Distribution Date
occurring before the Distribution Date in December 2014 and any
Mortgage Pool is 100%. Thereafter, the Senior Prepayment Percentage
for any Mortgage Pool will be subject to gradual reduction as
described in the following paragraphs. This disproportionate
allocation of unscheduled payments of principal to the Senior
Certificates of a Certificate Group will have the effect of
accelerating the amortization of such Senior Certificates while, in
the absence of Realized Losses, increasing the interest in the
principal balance of the Mortgage Loans evidenced by the Subordinate
Certificates. Increasing the interest of the Subordinate
Certificates relative to that of the Senior Certificates of a
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Certificate Group is intended to preserve the availability of the
subordination provided by the Subordinate Certificates.
- The "SENIOR PREPAYMENT PERCENTAGE" of each class of Senior
Certificates of a Certificate Group for any Distribution Date
occurring in or after December 2014, will be as follows:
- for any Distribution Date occurring in or after December
2014 but before December 2015, the related Senior
Percentage plus 70% of the related Subordinate
Percentage for that date;
- for any Distribution Date occurring in or after December
2015 but before December 2016, the related Senior
Percentage plus 60% of the related Subordinate
Percentage for that date;
- for any Distribution Date occurring in or after December
2016 but before December 2017, the related Senior
Percentage plus 40% of the related Subordinate
Percentage for that date;
- for any Distribution Date occurring in or after December
2017 but before December 2018, the related Senior
Percentage plus 20% of the related Subordinate
Percentage for that date; and
- for any Distribution Date occurring in December 2018 or
thereafter, the related Senior Percentage for that date.
Notwithstanding the preceding paragraphs, no decrease in the Senior
Prepayment Percentage for any Mortgage Pool will occur as described above unless
the Step-Down Test is satisfied on such Distribution Date.
- As to any Distribution Date, the "STEP-DOWN TEST" will be satisfied
if both of the following conditions are met:
first, the outstanding principal balance of all Mortgage Loans
delinquent 60 days or more (including Mortgage Loans in
foreclosure, REO property or bankruptcy status), averaged over
the preceding six-month period, as a percentage of the
aggregate Class Principal Amounts on such Distribution Date
(without giving effect to any payments on such Distribution
Date) of the Subordinate Certificates, does not equal or
exceed 50%; and
second, cumulative Realized Losses on the Mortgage Loans do
not exceed:
- for each Distribution Date occurring in the period
from December 2014 to November 2015, 30% of the
aggregate Class Principal Amount of the Subordinate
Certificates as of the Closing Date (the "Original
Subordinate Class Principal Amount");
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- for each Distribution Date occurring in the period
from December 2015 to November 2016, 35% of the
Original Subordinate Class Principal Amount;
- for each Distribution Date occurring in the period
from December 2016 to November 2017, 40% of the
Original Subordinate Class Principal Amount;
- for each Distribution Date occurring in the period
from December 2017 to November 2018, 45% of the
Original Subordinate Class Principal Amount; and
- for the Distribution Date in December 2018 and
thereafter, 50% of the Original Subordinate Class
Principal Amount.
Notwithstanding the preceding paragraphs, if on any Distribution Date, the
Two Times Test is satisfied, the Senior Prepayment Percentage for each Mortgage
Pool will equal the related Senior Percentage. However, if, on any Distribution
Date occurring on or after the Distribution Date in December 2014, the Pro Rata
Senior Percentage for any Mortgage Pool exceeds the Pro Rata Senior Percentage
on the Closing Date, the related Senior Prepayment Percentage for all three
Mortgage Pools for that date will once again equal 100%.
If on any Distribution Date the allocation to the Senior Certificates then
entitled to distributions of principal of related full and partial principal
prepayments and other amounts in the percentage required above would reduce the
sum of the Class Principal Amounts of those Certificates below zero, the
distribution to the class or classes of Certificates of the related Senior
Prepayment Percentage of those amounts for such Distribution Date will be
limited to the percentage necessary to reduce the related Class Principal
Amounts to zero.
Subordinate Principal Distribution Amounts: Except as provided in the next
paragraph, from the Available Distribution Amount remaining after the payment of
interest and principal to the Senior Certificates and any Subordinate
Certificate ranking in higher priority as described at "-- Priority of
Distributions," each class of Subordinate Certificates will be entitled to
receive on each Distribution Date, first, payments in respect of interest and
second, its pro rata share of each Subordinate Principal Distribution Amount.
Distributions of principal with respect to the Subordinate Certificates will be
made on each Distribution Date sequentially to the classes of Subordinate
Certificates in order of their numerical class designations, beginning with the
Class B-1 Certificates, until each such class has received its pro rata share
for that Distribution Date. Distributions to each such class' share of the
Subordinate Principal Distribution Amount will be made only after payments of
interest and principal to each class ranking senior to such class, and interest
to such class, have been paid. See " -- Priority of Distributions."
With respect to each class of Subordinate Certificates, if on any
Distribution Date the sum of the Class Subordination Percentage of that class
and the aggregate Class Subordination Percentages of all classes of Subordinate
Certificates which have higher numerical class designations than that class is
less than the Applicable Credit Support Percentage for that class on the date of
issuance of the Certificates, no distribution of principal prepayments will be
made to any such classes and the amount otherwise distributable to those classes
in respect of principal
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prepayments will be allocated among the remaining classes of Subordinate
Certificates, pro rata, based upon their respective Class Principal Amounts, and
distributed in the order described above.
- The "APPLICABLE CREDIT SUPPORT PERCENTAGE" for each class of
Subordinate Certificates and any Distribution Date will equal the
sum of the Class Subordination Percentages of that class and the
aggregate Class Subordination Percentage of all other classes of
Subordinate Certificates having higher numerical class designations
than that class.
- The "CLASS SUBORDINATION PERCENTAGE" for any Distribution Date and
each class of Subordinate Certificates will equal a fraction
(expressed as a percentage), the numerator of which is the Class
Principal Amount of that class immediately before that Distribution
Date and the denominator of which is the aggregate Class Principal
Amount of all classes of Certificates immediately before that
Distribution Date.
The approximate original Applicable Credit Support Percentages for the
Subordinate Classes of Certificates on the date of issuance of such Certificates
are expected to be as follows:
Class B-1 3.50%
Class B-2 2.25%
Class B-3 1.40%
Class B-4 0.80%
Class B-5 0.60%
Class B-6 0.40%
- The "SUBORDINATE PRINCIPAL DISTRIBUTION AMOUNT" for any Mortgage
Pool and for each Distribution Date is equal to the sum of:
(1) the product of (a) the related Subordinate Percentage and (b) the
principal portion of each related Scheduled Payment on each Mortgage Loan in the
related Mortgage Pool due during the related Due Period;
(2) the product of (a) the related Subordinate Prepayment Percentage
and (b) each of the following amounts: (i) the principal portion of each full
and partial principal prepayment made by a borrower on a Mortgage Loan in the
related Mortgage Pool during the related Prepayment Period, (ii) each other
unscheduled collection, including Subsequent Recoveries, Insurance Proceeds and
net Liquidation Proceeds (other than with respect to any Mortgage Loan in the
related Mortgage Pool that was finally liquidated during the related Prepayment
Period), representing or allocable to recoveries of principal of Mortgage Loans
in the related Mortgage Pool received during the related Prepayment Period and
(iii) the principal portion of the purchase price of each Mortgage Loan in the
related Mortgage Pool that was purchased by the Seller or any other person
pursuant to the Mortgage Loan Purchase Agreement due to a defect in
documentation or a material breach of a representation or warranty with respect
to such Mortgage Loan or, in the case of a permitted substitution of a defective
Mortgage Loan in the related Mortgage Pool, the amount representing any
principal adjustment in connection with any
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such replaced Mortgage Loan in the related Mortgage Pool with respect to
such Distribution Date;
(3) with respect to unscheduled recoveries allocable to principal of
any Mortgage Loan in the related Mortgage Pool that was finally liquidated
during the related Prepayment Period, the related net Liquidation Proceeds
allocable to principal, to the extent not distributed pursuant to clause
(3) of the definition of Senior Principal Distribution Amount); and
(4) any amounts described in clauses (1) through (3) for any
previous Distribution Date that remain unpaid;
Minus the sum of:
(A) if the aggregate Class Principal Amount of any Certificate Group
has been reduced to zero, principal paid from the Available Distribution
Amount from the related Mortgage Pool to the remaining Certificate Group,
as described under "-- Limited Cross-Collateralization"; and
(B) the amounts paid from the Available Distribution Amount for an
Overcollateralized Group to the Senior Certificates related to an
Undercollateralized Group, as described under "-- Limited
Cross-Collateralization."
On any Distribution Date after a Senior Termination Date has occurred with
respect to a Mortgage Pool, the Subordinate Principal Distribution Amount will
not be calculated with respect to a Mortgage Pool, but will equal the amount
calculated pursuant to the formula set forth above based on the Subordinate
Percentage or Subordinate Prepayment Percentage, as applicable, for the
Subordinate Certificates for such Distribution Date with respect to all of the
Mortgage Loans as opposed to the Mortgage Loans in the related Mortgage Pool
only.
- The "SUBORDINATE CLASS PERCENTAGE" for each class of Subordinate
Certificates for each Distribution Date is equal to the percentage
obtained by dividing the Class Principal Amount of such class
immediately prior to such Distribution Date by the aggregate Class
Principal Amount of all classes of Subordinate Certificates
immediately prior to such date.
- The "SUBORDINATE PREPAYMENT PERCENTAGE" for any Distribution Date
and for any Mortgage Pool is the difference between 100% and the
related Senior Prepayment Percentage for such Distribution Date.
- The "SUBORDINATE PERCENTAGE" with respect to each Mortgage Pool and
any Distribution Date will be equal to the difference between 100%
and the related Senior Percentage for such Mortgage Pool on such
Distribution Date; provided, however, that on any Distribution Date
after a Senior Termination Date has occurred with respect to a
Mortgage Pool, the Subordinate Percentage will represent the entire
interest of the Subordinate Certificates in the Mortgage Loans and
will be equal to the difference between 100% and the Senior
Percentage related to the Mortgage Loans in the aggregate for such
Distribution Date.
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PRIORITY OF DISTRIBUTIONS
On each Distribution Date, the Available Distribution Amount from the
related Mortgage Pool (in the case of the components of the Class X-A1
Certificates and the Senior Certificates other than the Class X Certificates)
and the Mortgage Pools in the aggregate (in the case of the Subordinate
Certificates and the Class X-B Certificates) will be allocated among the classes
of Senior Certificates and Subordinate Certificates in the following order of
priority:
(1) Concurrently, to the payment of the Interest Distribution
Amount and any accrued but unpaid Interest Shortfalls on each class of
Senior Certificates and each component thereof; provided, however, that on
each Distribution Date, the amount of interest that would otherwise be
distributable to the Pool 1 Component, the Pool 2 Component, the Class
X-A2 Certificates or the Class X-B Certificates will be deposited in the
related Sub Account of the Reserve Fund to the extent of any related
Required Reserve Fund Deposit for such Distribution Date in the manner
described herein;
(2) Concurrently, to the Senior Certificates from the Available
Distribution Amount remaining in the related Mortgage Pool after
application of priority (1) above, as follows:
(a) sequentially, to the Class A-R and Class A-1
Certificates, in that order, the Senior Principal
Distribution Amount for Pool 1, until their respective
Class Principal Amounts have been reduced to zero;
(b) to the Class A-2 Certificates, the Senior Principal
Distribution Amount for Pool 2, until their Class
Principal Amount has been reduced to zero; and
(c) to the Class A-3 Certificates, the Senior Principal
Distribution Amount for Pool 3, until their Class
Principal Amount has been reduced to zero.
(3) From the Available Distribution Amount from the Mortgage Pools in the
aggregate remaining after the application of priorities (1) and (2) above, to
the Class B-1 Certificates, the payment of its applicable Interest Distribution
Amount and any outstanding Interest Shortfalls;
(4) From the Available Distribution Amount from the Mortgage Pools in the
aggregate remaining after application of priorities (1) through (3) above, to
the Class B-1 Certificates, such class' Subordinate Class Percentage of the
Subordinate Principal Distribution Amount for each Mortgage Pool, until its
Class Principal Amount has been reduced to zero;
(5) From the Available Distribution Amount from the Mortgage Pools in the
aggregate remaining after the application of priorities (1) through (4) above,
to the Class B-2 Certificates, the payment of its applicable Interest
Distribution Amount and any outstanding Interest Shortfalls;
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(6) From the Available Distribution Amount from the Mortgage Pools in the
aggregate remaining after application of priorities (1) through (5) above, to
the Class B-2 Certificates, such class' Subordinate Class Percentage of the
Subordinate Principal Distribution Amount for each Mortgage Pool, until its
Class Principal Amount has been reduced to zero;
(7) From the related Sub Account of the Reserve Fund, concurrently (A) to
the Class A-1, Class A-2 and Class A-3 Certificates and (B) sequentially, to the
Class B-1 and Class B-2 Certificates, in that order, any related Net WAC
Shortfall or related unpaid Net WAC Shortfall for such date;
(8) From the remaining Available Distribution Amount from the Mortgage
Pools in the aggregate remaining after application of priorities (1) through (6)
above, in the following order of priority:
(a) to the Class B-3 Certificates, the payment of its applicable
Interest Distribution Amount and any outstanding Interest Shortfalls;
(b) to the Class B-3 Certificates, such class' Subordinate Class
Percentage of the Subordinate Principal Distribution Amount for each
Mortgage Pool, until its Class Principal Amount has been reduced to zero;
(c) to the Class B-4 Certificates, the payment of its applicable
Interest Distribution Amount and any outstanding Interest Shortfalls;
(d) to the Class B-4 Certificates, such class' Subordinate Class
Percentage of the Subordinate Principal Distribution Amount for each
Mortgage Pool, until its Class Principal Amount has been reduced to zero;
(e) to the Class B-5 Certificates, the payment of its applicable
Interest Distribution Amount and any outstanding Interest Shortfalls;
(f) to the Class B-5 Certificates, such class' Subordinate Class
Percentage of the Subordinate Principal Distribution Amount for each
Mortgage Pool, until its Class Principal Amount has been reduced to zero;
(g) to the Class B-6 Certificates, the payment of its applicable
Interest Distribution Amount and any outstanding Interest Shortfalls; and
(h) to the Class B-6 Certificates, such class' Subordinate Class
Percentage of the Subordinate Principal Distribution Amount for each
Mortgage Pool, until its Class Principal Amount has been reduced to zero;
and
(9) To the Class A-R Certificate, any remaining amount of the Available
Distribution Amount from the Mortgage Pools in the aggregate.
On each Distribution Date on and after the Credit Support Depletion Date,
the Available Distribution Amount for the Mortgage Pools will be combined and
distributed to the remaining classes of Certificates, first, to pay the Interest
Distribution Amount and any accrued but unpaid
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Interest Shortfalls; second, to pay principal on a pro rata basis; third, to pay
any Net WAC Shortfall or any unpaid Net WAC Shortfall; and fourth, to the Class
A-R Certificate, any remaining Available Distribution Amount from such Mortgage
Pool. The "Credit Support Depletion Date" is the date on which the aggregate
Class Principal Amount of the Subordinate Certificates has been reduced to zero.
LIMITED CROSS-COLLATERALIZATION
The priority of distributions described above in " -- Priority of
Distributions" will be subject to change if a Mortgage Pool is either subject to
rapid prepayments or disproportionately high Realized Losses, as described
below.
a. Cross-Collateralization Due to Rapid Prepayments in a Mortgage Pool.
The priority of distributions will change in the case where a Mortgage Pool is
experiencing rapid prepayments provided all the following conditions are met:
- the aggregate Class Principal Amount of a Certificate Group has been
reduced to zero;
- there are still Subordinate Certificates Outstanding; and
- either (i) the Aggregate Subordinate Percentage on that date is less
than 200% of the Aggregate Subordinate Percentage as of the Closing
Date or (ii) the outstanding principal balance of the Mortgage Loans
in a Mortgage Pool delinquent 60 days or more (including, for this
purpose, loans in REO, foreclosure or bankruptcy status) averaged
over the last six months, as a percentage of such Mortgage Pool's
applicable Pool Subordinate Amount, is greater than or equal to 50%.
When all of these three conditions are satisfied, all principal received
or advanced with respect to the Mortgage Loans in the Mortgage Pool or Mortgage
Pools relating to a Certificate Group that has been paid in full, will be
applied as a distribution of principal to the remaining Senior Certificates of
the other Certificate Group or Certificate Groups (on a pro rata basis) rather
than applied as a principal distribution to the Subordinate Certificates. Such
principal would be distributed in the same priority as those Senior Certificates
would receive other distributions of principal.
b. Cross-Collateralization Due to Disproportionate Realized Losses in a
Mortgage Pool. Realized losses of a Mortgage Pool are allocated generally to the
Subordinate Certificates and not just to the portion of the Subordinate
Certificates representing an interest in the Mortgage Pool that incurred the
loss. Therefore, if Realized Losses of any Mortgage Pool that are allocated to
the Subordinate Certificates exceed the related Pool Subordinate Amount for that
Mortgage Pool, the principal balance of the Mortgage Loans of that Mortgage Pool
will be less than the principal balance of the related Certificate Group. That
is, the principal balance of Mortgage Loans in that Mortgage Pool will be less
than the Class Principal Amount of the Certificate Group being supported by that
collateral and, therefore, the related Certificate Group is
"undercollateralized." In that situation, payments on the Mortgage Loans in the
other Mortgage Pools will be used to make interest and then principal
distributions to the Senior Certificates related to the undercollateralized
Certificate Group to the extent described below.
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If, on any Distribution Date, the aggregate Class Principal Amount of any
Certificate Group is greater than the aggregate Stated Principal Balance of the
Mortgage Loans in the related Mortgage Pool (such Certificate Group, the
"Undercollateralized Group" and the other Certificate Group or Certificate
Groups, an "Overcollateralized Group"), then until the occurrence of the Credit
Support Depletion Date, the priority of distributions described in this
prospectus supplement under "-- Priority of Distributions" will be altered as
follows:
- the Available Distribution Amount for the Overcollateralized Group
or Overcollateralized Groups, to the extent remaining following
distributions of interest and principal to the related Senior
Certificates of that Group or Groups and to any related component,
will be paid in the following priority: (1) first, such amount, up
to an amount for the Undercollateralized Group (the "Total Transfer
Amount") equal to the sum of the Interest Transfer Amount and the
Principal Transfer Amount for the Undercollateralized Group will be
distributed first to the Senior Certificates and to any component
thereof related to the Undercollateralized Group, in payment of
accrued but unpaid interest, if any, and then to those Senior
Certificates as principal, in the same order and priority as they
would receive with respect to other distributions of principal to
the extent required so that such Certificate Group will no longer
qualify as an Undercollateralized Group; and (2) second, any
remaining amount will be distributed pursuant to paragraphs (3),
(4), (5), (6) and (8) under " -- Priority of Distributions" in this
prospectus supplement.
On each Distribution Date, the "Interest Transfer Amount" for an
Undercollateralized Group will equal one month's interest on the applicable
Principal Transfer Amount at such Mortgage Pool's weighted average Net Mortgage
Rate, plus any shortfall of interest on the Senior Certificates of such
Undercollateralized Group and the components thereof, from prior Distribution
Dates.
On each Distribution Date, the "Principal Transfer Amount" for an
Undercollateralized Group will equal the excess of the aggregate Class Principal
Amount of the Senior Certificates related to that Undercollateralized Group over
the aggregate Stated Principal Balance of the Mortgage Loans in that Mortgage
Pool.
The payment of interest to the Certificates related to an
Undercollateralized Group from the interest collected on the Overcollateralized
Group or Overcollateralized Groups may cause a shortfall in the amount of
principal and interest otherwise distributable to the Subordinate Certificates.
In addition, after the aggregate principal balance of the Subordinate
Certificates has been reduced to zero, this may cause a shortfall of principal
that would be allocated to the Senior Certificates related to the
Undercollateralized Group.
SUBORDINATION OF THE PAYMENT OF THE SUBORDINATE CERTIFICATES
The rights of the holders of the Subordinate Certificates to receive
payments with respect to the Mortgage Loans will be subordinated to the rights
of the holders of the Senior Certificates and the rights of the holders of each
class of Subordinate Certificates (other than the Class B-1 Certificates) to
receive such payments will be further subordinated to the rights of the class or
classes of Subordinate Certificates with lower numerical class designations, in
each case only to the extent described in this prospectus supplement. The
subordination of the Subordinate
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Certificates to the Senior Certificates and the further subordination among the
Subordinate Certificates is intended to provide the Certificateholders having
higher relative payment priority with protection against Realized Losses.
ALLOCATION OF REALIZED LOSSES
If a Realized Loss occurs on the Mortgage Loans, then, on each
Distribution Date the principal portion of that Realized Loss will be allocated
first, to reduce the Class Principal Amount of each class of Subordinate
Certificates, in inverse order of priority, until the Class Principal Amount
thereof has been reduced to zero (that is, such Realized Losses will be
allocated to the Class B-6 Certificates while those Certificates are
outstanding, then to the Class B-5 Certificates, and so forth) and second, to
the Senior Certificates related to the Mortgage Pool sustaining such losses, on
the basis of their respective Certificate Principal Amounts.
The Class Principal Amount of the lowest ranking class of Subordinate
Certificates then outstanding will also be reduced by the amount, if any, by
which the total Certificate Principal Amount of all the Certificates on any
Distribution Date (after giving effect to distributions of principal and
allocation of Realized Losses on that date) exceeds the total Stated Principal
Balance of the Mortgage Loans for the related Distribution Date (a "Subordinate
Certificate Writedown Amount").
- In general, a "REALIZED LOSS" means (a) with respect to a
Liquidated Mortgage Loan, the amount by which the remaining unpaid
principal balance of that Mortgage Loan plus all accrued and unpaid
interest thereon and any related expenses exceeds the amount of
Liquidation Proceeds applied to the principal balance of that
Mortgage Loan, or (b) the amount by which, in the event of
bankruptcy of a borrower, a bankruptcy court reduces the secured
debt to the value of the related Mortgaged Property (a "Deficient
Valuation"). In determining whether a Realized Loss is a loss of
principal or of interest, Liquidation Proceeds and other recoveries
on a Mortgage Loan will be applied first to outstanding expenses
incurred with respect to such Mortgage Loan, then to accrued, unpaid
interest, and finally to principal.
- A "LIQUIDATED MORTGAGE LOAN" generally is a defaulted Mortgage Loan
as to which the Mortgage Loan or related REO Property has been
disposed of and all amounts expected to be recovered in respect of
that Mortgage Loan have been received by the related Servicer.
In the event that any amount is recovered in respect of principal of a
Liquidated Mortgage Loan (after reimbursement of any unreimbursed advances or
expenses of the Servicer), after any related Realized Loss has been allocated in
reduction of the Class Principal Amount of a class of Certificates as described
herein, such amount (a "Subsequent Recovery ") will be distributed to the
Certificates still outstanding, in accordance with the priorities described
under " -- Priority of Distributions," and the Class Principal Amount of each
class of Certificates then outstanding that has been reduced due to application
of a Realized Loss will be increased, in order of seniority, by the amount of
such Subsequent Recovery. Any Subsequent Recovery that is received during a
Prepayment Period will be included as part of the Available Distribution Amount
for the related Distribution Date. It is generally not anticipated that any such
amounts
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will be recovered, or that any distributions in respect of Subsequent Recoveries
will be made to the Subordinate Certificates prior to the Distribution Date in
December 2014.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Securities Administrator will make
available to each Certificateholder and will forward to the rating agencies a
statement (based on information received from each Servicer) generally setting
forth, among other things:
- the amount of the distributions, separately identified, with respect
to each class of Certificates;
- the amount of the distributions set forth in the first clause above
allocable to principal, separately identifying the aggregate amount
of any principal prepayments or other unscheduled recoveries of
principal included in that amount;
- the amount of the distributions set forth in the first clause above
allocable to interest and how it was calculated;
- the amount of any unpaid Interest Shortfall, Net WAC Shortfall or
unpaid Net WAC Shortfall (if applicable) and the related accrued
interest thereon, with respect to each class of Certificates;
- the Class Principal Amount of each class of Certificates after
giving effect to the distribution of principal on that Distribution
Date;
- the Pool Balance, the Stated Principal Balance of the Mortgage Loans
in each Mortgage Pool and the Pool 1 Net WAC, the Pool 2 Net WAC and
the Pool 3 Net WAC, as applicable, at the end of the related
Prepayment Period;
- the Stated Principal Balance of the Mortgage Loans in each Mortgage
Pool whose Mortgage Rates adjust on the basis of the One-Month LIBOR
index and the Six- Month LIBOR index at the end of the related
Prepayment Period;
- the Pro Rata Senior Percentage, Senior Percentage and the
Subordinate Percentage for each Mortgage Pool for the following
Distribution Date;
- the Senior Prepayment Percentage and Subordinate Prepayment
Percentage for each Mortgage Pool for the following Distribution
Date;
- in the aggregate and with respect to each Mortgage Pool, the amount
of the Master Servicing Fee and the Servicing Fee paid to or
retained by the Master Servicer and by each Servicer, respectively;
- in the aggregate and with respect to each Mortgage Pool, the amount
of Monthly Advances for the related Due Period;
- in the aggregate and with respect to each Mortgage Pool, the number
and aggregate principal balance of the Mortgage Loans that were (A)
delinquent (exclusive of
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Mortgage Loans in foreclosure) (1) 30 to 59 days, (2) 60 to 89 days
and (3) 90 or more days, (B) in foreclosure and delinquent (1) 30 to
59 days, (2) 60 to 89 days and (3) 90 or more days and (C) in
bankruptcy as of the close of business on the last day of the
calendar month preceding that Distribution Date;
- in the aggregate and with respect to each Mortgage Pool, for any
Mortgage Loan as to which the related Mortgaged Property was an REO
property during the preceding calendar month, the loan number, the
principal balance of that Mortgage Loan as of the close of business
on the last day of the related Due Period and the date of
acquisition of the REO property;
- in the aggregate and with respect to each Mortgage Pool, the total
number and principal balance of any REO properties as of the close
of business on the last day of the preceding Due Period;
- in the aggregate and with respect to each Mortgage Pool, the amount
of Realized Losses incurred during the preceding calendar month;
- in the aggregate and with respect to each Mortgage Pool, the
cumulative amount of Realized Losses incurred since the Closing
Date; and
- the Certificate Interest Rate for each class of Certificates for
that Distribution Date.
The Securities Administrator may make available each month, to any
interested party, the monthly statement to Certificateholders via the Securities
Administrator's website. The Securities Administrator's website will be located
at www.ctslink.com, and assistance in using the website can be obtained by
calling the Securities Administrator's customer service desk at (301) 815-6600.
Parties that are unable to use the above distribution option are entitled to
have a paper copy mailed to them via first class mail by notifying the
Securities Administrator at the following address: Wells Fargo Bank, National
Association, P.O. Box 98, Columbia, Maryland 21046 (or for overnight deliveries
at 9062 Old Annapolis Road, Columbia, Maryland 21045). The Securities
Administrator will have the right to change the way such reports are distributed
in order to make such distributions more convenient and/or more accessible, and
the Securities Administrator will provide timely and adequate notification to
such parties regarding any such changes.
In addition, within a reasonable period of time after the end of each
calendar year, the Securities Administrator will, upon request, prepare and
deliver to each holder of a Certificate of record during the previous calendar
year a statement containing information necessary to enable holders of the
Certificates to prepare their tax returns. These statements will not have been
examined and reported upon by an independent public accountant.
FINAL SCHEDULED DISTRIBUTION DATE
The "Final Scheduled Distribution Date" for the Offered Certificates is
the Distribution Date in December 2034, which is the Distribution Date in the
month following the scheduled maturity date for the latest maturing Mortgage
Loan. The actual final Distribution Date of any
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class of Certificates may be earlier or later, and could be substantially
earlier, than such class's Final Scheduled Distribution Date.
OPTIONAL CLEAN-UP REDEMPTION OF THE CERTIFICATES
On any Distribution Date on or after the Distribution Date (the "Clean-Up
Call Date") on which the aggregate outstanding principal balance of the Mortgage
Loans as of the related Due Date is equal to or less than 10% of the aggregate
principal balance of the Mortgage Loans (in the aggregate) as of the Cut-off
Date, subject to satisfaction of the conditions described in the Pooling and
Servicing Agreement, the Master Servicer will purchase the Mortgage Loans from
the Trust Fund and apply the proceeds to redeem the Certificates at a price
equal to 100% of the then aggregate outstanding Class Principal Amount of all
the Certificates, plus accrued interest thereon through the end of the Accrual
Period immediately preceding the related Distribution Date (excluding the amount
of any unpaid Net WAC Shortfalls). NO REDEMPTION PREMIUM WILL BE DISTRIBUTABLE
IN CONNECTION WITH SUCH REDEMPTION. Upon such redemption of the Certificates,
any funds or property remaining in the Trust Fund will be liquidated and the
Trust Fund will terminate.
If the Master Servicer does not exercise its optional clean-up redemption
right on the initial Clean-Up Call Date and redeem the Certificates, then on the
immediately succeeding Distribution Date, the applicable margin specified in
clause (i) of the definition of Certificate Interest Rate for the Class A-1,
Class A-2, Class A-3, Class B-1 and Class B-2 Certificates will increase as
described at "Description of the Certificates -- Distributions of Interest" and
the increased margin will remain in effect on all subsequent Distribution Dates.
THE TRUSTEE AND THE SECURITIES ADMINISTRATOR
HSBC Bank USA, National Association, a national banking association
organized and existing under the laws of the United States of America, will be
the Trustee under the Pooling and Servicing Agreement. The Trustee will be paid
an annual fee by the Master Servicer from its Master Servicing Fee. The Trustee
will be entitled to reimbursement for certain expenses and other amounts prior
to payment of any amounts to Certificateholders. The Trustee's "Corporate Trust
Office" is located at 452 Fifth Avenue, New York, New York 10018, or at such
other addresses as the Trustee may designate from time to time.
Wells Fargo Bank, National Association, as Securities Administrator, for
so long as it is Master Servicer, will perform certain administrative duties
with respect to the Certificates, on behalf of the Trustee including acting as
authentication agent, calculation agent, paying agent, and the party responsible
for preparing distribution statements and tax information for Certificateholders
and preparing tax filings for the Trust. The Securities Administrator's
"Corporate Trust Office" for purposes of presentment and surrender of the
Certificates for final payment thereon is Sixth Street and Marquette Avenue,
Minneapolis, Minnesota 55479, Attn: Sequoia Mortgage Trust 2004-11. The
Securities Administrator may be removed or may resign under the circumstances
set forth in the Pooling and Servicing Agreement.
VOTING RIGHTS
The Class A-R, Class X-A1, Class X-A2 and X-B Certificates will be
allocated 4% of all voting rights and the other classes of Certificates will be
allocated 96% of all voting rights under
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the Pooling and Servicing Agreement. Voting rights will be allocated among the
classes of Certificates in proportion to their respective Class Principal
Amounts or Class Notional Amounts, as applicable, and among Certificates of such
class in proportion to their Percentage Interests. The "Percentage Interest" of
a Certificate will be a fraction, expressed as a percentage, the numerator of
which is that Certificate's Certificate Principal Amount or notional amount, and
the denominator of which is the applicable Class Principal Amount or Class
Notional Amount.
THE SERVICERS
Initially, GreenPoint, Cendant Mortgage Corporation, MSDWCC, GMAC, Bank of
America and Residential Funding Corporation (together, the "Servicers") will be
responsible for servicing approximately 31.89%, 25.76%, 21.81%, 13.06%, 7.33%
and 0.15% of the Mortgage Loans, respectively. The Servicers will initially have
primary responsibility for servicing the Mortgage Loans, including, but not
limited to, all collection, advancing and loan-level reporting obligations,
maintenance of escrow accounts, maintenance of insurance and enforcement of
foreclosure proceedings with respect to the Mortgage Loans and related Mortgaged
Properties.
GREENPOINT MORTGAGE FUNDING, INC.
The delinquency, foreclosure and loss experience for GreenPoint is not
provided in this prospectus supplement because GreenPoint's historical servicing
portfolio has consisted primarily of mortgage loans with characteristics that
are not comparable to those of the Mortgage Loans.
GreenPoint is an indirect wholly-owned subsidiary of North Fork
Bancorporation, Inc., a bank holding company. GreenPoint is engaged in the
mortgage banking business, which consists of the origination, acquisition, sale
and servicing of residential mortgage loans secured primarily by one- to
four-unit family residences, and the purchase and sale of mortgage servicing
rights.
GreenPoint's executive offices are located at 100 Wood Hollow Drive,
Novato, California 94945.
Following the Closing Date, it is anticipated that substantially all of
the Mortgage Loans being serviced by GreenPoint will be subject to a servicing
transfer to GMACM. There can be no assurance as to the timing or certainty of
any such servicing transfer.
GMAC MORTGAGE CORPORATION
GMAC Mortgage Corporation ("GMACM" ) is an indirect wholly-owned
subsidiary of General Motors Acceptance Corporation and is one of the nation's
largest mortgage bankers. GMACM is engaged in the mortgage banking business,
including the origination, purchase, sale and servicing of residential loans.
GMACM maintains its executive and principal offices at 100 Witmer Road, Horsham,
Pennsylvania 19044, telephone (215) 682-1000.
The following table summarizes the delinquency experience for all the
mortgage loans originated and serviced under the GMACM Non-Conforming Adjustable
Rate Loan Programs. These mortgage loans include hybrid adjustable rate mortgage
loans and other types of adjustable rate mortgage loans that are not included in
the Mortgage Pool. The data presented in
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the following table is for illustrative purposes only, and there is no assurance
that the delinquency experience of the mortgage loans included in the trust will
be similar to that set forth below.
DELINQUENCY EXPERIENCE (1)
AT SEPTEMBER 30, 2004 AT DECEMBER 31, 2003 AT DECEMBER 31, 2002 AT DECEMBER 31, 2001
--------------------- -------------------- -------------------- --------------------
$ LOANS % BY $ $ LOANS % BY $ $ LOANS % BY $ $ LOANS % BY $
------- ------ ------- ------ ------- ------ ------- ------
Number of Loans ........... 8,526 3,413 3,161 5,776
Total Portfolio ........... $ 3,746,881,362 100% $1,500,841,189 100% $1,124,121,260 100% $1,951,330,393 100%
Period of Delinquency
30-59 Days ........ $ 39,326,344 1.05% $ 20,484,076 1.36% $ 20,362,044 1.81% $ 22,637,877 1.16%
60-89 Days ........ $ 3,080,013 0.08% $ 3,839,246 0.26% $ 1,882,746 0.17% $ 1,533,037 0.08%
90 or more Days ... $ 698,937 0.02% $ 2,038,390 0.14% $ 1,074,413 0.10% $ 753,340 0.04%
Sub-Total ................. $ 43,105,294 1.15% $ 26,361,712 1.76% $ 23,319,203 2.07% $ 24,924,253 1.28%
--------------- ---- -------------- ---- -------------- ---- -------------- ----
Delinquency Status
Bankruptcy ........ $ 3,867,677 0.10% $ 1,311,598 0.09% $ 524,919 0.05% $ 630,690 0.03%
Foreclosure ....... $ 4,694,807 0.13% $ 1,846,319 0.12% $ 5,677,038 0.51% $ 2,185,813 0.11%
Real Estate Owned . $ 3,057,033 0.08% $ 4,825,626 0.32% $ 2,142,133 0.19% $ 1,978,530 0.10%
Sub-Total ................. $ 11,619,517 0.31% $ 7,983,543 0.53% $ 8,344,090 0.74% $ 4,795,033 0.25%
--------------- ---- -------------- ---- -------------- ---- -------------- ----
Total Delinquent
Loans ..................... $ 54,724,811 1.46% $ 34,345,255 2.29% $ 31,663,292 2.82% $ 29,719,286 1.52%
=============== ==== ============== ==== ============== ==== ============== ====
- ---------------------
(1) All percentages based on the total loan balance outstanding rounded to the
nearest dollar.
CENDANT MORTGAGE CORPORATION
General. Cendant, a New Jersey corporation, is a wholly owned indirect
subsidiary of Cendant Corporation, a publicly traded company. Cendant
originates, sells and services residential mortgage loans in the United States.
Cendant is a centralized mortgage lender conducting its business in all 50
states. Cendant markets its mortgage products to consumers through a number of
channels, which include, an 800-number teleservices platform, a Web interface,
field sales professionals and purchasing closed loans from financial
institutions and mortgage banks after underwriting the loans.
Cendant customarily sells all mortgages it originates to investors (which
include a variety of institutional investors) either as individual loans,
mortgage-backed securities or participation certificates issued or guaranteed by
Fannie Mae, the Federal Home Loan Mortgage Corporation or the Government
National Mortgage Association. Cendant earns revenue from the sale of the
mortgage loans to investors, as well as on the servicing of the loans for
investors.
Cendant's executive offices are located at 3000 Leadenhall Road, Mt.
Laurel, New Jersey 08054, and its telephone number is (856) 917-6000.
As of September 30, 2004, Cendant provided servicing for approximately
$144.7 billion aggregate principal amount of mortgage loans, substantially all
of which are being serviced for unaffiliated persons.
Delinquency and foreclosure experience. The following table sets forth the
delinquency and foreclosure experience of residential mortgage loans funded and
serviced by Cendant as of
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the dates indicated. Cendant's portfolio of mortgage loans in the aggregate may
differ significantly from the Mortgage Loans in terms of interest rates,
principal balances, geographic distribution, loan to value ratios and other
possibly relevant characteristics. There can be no assurance, and no
representation is made, that the delinquency and foreclosure experience with
respect to the Mortgage Loans will be similar to that reflected in the table
below, nor is any representation made as to the rate at which losses may be
experienced on liquidation of defaulted mortgage loans. The actual loss and
delinquency experience on the Mortgage Loans will depend, among other things,
upon the value of the real estate securing those mortgage loans and the ability
of borrowers to make required payments.
CENDANT MORTGAGE CORPORATION
DELINQUENCY AND FORECLOSURE EXPERIENCE IN THE PORTFOLIO
OF ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LOANS(1)
At December 31, 2002 At December 31, 2003 At September 30, 2004
----------------------------------------------------------------------------
Number Principal Number Principal Number Principal
of Loans Balance of Loans Balance of Loans Balance
----------------------------------------------------------------------------
Total Portfolio 786,201 $114,079 888,860 $136,427 922,950 $144,714
Period of Delinquency:(2)(3)
30 -- 59 Days 19,075 $ 2,260 20,075 $ 2,383 18,756 $ 2,375
Percent Delinquent 2.4% 2.0% 2.3% 1.7% 2.0% 1.6%
60 -- 89 Days 3,827 $ 427 3,896 $ 398 3,866 $ 415
Percent Delinquent 0.5% 0.4% 0.4% 0.3% 0.4% 0.3%
90 Days or More 4,932 $ 467 5,736 $ 536 4,232 $ 420
Percent Delinquent 0.6% 0.4% 0.6% 0.4% 0.5% 0.3%
Total Delinquencies(4) 27,834 $ 3,154 29,707 $ 3,317 26,854 $ 3,210
Total Delinquencies by
Percent of Total Portfolio 3.5% 2.8% 3.3% 2.4% 2.9% 2.2%
Foreclosures, Bankruptcies
or Real Estate Owned 8,629 $ 781 10,120 $ 950 9,533 $ 902
Percent of Total Portfolio in
Foreclosures, Bankruptcies or
Real Estate Owned(5) 1.1% 0.7% 1.1% 0.7% 1.0% 0.6%
- -------------------------
(1) The table shows mortgage loans which were delinquent or for which
foreclosure proceedings had been instituted as of the date indicated. All
dollar amounts are in millions and have been rounded to the nearest whole
number.
(2) No mortgage loan is included in this table as delinquent until it is 30
days past due.
(3) Bankruptcies are included in the delinquency calculations and also in the
"Foreclosures, Bankruptcies or Real Estate Owned" category. The
Foreclosures and Real Estate Owned categories are excluded from the
delinquency calculations.
(4) Entries may not add up to total due to rounding.
(5) Percentages stated are of the total servicing portfolio.
While the above foreclosure and delinquency experience is typical of
Cendant's recent experience, there can be no assurance that experience on the
Mortgage Loans will be similar. As a result of the rapid growth experienced by
Cendant, its servicing portfolio is relatively unseasoned. Accordingly, the
information should not be considered to reflect the credit quality of the
Mortgage Loans, or as a basis for assessing the likelihood, amount or severity
of losses on the Mortgage Loans. The statistical data in the table is based on
all of the loans in Cendant's servicing portfolio. The Mortgage Loans may be
more recently originated than, and also have other characteristics which
distinguish them from, the majority of the loans in Cendant's servicing
portfolio.
S-99
Legal Proceedings. Pursuant to a merger with HFS Incorporated ("HFS") in
April 1997, PHH Corporation became a wholly-owned subsidiary of HFS. On December
17, 1997, pursuant to a merger between CUC International, Inc. ("CUC") and HFS,
HFS was merged into CUC with CUC surviving and changing its name to Cendant
Corporation.
On April 15, 1998, Cendant Corporation announced that in the course of
transferring responsibility for Cendant Corporation's accounting functions from
Cendant Corporation personnel associated with CUC prior to the merger to Cendant
Corporation personnel associated with HFS before the merger and preparing for
the report of first quarter 1998 financial results, Cendant Corporation
discovered accounting irregularities in some of the CUC business units.
Following the April 15, 1998 announcement of the discovery of accounting
irregularities in the former business units of CUC, approximately 70 lawsuits
claiming to be class actions and various individual lawsuits and arbitration
proceedings were commenced in various courts and other forums against Cendant
Corporation and other defendants by or on behalf of persons claiming to have
purchased or otherwise acquired securities or options issued by CUC or Cendant
Corporation between May 1995 and August 1998.
On December 7, 1999, Cendant Corporation announced that it had reached an
agreement to settle claims made by class members in the principal securities
class action pending against it for $2.85 billion in cash. The settlement
received all necessary court approvals and was fully funded by Cendant
Corporation on May 24, 2002.
The accounting irregularities described above did not include PHH
Corporation or any of its subsidiaries, including Cendant.
Recent Developments. Cendant Corporation and its PHH Corporation
subsidiary recently announced that Cendant Corporation intends to distribute the
mortgage and fleet operations of PHH Corporation to Cendant Corporation
shareholders. The spin-off is expected to be consummated in the first quarter of
2005. Cendant Corporation anticipates it will enter into a joint venture with
Cendant, designed to preserve the mutually beneficial cross-selling
opportunities that exist between the mortgage business and Cendant Corporation's
residential real estate, relocation and settlement services businesses. PHH
Corporation debt is expected to remain investment grade. The dividend
distribution to Cendant Corporation shareholders of the common stock of PHH
Corporation, and the establishment of the record date related thereto, remain
subject to the formal declaration of such dividend by Cendant Corporation's
board of directors. There can be no assurance that the transaction will be
completed.
The information set forth above with respect to Cendant has been provided
by Cendant, and neither the Seller, the Depositor, the Trustee nor any
Underwriter makes representations or warranties as to the accuracy or
completeness of such information.
MORGAN STANLEY DEAN WITTER CREDIT CORPORATION
The delinquency, foreclosure and loss experience set forth below for
MSDWCC has been provided by such Servicer and solely represents the historical
experience of the Servicer's servicing portfolio for its First Mortgage Program,
for the periods indicated and no representation is made by MSDWCC, the Depositor
or any other entity that the delinquency and/or loss experience of the Mortgage
Loans will be similar to that of the servicing portfolio,
S-100
nor is any representation made by such Servicer as to the rate at which losses
may be experienced on liquidation of defaulted Mortgage Loans.
S-101
MORGAN STANLEY DEAN WITTER CREDIT CORPORATION
DELINQUENCY AND LOSS HISTORY
(DOLLARS IN THOUSANDS)
Fiscal Year ended: NOVEMBER 30, 2001 NOVEMBER 30, 2002 NOVEMBER 30, 2003 MAY 31, 2004
------------------ ----------------- ----------------- ----------------- ------------
$ # $ # $ # $ #
---------- ------ ---------- ------ ---------- ------ ---------- ------
First Mortgage Loans
Outstanding .............................. $2,749,306 12,218 $4,944,219 19,354 $7,468,471 27,540 $8,268,305 29,749
Delinquency Period:(1)
30-- 59 Days .............................. $ 1,613 12 $ 3,038 18 $ 2,599 14 $ 3,576 16
60-- 89 Days .............................. $ 459 4 $ 1,203 10 $ 1,965 9 $ 2,060 6
90 Days or More ........................... $ 1,132 10 $ 2,673 12 $ 5,275 22 $ 3,622 22
Total Delinquency ......................... $ 3,204 26 $ 6,914 40 $ 9,839 45 $ 9,258 44
Percent of Loan Portfolio ................. 0.12% 0.21% 0.14% 0.21% 0.13% 0.16% 0.11% 0.15%
Foreclosures:
Outstanding ............................... 1,208 8 3,084 16 5,275 22 1,637 10
Percent of Loan Portfolio ................. 0.04% 0.07% 0.06% 0.08% 0.07% 0.08% 0.02% 0.03%
Average Portfolio Balance(2) ... .......... $2,295,376 10,284 $3,761,663 15,658 $6,276,264 23,733 $7,854,612 28,584
Gross Losses .............................. $ 52 $ 206 $ 264 $ 357
Recoveries ................................ $ (0) $ (0) $ (2) $ (0)
Net Losses ................................ $ 52 $ 206 $ 262 $ 357
Percent of Average Portfolio
Balance(3) ................................ 0.00% 0.01% 0.00% 0.00%
- ------------
(1) Delinquency is based on the number of days payments are contractually past
due. Any loans in foreclosure status are included in the respective aging
category in the chart.
(2) Average portfolio balance is the sum of the prior fiscal year-end balance
plus the sum of each month-end balance for the year indicated divided by
thirteen periods (or seven periods in the case of May 31, 2004).
(3) For May 31, 2004, the loss rate is annualized.
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BANK OF AMERICA, N.A.
Bank of America, N.A. is an indirect wholly-owned subsidiary of Bank of
America Corporation. Bank of America is engaged in a general commercial banking
business, offering a wide range of commercial, corporate, international,
financial and retail banking services to corporations, governments and
individuals. Bank of America originates and services residential mortgage loans
and performs subservicing functions for affiliates.
Bank of America's headquarters and its executive offices are located at
100 North Tryon Street, Charlotte, North Carolina 28255. Bank of America is
subject to regulation, supervision and examination by the Office of the
Comptroller of the Currency and has been approved as a mortgagee and
seller/servicer by the Department of Housing and Urban Development, the Veterans
Administration, the Government National Mortgage Association, FNMA and FHLMC.
Foreclosure and Delinquency Experience of Bank of America. The following
table summarizes the delinquency and foreclosure experience on the portfolio of
one- to four-family first mortgage loans originated or acquired by Bank of
America or certain of its affiliates and serviced or subserviced by Bank of
America, or serviced by Bank of America for others, other than (i) mortgage
loans acquired through certain mergers with previously unaffiliated entities,
(ii) mortgage loans with respect to which the servicing rights were acquired by
Bank of America in bulk and (iii) certain other mortgage loans, to the extent
such mortgage loans were originated at bank branches of Bank of America.
The portfolio of mortgage loans serviced by Bank of America includes both
fixed and adjustable interest rate mortgage loans, including "buydown" mortgage
loans, loans with balances conforming to FHLMC's and FNMA's limits as well as
jumbo loans, loans with stated maturities of 10 to 40 years and other types of
mortgage loans having a variety of payment characteristics, and includes
mortgage loans secured by mortgaged properties in geographic locations that may
not be representative of the geographic distribution or concentration of the
mortgaged properties securing the Mortgage Loans. There can be no assurance that
the delinquency, foreclosure and loss experience set forth below will be similar
to the results that may be experienced with respect to the Mortgage Loans.
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BANK OF AMERICA, N.A.
DELINQUENCY AND FORECLOSURE EXPERIENCE ON MORTGAGE LOANS
AT SEPTEMBER 30, 2004 AT DECEMBER 31, 2003
--------------------- --------------------
Outstanding and Outstanding and
Number and % % Number and % %
of Principal of Principal
Mortgage Amount Mortgage Amount
Loans (In Millions) Loans (In Millions)
----- ------------- ----- -------------
Total Portfolio 1,286,755 $190,647.9 1,229,050 $174,777.5
Delinquencies*
One Installment delinquent 17,810 $ 1,961.6 20,406 $ 2,219.3
Percent Delinquent 1.4% 1.0% 1.7% 1.3%
Two Installments delinquent 4,374 $ 447.5 5,399 $ 549.9
Percent Delinquent 0.3% 0.2% 0.4% 0.3%
Three or more installments delinquent 5,240 $ 502.4 6,294 $ 615.8
Percent Delinquent 0.4% 0.3% 0.5% 0.4%
In Foreclosure 4,054 $ 397.0 5,449 $ 548.2
Percent in Foreclosure 0.3% 0.2% 0.4% 0.3%
Delinquent and in Foreclosure 31,478 $ 3,308.5 37,548 $ 3,933.2
Percent Delinquent and in Foreclosure** 2.4% 1.7% 3.1% 2.3%
AT DECEMBER 31, 2002 AT DECEMBER 31, 2001
-------------------- --------------------
Outstanding and Outstanding and
Number and % % Number and % %
of Principal of Principal
Mortgage Amount Mortgage Amount
Loans (In Millions) Loans (In Millions)
----- ------------- ----- -------------
Total Portfolio 1,202,522 $ 168,063.2 1,273,067 $178,164.2
Delinquencies*
One Installment delinquent 25,415 $ 2,971.5 28,120 $ 3,231.9
Percent Delinquent 2.1% 1.8% 2.2% 1.8%
Two Installments delinquent 5,952 $ 625.2 5,910 $ 619.1
Percent Delinquent 0.5% 0.4% 0.5% 0.3%
Three or more installments delinquent 6,373 $ 649.5 5,874 $ 592.8
Percent Delinquent 0.5% 0.4% 0.5% 0.3%
In Foreclosure 5,855 $ 590.1 5,717 $ 578.3
Percent in Foreclosure 0.5% 0.4% 0.4% 0.3%
Delinquent and in Foreclosure 43,595 $ 4,836.4 45,621 $ 5,022.0
Percent Delinquent and in Foreclosure** 3.6% 2.9% 3.6% 2.8%
- ------------------------------
* A mortgage loan is deemed to have "one installment delinquent" if any
scheduled payment of principal or interest is delinquent past the end of
the month in which such payment was due, "two installments delinquent" if
such delinquency persists past the end of the month following the month in
which such payment was due, and so forth.
** The sums of the Percent Delinquent and Percent in Foreclosure set forth in
this table may not equal the Percent Delinquent and in Foreclosure due to
rounding.
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SERVICING OF THE MORTGAGE LOANS
GENERAL
Wells Fargo Bank, National Association, with its principal master
servicing offices at 9062 Old Annapolis Road, Columbia, Maryland 21045, will
perform the duties of Master Servicer in accordance with the terms set forth in
the Pooling and Servicing Agreement. The Master Servicer will not be ultimately
responsible for the performance of the servicing activities by a Servicer,
except as described under "-- Servicing Compensation and Payment of Expenses;
Master Servicing Compensation," "-- Adjustment to Servicing Fees in Connection
with Certain Prepaid Mortgage Loans" and "-- Advances" below. If any Servicer
fails to fulfill its obligations under the applicable Servicing Agreement, the
Master Servicer is obligated to terminate that Servicer and appoint a successor
servicer as provided in the Pooling and Servicing Agreement.
SERVICING AND COLLECTION PROCEDURES
Servicing functions to be performed by each Servicer under the related
Servicing Agreement include collection and remittance of principal and interest
payments, administration of mortgage escrow accounts, collection of certain
insurance claims and, if necessary, foreclosure. Each Servicer may contract with
subservicers to perform some or all of such Servicer's servicing duties, but the
Servicer will not thereby be released from its obligations under the related
Servicing Agreement. When used herein with respect to servicing obligations, the
term Servicer includes a subservicer.
Each Servicer will make reasonable efforts to collect all payments called
for under the Mortgage Loans and will, consistent with the related Servicing
Agreement and any primary mortgage insurance policy, follow such collection
procedures as are customary with respect to mortgage loans that are comparable
to the Mortgage Loans. Consistent with the above, each Servicer may, in its
discretion, (i) waive any assumption fee, late payment or other charge in
connection with a Mortgage Loan and (ii) to the extent not consistent with the
coverage of such Mortgage Loan by a primary mortgage insurance policy, arrange
with a mortgagor a schedule for the liquidation of delinquencies. The
Depositor's prior approval or consent will be required for certain servicing
activities such as modification of the terms of any Mortgage Loan and the sale
of any defaulted Mortgage Loan or REO Property.
Pursuant to each Servicing Agreement, the Servicer will deposit
collections on the Mortgage Loans into the Custodial Account established by it.
Each Custodial Account is required to be kept segregated from operating accounts
of the related Servicer and to meet the eligibility criteria set forth in the
related Servicing Agreement. Under each Servicing Agreement, amounts on deposit
in the Custodial Account may be invested in certain permitted investments
described therein. Any losses resulting from such investments are required to be
reimbursed to the Custodial Account by the related Servicer out of its own
funds.
On or before the Closing Date, the Securities Administrator, on behalf of
the Trustee, will establish the Distribution Account into which each Servicer
will remit all amounts required to be
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deposited therein (net of such Servicer's servicing compensation) on the
remittance date specified in the related Servicing Agreement. Generally, each
Servicer will determine the amount of Monthly Advances for the related Due
Period on or before the 18th day of each month, or, if the 18th is not a
Business Day, on the immediately preceding Business Day, (each, a "Determination
Date"), and will furnish to the Master Servicer information with respect to loan
level remittance data for such month's remittance on the reporting date
specified in the related Servicing Agreement.
Events of default under the Servicing Agreements include (i) any failure
of the Servicer to remit to the Distribution Account any required payment which
continues unremedied for a specified period after the giving of written notice
of such failure to the Servicer; (ii) any failure by the Servicer to make a
Monthly Advance as required under the Servicing Agreement, unless cured as
specified therein; (iii) any failure by the Servicer duly to observe or perform
in any material respect any of its other covenants or agreements in the
Servicing Agreement which continues unremedied for a specified period after the
giving of written notice of such failure to the Servicer; and (iv) certain
events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceeding and certain actions by or on behalf of the
Servicer indicating its insolvency, reorganization or inability to pay its
obligations.
In the event of a default by a Servicer under its Servicing Agreement, the
Master Servicer will have the right to remove the Servicer and will exercise
that right if it considers such removal to be in the best interest of the
Certificateholders. In the event that the Master Servicer removes a Servicer,
the Master Servicer will, in accordance with the Pooling and Servicing
Agreement, act as successor servicer under the related Servicing Agreement or
will appoint a successor servicer reasonably acceptable to the Depositor and the
Trustee. In connection with the removal of a Servicer, the Master Servicer will
be entitled to be reimbursed from the assets of the Trust Fund for all of its
reasonable costs associated with the termination of the Servicer and the
transfer of servicing to a successor servicer.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES; MASTER SERVICING COMPENSATION
Each Servicer will be entitled to receive, from interest actually
collected on each Mortgage Loan serviced by it, a servicing fee (the "Servicing
Fee") equal to the product of (1) the principal balance of such Mortgage Loans
as of the first day of the related Due Period and (2) a per annum rate (the
"Servicing Fee Rate") ranging from approximately 0.250% to approximately 0.750%.
As of the Cut-off Date, the weighted average Servicing Fee Rate for the Mortgage
Loans is expected to be approximately 0.346% per annum. The Servicers are also
entitled to receive, as additional servicing compensation, all late payment
fees, assumption fees and other similar charges and all reinvestment income
earned on amounts on deposit in the Custodial Accounts.
The Master Servicer will be paid a monthly fee (the "Master Servicing
Fee") with respect to each Mortgage Loan, calculated as 0.0095% per annum (the
"Master Servicing Fee Rate") of the Stated Principal Balance of each Mortgage
Loan as of the first day of the related Due Period. The Master Servicer also is
entitled to receive as additional master servicing compensation the investment
earnings on amounts on deposit in the Distribution Account. The Master Servicer
will pay the fees of the Trustee from the Master Servicing Fee.
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The amount of the Master Servicing Fee and each Servicer's Servicing Fee
is subject to adjustment with respect to prepaid Mortgage Loans, as described
below under "-- Adjustment to Servicing Fees in Connection with Certain Prepaid
Mortgage Loans."
ADJUSTMENT TO SERVICING FEES IN CONNECTION WITH CERTAIN PREPAID MORTGAGE LOANS
When a borrower prepays a Mortgage Loan in full between Due Dates, the
borrower is required to pay interest on the amount prepaid only to the date of
prepayment and not thereafter. Principal prepayments by borrowers received by a
Servicer during the related Prepayment Period for a Distribution Date will be
distributed to Certificateholders on the related Distribution Date. Thus, less
than one month's interest may have been collected on Mortgage Loans that have
been prepaid in full with respect to any Distribution Date. Pursuant to each
Servicing Agreement, either (i) the related Servicing Fee for any month will be
reduced (but not below zero) by the amount of any Prepayment Interest Shortfall
or (ii) the related Servicer will be required to make payments in respect of
Prepayment Interest Shortfalls from its own funds with respect to Mortgage Loans
serviced by such Servicer. The Master Servicer is obligated to reduce a portion
of its Master Servicing Fee for the related Distribution Date to the extent
necessary to fund any Prepayment Interest Shortfalls required to be paid but not
paid by a Servicer. The amount of interest available to be paid to
Certificateholders will be reduced by any uncompensated Prepayment Interest
Shortfalls.
ADVANCES
Subject to the limitations described in the following paragraph, each
Servicer will be required to advance prior to each Distribution Date, from its
own funds, or funds in its Custodial Account that are not otherwise required to
be remitted to the Distribution Account for such Distribution Date, an amount
equal to the scheduled payment of interest at the related Mortgage Rate (less
the applicable Servicing Fee Rate) and scheduled principal payment on each
Mortgage Loan which were due on the related Due Date and which were not received
prior to the related Determination Date (any such advance, a "Monthly Advance").
The Master Servicer will be obligated to make any required Monthly Advance if
the Servicer fails in its obligation to do so, to the extent provided in the
Pooling and the Servicing Agreement and the related Servicing Agreement.
Monthly Advances are intended to maintain a regular flow of scheduled
interest and principal payments on the Certificates rather than to guarantee or
insure against losses. Each Servicer is obligated to make Monthly Advances with
respect to delinquent payments of interest and principal on each Mortgage Loan
serviced by it, to the extent that such Monthly Advances are, in its reasonable
judgment, recoverable from future payments and collections or insurance payments
or proceeds of liquidation of the related Mortgage Loans. Any failure by a
Servicer to make a Monthly Advance as required under the related Servicing
Agreement will constitute a default thereunder, in which case the Master
Servicer will be required, as successor servicer, to make a Monthly Advance in
accordance with the terms of the Pooling and Servicing Agreement; provided,
however, that in no event will the Master Servicer be required to make a Monthly
Advance that is not, in its reasonable judgment, recoverable from future
payments and collections or insurance payments or proceeds of liquidation of the
related Mortgage Loans. If a Servicer determines on any Determination Date to
make a Monthly Advance, such Monthly
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Advance will be included with the payment to Certificateholders on the related
Distribution Date. Any failure by the Master Servicer to make a Monthly Advance
as required under the Pooling and Servicing Agreement will constitute a Master
Servicer Default thereunder, in which case the Trustee or the successor master
servicer will be obligated to make such Monthly Advance.
EVIDENCE AS TO COMPLIANCE
Each Servicing Agreement provides that on or before a specified date in
each year, a firm of independent public accountants will furnish a statement to
the Master Servicer, the Depositor and the Trustee to the effect that, on the
basis of the examination by such firm conducted substantially in compliance with
the Uniform Single Attestation Program for Mortgage Bankers, the servicing by or
on behalf of the Servicer was conducted in compliance with its Servicing
Agreement, except for any significant exceptions or errors in records that, in
the opinion of the firm, the Uniform Single Attestation Program for Mortgage
Bankers requires it to report.
Each Servicing Agreement also provides for delivery to the Master
Servicer, the Depositor and the Trustee, on or before a specified date in each,
of an annual officer's certificate to the effect that the Servicer has fulfilled
its obligations under its Servicing Agreement throughout the preceding year.
MASTER SERVICER DEFAULT; SERVICER DEFAULT
Events of default by the Master Servicer under the Pooling and Servicing
Agreement include (i) any failure by the Master Servicer to make a back-up
Monthly Advance as required under the Pooling and Servicing Agreement, unless
cured as specified therein; (ii) any failure by the Master Servicer duly to
observe or perform in any material respect any of its other covenants or
agreements in the Pooling and Servicing Agreement which continues unremedied for
a specified period after the giving of written notice of such failure to the
Master Servicer; and (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceeding and certain actions
by on or behalf of the Master Servicer indicating its insolvency, reorganization
or inability to pay its obligations.
If the Master Servicer is in default in its obligations under the Pooling
and Servicing Agreement, the Trustee may, and must if directed to do so by
Certificateholders having more than 50% of the Class Principal Amount applicable
to each class of Certificates affected thereby, terminate the Master Servicer
and either appoint a successor Master Servicer in accordance with the Pooling
and Servicing Agreement or succeed to the responsibilities of the Master
Servicer.
If a Servicer is in default in its obligations under the applicable
Servicing Agreement, the Master Servicer may, at its option, terminate the
defaulting Servicer and either appoint a successor Servicer in accordance with
the applicable Servicing Agreement and the Pooling and Servicing Agreement or
succeed to the responsibilities of the terminated Servicer.
RESIGNATION OF SERVICERS; ASSIGNMENT AND MERGER
A Servicer may not resign from its obligations and duties under its
Servicing Agreement or assign or transfer its rights, duties or obligations
except (i) upon a determination that its duties
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thereunder are no longer permissible under applicable law, (ii) in certain
cases, upon the sale of substantially all of its assets or (iii) upon a sale of
its servicing rights with respect to the Mortgage Loans with the prior written
consent of the Depositor, which consent may not be unreasonably withheld. No
such resignation will become effective until the Master Servicer or a successor
servicer approved by it has assumed the Servicer's obligations and duties under
such Servicing Agreement.
Any person into which a Servicer may be merged or consolidated, any person
resulting from any merger or consolidation which a Servicer is a party, any
person succeeding to the business of a Servicer or any person to whom a Servicer
assigns or transfers its duties and obligations, will be the successor of such
Servicer under the related Servicing Agreement.
YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE
YIELD CONSIDERATIONS
The yields to maturity (or to early termination) of the Offered
Certificates will be affected by the rate of principal payments (including
prepayments, which may include amounts received by virtue of purchase,
condemnation, insurance or foreclosure) on the Mortgage Loans in the related
Mortgage Pool. Yields will also be affected by the extent to which Mortgage
Loans in the related Mortgage Pool bearing higher Mortgage Rates prepay at a
more rapid rate than Mortgage Loans with lower Mortgage Rates, the amount and
timing of borrower delinquencies and defaults resulting in Realized Losses, the
purchase price for the Offered Certificates and other factors.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors. As of the Cut-off
Date, approximately 75.82% of the Pool 1 Mortgage Loans, approximately 77.46% of
the Pool 2 Mortgage Loans and all of the Pool 3 Mortgage Loans may be
voluntarily prepaid in full or in part without the payment of any penalty or
premium. In general, if prevailing interest rates fall below the interest rates
on the Mortgage Loans, the Mortgage Loans are likely to be subject to higher
prepayments than if prevailing rates remain at or above the interest rates on
the Mortgage Loans. Conversely, if prevailing interest rates rise above the
interest rates on the Mortgage Loans, the rate of prepayment would be expected
to decrease. Other factors affecting prepayment of the Mortgage Loans include
such factors as changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity in the mortgaged properties, changes in the
value of the mortgaged properties, mortgage market interest rates and servicing
decisions. The Mortgage Loans generally have due-on-sale clauses.
As of the Cut-off Date, approximately 56.12% and 43.88% of the Mortgage
Loans are Six-Month LIBOR Loans and One-Month LIBOR Loans, respectively.
Increases and decreases in the Mortgage Rate on a Mortgage Loan will be limited
(except in the case of the first rate adjustment) by the maximum Mortgage Rate
and the minimum Mortgage Rate, if any, and will be based on the applicable index
in effect on the applicable date prior to the related interest rate adjustment
date plus the applicable gross margin. The applicable index may not rise and
fall consistently with Mortgage Rates. As a result, the Mortgage Rates on the
Mortgage Loans at any
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time may not equal the prevailing mortgage interest rates for similar adjustable
rate loans, and accordingly the prepayment rate may be lower or higher than
would otherwise be anticipated. Moreover, some borrowers who prefer the
certainty provided by fixed rate mortgage loans may, nevertheless, obtain
adjustable rate mortgage loans at a time when they regard the mortgage interest
rates (and, therefore, the payments) on fixed rate mortgage loans as
unacceptably high. These borrowers may be induced to refinance adjustable rate
loans when the mortgage interest rates and monthly payments on comparable fixed
rate mortgage loans decline to levels which these borrowers regard as
acceptable, even though such mortgage interest rates and monthly payments may be
significantly higher than the current mortgage interest rates and monthly
payments on the borrowers' adjustable rate mortgage loans. The ability to
refinance a Mortgage Loan will depend on a number of factors prevailing at the
time refinancing is desired, including, without limitation, real estate values,
the borrower's financial situation, prevailing mortgage interest rates, the
borrower's equity in the related mortgaged property, tax laws and prevailing
general economic conditions.
The rate of principal payments on the Mortgage Loans will also be affected
by the amortization schedules of the Mortgage Loans, the rate and timing of
prepayments thereon, liquidations of defaulted Mortgage Loans and purchases of
Mortgage Loans due to certain breaches of representations and warranties or
defective documentation. The timing of changes in the rate of prepayments,
liquidations and purchases of the related Mortgage Loans may, and the timing of
Realized Losses will, significantly affect the yield to an investor, even if the
average rate of principal payments experienced over time is consistent with an
investor's expectation. Because the rate and timing of principal payments on the
Mortgage Loans will depend on future events and on a variety of factors, no
assurance can be given as to such rate or the timing of principal payments on
the Offered Certificates. In general, the earlier a prepayment of principal of
the related Mortgage Loans, the greater the effect on an investor's yield. The
effect on an investor's yield of principal payments occurring at a rate higher
(or lower) than the rate anticipated by the investor during the period
immediately following the issuance of the Certificates may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
From time to time, areas of the United States may be affected by flooding,
severe storms, landslides, wildfires, earthquakes or other natural disasters.
Recently areas in the southern and eastern United States were affected by
hurricanes and tropical storms. Whether any Mortgaged Properties were damaged by
these storms, and if so how many, is not known as of the date of this prospectus
supplement, and no assurance can be given as to the effect of these storms on
the rate of delinquencies and losses on any Mortgage Loans secured by Mortgaged
Properties that were damaged by these storms.
Under the Mortgage Loan Purchase Agreement, the Seller will represent and
warrant that as of the Closing Date each Mortgaged Property was free of material
damage. In the event of an uncured breach of this representation and warranty
that materially and adversely affects the interests of Certificateholders, the
Seller will be required to repurchase the affected Mortgage Loan or substitute
another mortgage loan therefor. If any damage caused by flooding, storms,
wildfires, landslides or earthquakes (or other cause) occurs after the Closing
Date, the Seller will not have any repurchase obligation. In addition, the
standard hazard policies covering the Mortgaged Properties generally do not
cover damage caused by earthquakes, flooding and
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landslides, and earthquake, flood or landslide insurance may not have been
obtained with respect to such Mortgaged Properties. As a consequence, Realized
Losses could result. To the extent that the insurance proceeds received with
respect to any damaged Mortgaged Properties are not applied to the restoration
thereof, the proceeds will be used to prepay the related Mortgage Loans in whole
or in part. Any purchases or repayments of the Mortgage Loans may reduce the
weighted average lives of the Offered Certificates and will reduce the yields on
the Offered Certificates to the extent they are purchased at a premium.
Prepayments, liquidations and purchases of the Mortgage Loans will result
in distributions to Certificateholders of principal amounts that would otherwise
be distributed over the remaining terms of such Mortgage Loans. The rate of
defaults on the Mortgage Loans will also affect the rate and timing of principal
payments on the Mortgage Loans. In general, defaults on Mortgage Loans are
expected to occur with greater frequency in their early years.
As described herein, approximately 4.59% and 95.41% of the Mortgage Loans
provide for only monthly interest payments for the first five or ten years,
respectively, following origination. Other considerations aside, due to such
characteristics, borrowers may be disinclined to prepay the Mortgage Loans
during such interest-only period. In addition, because no principal is due on
the Mortgage Loans during the initial five- or ten-year period, the Certificates
will amortize at a slower rate during such period than would otherwise be the
case. Thereafter, when the monthly payments on the Mortgage Loans are
recalculated on the basis of a level payment amortization schedule for the
remaining term of such Mortgage Loan, as described herein, principal payments on
the Certificates are expected to increase correspondingly, and, in any case, at
a faster rate than if payments on the Mortgage Loans were calculated on the
basis of a 25 or 30 year amortization schedule. Notwithstanding the foregoing,
no assurance can be given as to any prepayment rate on the Mortgage Loans.
As described under "Description of the Certificates -- Distributions of
Principal" herein, scheduled and unscheduled principal payments on the Mortgage
Loans in a Mortgage Pool will generally be allocated disproportionately to the
Senior Certificates of the related Certificate Group during the first ten years
following the Closing Date (except as described herein) or if certain conditions
are met. Such allocation will initially accelerate the amortization of the
Senior Certificates.
The yields on the Offered Certificates may also be adversely affected by
Net Prepayment Interest Shortfalls. The Certificate Interest Rates and the
yields on the Class A-1, Class A-3, Class X-A2, Class B-1 and Class B-2
Certificates will be affected by the level of One-Month LIBOR from time to time;
the Certificate Interest Rates and the yields on the Class A-2 Certificates will
be affected by the level of Six-Month LIBOR from time to time; and the yields on
the Class X-A1 and Class X-B Certificates and each class of Subordinate
Certificates will be affected by the level of One-Month LIBOR and Six-Month
LIBOR from time to time. Moreover, the yield on each class of Offered
Certificates (or in the case of the Class X-A1 Certificates, the related
components) will be affected by the Mortgage Rates of the Mortgage Loans in the
related Mortgage Pool from time to time, as described under "Risk Factors --
Your Yield May Be Affected by Changes in Interest Rates." No prediction can be
made as to future levels of One-Month LIBOR or Six-Month LIBOR or as to the
timing of any changes therein.
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The yields to investors in the Offered Certificates may be significantly
affected by the exercise of the Master Servicer's option to redeem the
Certificates, as described herein. See "Description of the Certificates --
Optional Clean-Up Redemption of the Certificates." If the purchaser of a
Certificate offered at a discount from its initial principal amount calculates
its anticipated yield to maturity (or early termination) based on an assumed
rate of payment of principal that is faster than that actually experienced on
the related Mortgage Loans, the actual yield may be lower than that so
calculated.
Conversely, if the purchaser of a Class X-A1, Class X-A2 or Class X-B
Certificate or another Certificate offered at a premium, calculates its
anticipated yield based on an assumed rate of payment of principal that is
slower than that actually experienced on the related Mortgage Loans, the actual
yield may be lower than that so calculated. The effective yield to holders of
the Offered Certificates (other than the LIBOR Certificates) will be lower than
the yield otherwise produced by the applicable Certificate Interest Rate and the
related purchase price because monthly distributions will not be payable to such
holders until the 20th day of the month (or the immediately following Business
Day if such day is not a Business Day) following the month in which interest
accrues on the Mortgage Loans (without any additional distribution of interest
or earnings thereon in respect of such delay).
Prospective purchasers of the Class X-A1, Class X-A2 and Class X-B
Certificates should carefully consider the risk that a rapid rate of principal
payments on the Mortgage Loans could result in the failure of such purchasers to
recover their initial investments.
SUBORDINATION OF THE OFFERED SUBORDINATE CERTIFICATES
On each Distribution Date, the holders of classes of Certificates having a
relatively higher priority of distribution will have a preferential right to
receive amounts of interest and principal due them on such Distribution Date
before any distributions are made on any class of Certificates subordinate to
such higher ranking class. As a result, the yields to maturity and the aggregate
amount of distributions on the Class B-1, Class B-2 and Class B-3 Certificates
will be more sensitive than the yields of higher ranking Certificates to the
rate of delinquencies and defaults on the Mortgage Loans.
As more fully described herein, the principal portion of Realized Losses
on the Mortgage Loans will be allocated first to the lower ranking class of
Subordinate Certificates, then to the higher ranking class of Subordinate
Certificates, in inverse order of priority, until the Class Principal Amount of
each such class has been reduced to zero, before any such Realized Losses will
be allocated to the Senior Certificates. The interest portion of Realized Losses
on the Mortgage Loans will reduce the amount available for distribution on the
related Distribution Date to the lowest ranking related class outstanding on
such date.
WEIGHTED AVERAGE LIFE
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor of each dollar distributed in net reduction of principal of such
security (assuming no losses). The weighted average lives of the Offered
Certificates will be influenced by, among other things, the rate at which
principal of the
S-112
related Mortgage Loans is paid, which may be in the form of scheduled
amortization, prepayments or liquidations.
For a discussion of the factors which may influence the rate of payments
(including prepayments) of the Mortgage Loans, see "Risk Factors -- Prepayments
are Unpredictable and Affect Yield" in the accompanying prospectus.
Prepayments of mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement for
the Mortgage Loans is a Constant Prepayment Rate ("CPR"). CPR represents an
assumed constant rate of prepayment each month, relative to the then outstanding
principal balance of a pool of mortgage loans, for the life of such mortgage
loans.
CPR DOES NOT PURPORT TO BE EITHER A HISTORICAL DESCRIPTION OF THE
PREPAYMENT EXPERIENCE OF ANY POOL OF MORTGAGE LOANS OR A PREDICTION OF THE
ANTICIPATED RATE OF PREPAYMENT OF ANY POOL OF MORTGAGE LOANS, INCLUDING THE
MORTGAGE LOANS.
The following tables were prepared on the basis of the following
assumptions (collectively, the "Structuring Assumptions"): (i) distributions in
respect of the Certificates are received in cash on the 20th day of each month
commencing in December 2004, (ii) the Mortgage Loans prepay at the indicated
percentages of CPR, (iii) no defaults or delinquencies occur in the payment by
borrowers of principal and interest on the Mortgage Loans, and no shortfalls are
incurred due to the application of the Relief Act, (iv) the Seller is not
required to purchase or substitute for any Mortgage Loan, (v) scheduled monthly
payments on the Mortgage Loans are received on the first day of each month
commencing in December 2004 and are computed prior to giving effect to any
prepayments received in the prior month, (vi) prepayments are allocated as
described herein without giving effect to loss and delinquency tests, (vii)
prepayments represent voluntary prepayments in full of individual Mortgage Loans
and are received on the last day of each month, commencing in November 2004 and
include 30 days' interest, (viii) the scheduled monthly payment for each
Mortgage Loan has been calculated based on the assumed mortgage loan
characteristics described in item (xiv) below such that each such Mortgage Loan
will amortize in amounts sufficient to repay the principal balance of such
assumed mortgage loan by its remaining term to maturity (taking into account any
interest-only period), (ix) interest accrues on each class of Certificates at
the applicable Certificate Interest Rate described under "Description of the
Certificates -- Distributions of Interest" in this prospectus supplement, (x)
the initial Class Principal Amount of each class of Certificates is as described
in this prospectus supplement, (xi) Six-Month LIBOR is equal to 2.49000% and
One-Month LIBOR is equal to 2.10125% at all times; (xii) no exercise of any
optional clean-up redemption will occur, except that this assumption does not
apply to the calculation of weighted average lives to the optional clean-up
redemption, (xiii) the Closing Date of the sale of the Offered Certificates is
November 23, 2004; and (xiv) the Mortgage Loans in each Mortgage Pool are
aggregated into assumed Mortgage Loans having the following characteristics:
S-113
ASSUMED MORTGAGE LOAN CHARACTERISTICS
REMAINING
CURRENT ORIGINAL REMAINING INTEREST- NEXT RATE
CURRENT NET TERM TO TERM TO ONLY GROSS MINIMUM MAXIMUM ADJUSTMENT
MORTGAGE PRINCIPAL MORTGAGE MORTGAGE MATURITY MATURITY TERM MARGIN MORTGAGE MORTGAGE PERIOD
POOL LOAN TYPE BALANCE($) RATE(%) RATE(%) (MONTHS) (MONTHS) (MONTHS) (%) RATE(%) RATE(%) (MONTHS)
---- --------- ---------- ------- ------- -------- -------- -------- --- ------- ------- --------
Pool 1 One-Month LIBOR 6,009,631.38 3.59788 3.21338 360 359 59 1.76269 1.76269 12.00000 1
Pool 1 One-Month LIBOR 218,872,094.16 3.44799 3.05952 332 331 119 1.60827 1.60827 12.04074 1
Pool 1 Six-Month LIBOR 17,745,256.38 3.89469 3.51019 360 359 59 1.90007 1.90007 12.00000 5
Pool 1 Six-Month LIBOR 207,098,735.23 3.67926 3.29414 336 335 119 1.71577 1.71577 12.07952 5
Pool 2 Six-Month LIBOR 9,117,569.82 3.77048 3.38598 360 359 59 1.77186 1.77186 12.00000 5
Pool 2 Six-Month LIBOR 80,039,147.44 3.73590 3.35140 336 335 119 1.75102 1.75102 12.07693 5
Pool 3 One-Month LIBOR 89,217,853.34 3.46753 3.20803 300 211 31 1.71639 1.71639 12.35901 1
Pool 3 Six-Month LIBOR 87,667,237.94 3.43921 3.17971 300 211 31 1.89049 1.89049 12.73480 3
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The actual characteristics and the performance of the Mortgage Loans will
differ from the assumptions used in constructing the tables set forth below,
which are hypothetical in nature and are provided only to give a general sense
of how the principal cash flows might behave under varying prepayment scenarios.
For example, it is not expected that the Mortgage Loans will prepay at a
constant rate until maturity, that all of the Mortgage Loans will prepay at the
same rate or that there will be no defaults or delinquencies on the Mortgage
Loans. Moreover, the diverse remaining terms to maturity and the Mortgage Rates
of the Mortgage Loans could produce slower or faster principal distributions
than indicated in the tables at the various percentages of CPR specified, even
if the weighted average remaining term to maturity and weighted average Mortgage
Rate of the Mortgage Loans are assumed. Any difference between such assumptions
and the actual characteristics and performance of the Mortgage Loans, or actual
prepayment or loss experience, will cause the percentages of initial Class
Principal Amounts outstanding over time and the weighted average lives of the
Offered Certificates to differ (which difference could be material) from the
corresponding information in the tables for each indicated percentage of CPR.
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average lives of the Offered Certificates (other than the
Class A-R and the Class X Certificates) and set forth the percentages of the
initial Class Principal Amounts of such Offered Certificates that would be
outstanding after each of the Distribution Dates shown at various percentages of
CPR.
The weighted average life of an Offered Certificate is determined by (1)
multiplying the net reduction, if any, of the applicable Class Principal Amount
by the number of years from the date of issuance of the Offered Certificate to
the related Distribution Date, (2) adding the results and (3) dividing the sum
by the aggregate of the net reductions of Class Principal Amount described in
(1) above.
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PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OF THE OFFERED CERTIFICATES
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF CPR
Class A-1 Certificates
-----------------------------------------------------------------------------------
DISTRIBUTION DATE 12% 15% 20% 25% 30% 40%
- ----------------- --- --- --- --- --- ---
Initial Percentage ......................... 100% 100% 100% 100% 100% 100%
November 2005 .............................. 88 84 79 74 69 59
November 2006 .............................. 77 71 63 55 47 34
November 2007 .............................. 67 60 49 40 33 20
November 2008 .............................. 59 50 39 30 23 12
November 2009 .............................. 51 43 32 23 16 7
November 2010 .............................. 45 36 25 17 11 4
November 2011 .............................. 39 31 20 13 8 3
November 2012 .............................. 35 26 16 10 5 2
November 2013 .............................. 30 22 13 7 4 1
November 2014 .............................. 27 19 10 5 3 1
November 2015 .............................. 23 15 8 4 2 *
November 2016 .............................. 19 12 6 3 1 *
November 2017 .............................. 16 10 5 2 1 *
November 2018 .............................. 13 8 3 1 1 *
November 2019 .............................. 11 7 3 1 * *
November 2020 .............................. 9 5 2 1 * *
November 2021 .............................. 7 4 1 * * *
November 2022 .............................. 6 3 1 * * *
November 2023 .............................. 5 3 1 * * *
November 2024 .............................. 4 2 1 * * *
November 2025 .............................. 3 1 * * * *
November 2026 .............................. 2 1 * * * *
November 2027 .............................. 2 1 * * * *
November 2028 .............................. 1 1 * * * *
November 2029 .............................. 1 * * * * *
November 2030 .............................. * * * * * *
November 2031 .............................. * * * * * *
November 2032 .............................. * * * * * *
November 2033 .............................. * * * * * *
November 2034 .............................. 0 0 0 0 0 0
November 2035 .............................. 0 0 0 0 0 0
Weighted Average Life in Years
to maturity ............................... 6.92 5.70 4.30 3.38 2.74 1.91
to Optional Clean-Up
Redemption of the Certificates .... 6.42 5.23 3.91 3.05 2.47 1.73
- -----------------------------
* Indicates a value between 0.0% and 0.5%.
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PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OF THE OFFERED CERTIFICATES
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF CPR
Class A-2 Certificates
-----------------------------------------------------------------------------------
DISTRIBUTION DATE 12% 15% 20% 25% 30% 40%
- ----------------- --- --- --- --- --- ---
Initial Percentage ......................... 100% 100% 100% 100% 100% 100%
November 2005 .............................. 88 84 79 74 69 59
November 2006 .............................. 77 71 63 55 47 34
November 2007 .............................. 67 60 49 40 33 20
November 2008 .............................. 59 50 39 30 23 12
November 2009 .............................. 51 43 32 23 16 7
November 2010 .............................. 45 36 25 17 11 4
November 2011 .............................. 39 31 20 13 8 3
November 2012 .............................. 34 26 16 10 5 2
November 2013 .............................. 30 22 13 7 4 1
November 2014 .............................. 26 19 10 5 3 1
November 2015 .............................. 22 15 8 4 2 *
November 2016 .............................. 19 12 6 3 1 *
November 2017 .............................. 16 10 5 2 1 *
November 2018 .............................. 13 8 3 1 1 *
November 2019 .............................. 11 7 3 1 * *
November 2020 .............................. 9 5 2 1 * *
November 2021 .............................. 8 4 1 * * *
November 2022 .............................. 6 3 1 * * *
November 2023 .............................. 5 3 1 * * *
November 2024 .............................. 4 2 1 * * *
November 2025 .............................. 3 2 * * * *
November 2026 .............................. 2 1 * * * *
November 2027 .............................. 2 1 * * * *
November 2028 .............................. 1 1 * * * *
November 2029 .............................. 1 * * * * *
November 2030 .............................. 1 * * * * *
November 2031 .............................. * * * * * *
November 2032 .............................. * * * * * *
November 2033 .............................. * * * * * *
November 2034 .............................. 0 0 0 0 0 0
November 2035 .............................. 0 0 0 0 0 0
Weighted Average Life in Years
to maturity ............................... 6.92 5.70 4.30 3.38 2.74 1.91
to Optional Clean-Up
Redemption of the Certificates .... 6.41 5.23 3.91 3.05 2.47 1.73
- -------------------------
* Indicates a value between 0.0% and 0.5%.
S-117
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OF THE OFFERED CERTIFICATES
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF CPR
Class A-3 Certificates
----------------------------------------------------------------------------------
DISTRIBUTION DATE 12% 15% 20% 25% 30% 40%
- ----------------- --- --- --- --- --- ---
Initial Percentage 100% 100% 100% 100% 100% 100%
November 2005 88 84 79 74 69 59
November 2006 77 71 63 55 47 34
November 2007 66 59 48 40 32 20
November 2008 54 47 37 28 21 11
November 2009 44 37 28 20 14 6
November 2010 36 30 21 14 9 4
November 2011 30 24 15 10 6 2
November 2012 24 18 11 7 4 1
November 2013 19 14 8 5 2 1
November 2014 15 11 6 3 2 *
November 2015 12 8 4 2 1 *
November 2016 9 6 3 1 1 *
November 2017 7 4 2 1 * *
November 2018 5 3 1 1 * *
November 2019 3 2 1 * * *
November 2020 2 1 * * * *
November 2021 1 * * * * *
November 2022 0 0 0 0 0 0
November 2023 0 0 0 0 0 0
November 2024 0 0 0 0 0 0
November 2025 0 0 0 0 0 0
November 2026 0 0 0 0 0 0
November 2027 0 0 0 0 0 0
November 2028 0 0 0 0 0 0
November 2029 0 0 0 0 0 0
November 2030 0 0 0 0 0 0
November 2031 0 0 0 0 0 0
November 2032 0 0 0 0 0 0
November 2033 0 0 0 0 0 0
November 2034 0 0 0 0 0 0
November 2035 0 0 0 0 0 0
Weighted Average Life in Years
to maturity 5.44 4.72 3.80 3.11 2.59 1.87
to Optional Clean-Up
Redemption of the Certificates 5.40 4.62 3.64 2.93 2.41 1.72
- -------------------------------
* Indicates a value between 0.0% and 0.5%.
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PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OF THE OFFERED CERTIFICATES
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF CPR
Class B-1, Class B-2 and Class B-3 Certificates
----------------------------------------------------------------------------------
DISTRIBUTION DATE 12% 15% 20% 25% 30% 40%
- ----------------- --- --- --- --- --- ---
Initial Percentage 100% 100% 100% 100% 100% 100%
November 2005 100 100 100 100 100 100
November 2006 100 100 100 100 100 86
November 2007 100 100 100 92 84 67
November 2008 100 100 81 68 58 40
November 2009 100 86 64 50 40 23
November 2010 90 72 50 37 28 14
November 2011 78 60 40 27 19 8
November 2012 67 50 32 20 13 5
November 2013 58 43 25 15 9 3
November 2014 50 35 19 11 6 2
November 2015 41 29 15 8 4 1
November 2016 34 23 11 6 3 1
November 2017 28 18 8 4 2 *
November 2018 23 14 6 3 1 *
November 2019 19 11 5 2 1 *
November 2020 15 9 3 1 * *
November 2021 12 7 2 1 * *
November 2022 9 5 2 1 * *
November 2023 8 4 1 * * *
November 2024 6 3 1 * * *
November 2025 5 2 1 * * *
November 2026 4 2 * * * *
November 2027 3 1 * * * *
November 2028 2 1 * * * *
November 2029 1 1 * * * *
November 2030 1 * * * * *
November 2031 * * * * * *
November 2032 * * * * * *
November 2033 * * * * * *
November 2034 0 0 0 0 0 0
November 2035 0 0 0 0 0 0
Weighted Average Life in Years
to maturity 11.06 9.30 7.19 5.99 5.18 4.03
to Optional Clean-Up
Redemption of the Certificates 10.26 8.53 6.49 5.32 4.54 3.44
- -----------------------------
* Indicates a value between 0.0% and 0.5%.
S-119
SENSITIVITY OF THE CLASS X-A1, CLASS X-A2 AND CLASS X-B CERTIFICATES
The yield to maturity of the Class X-A1, Class X-A2 and Class X-B
Certificates will be sensitive to the rate and timing of principal payments
(including prepayments, liquidations, repurchases and defaults) on the related
Mortgage Loans, which may fluctuate significantly from time to time. An investor
should fully consider the associated risks, including the risk that a relatively
fast rate of principal payments (including prepayments, liquidations,
repurchases and defaults) on the related Mortgage Loans will have a material
negative effect on the yield to investors in the Class X-A1, Class X-A2 and
Class X-B Certificates and could result in the failure of investors in such
Certificates to recoup their initial investment.
The following tables (the "Yield Tables") were prepared on the basis of
the Structuring Assumptions (except for the pricing assumptions that are listed
below) and demonstrate the sensitivity of the pre-tax yields on the Class X-A1,
Class X-A2 and Class X-B Certificates to various constant rates of prepayment by
projecting the aggregate payments of interest on such Certificates and the
corresponding pre-tax yields on a corporate bond equivalent ("CBE") basis,
assuming distributions on the Mortgage Loans are made as set forth in the
Pooling and Servicing Agreement.
PRE-TAX YIELD (%) ON THE CLASS X-A1 CERTIFICATES
(PRICED TO MATURITY)
PERCENTAGE OF CPR
ASSUMED
PURCHASE PRICE (%)* 10% 15% 20% 25% 30% 35% 40% 50%
- ------------------- --- --- --- --- --- --- --- ---
1.75% .............. 55.39% 48.20% 40.81% 33.07% 24.95% 16.46% 7.49% (11.67)%
2.00% .............. 46.77% 39.79% 32.62% 25.07% 17.14% 8.86% 0.13% (18.45)%
2.25% .............. 40.12% 33.31% 26.29% 18.89% 11.11% 3.00% (5.54)% (23.65)%
2.50% .............. 34.84% 28.16% 21.26% 13.97% 6.31% (1.66)% (10.04)% (27.74)%
2.75% .............. 30.54% 23.96% 17.15% 9.94% 2.39% (5.46)% (13.69)% (31.05)%
3.00% .............. 26.96% 20.47% 13.73% 6.60% (0.88)% (8.62)% (16.72)% (33.77)%
3.25% .............. 23.93% 17.51% 10.83% 3.76% (3.63)% (11.28)% (19.26)% (36.06)%
- --------------------
PRE-TAX YIELD (%) ON THE CLASS X-A2 CERTIFICATES
(PRICED TO MATURITY)
PERCENTAGE OF CPR
ASSUMED
PURCHASE PRICE (%)* 10% 15% 20% 25% 30% 35% 40% 50%
- ------------------- --- --- --- --- --- --- --- ---
2.25% .............. 52.45% 45.37% 38.11% 30.51% 22.55% 14.22% 5.46% (13.32)%
2.50% .............. 45.42% 38.53% 31.45% 24.02% 16.22% 8.08% (0.48)% (18.81)%
2.75% .............. 39.70% 32.95% 26.02% 18.73% 11.07% 3.07% (5.33)% (23.26)%
3.00% .............. 34.93% 28.31% 21.51% 14.33% 6.78% (1.09)% (9.35)% (26.95)%
3.25% .............. 30.91% 24.39% 17.69% 10.60% 3.15% (4.61)% (12.75)% (30.06)%
3.50% .............. 27.45% 21.03% 14.41% 7.40% 0.03% (7.64)% (15.66)% (32.71)%
3.75% .............. 24.45% 18.11% 11.56% 4.61% (2.68)% (10.26)% (18.19)% (35.00)%
- --------------------------
* The price shown does not include accrued interest. Accrued interest has
been added to such price for calculating the yields set forth in the table
above.
S-120
PRE-TAX YIELD (%) ON THE CLASS X-B CERTIFICATES
(PRICED TO MATURITY)
PERCENTAGE OF CPR
ASSUMED
PURCHASE PRICE (%)* 10% 15% 20% 25% 30% 35% 40% 50%
- ------------------- --- --- --- --- --- --- --- ---
2.75% 32.90% 30.11% 26.14% 22.49% 18.74% 14.47% 9.73% (1.81)%
3.00% 29.69% 26.70% 22.55% 18.75% 14.87% 10.49% 5.66% (5.93)%
3.25% 26.94% 23.78% 19.47% 15.52% 11.52% 7.05% 2.16% (9.48)%
3.50% 24.55% 21.23% 16.78% 12.71% 8.61% 4.05% (0.90)% (12.57)%
3.75% 22.45% 18.99% 14.41% 10.23% 6.04% 1.41% (3.60)% (15.30)%
4.00% 20.59% 16.99% 12.31% 8.03% 3.75% (0.94)% (6.00)% (17.72)%
4.25% 18.93% 15.21% 10.43% 6.05% 1.70% (3.05)% (8.15)% (19.89)%
- ---------------------
* The price shown does not include accrued interest. Accrued interest has
been added to such price for calculating the yields set forth in the table
above.
Based upon the above assumptions, at approximately 34% CPR (at an assumed
purchase price of 2.50% of the related Class Notional Amount, excluding accrued
interest, but adding accrued interest to the price for purposes of calculating
yield), at approximately 35% CPR (at an assumed purchase price of 3.00% of the
related Class Notional Amount, excluding accrued interest, but adding accrued
interest to the price for purposes of calculating yield) and 39% CPR (at an
assumed purchase price of 3.50% of the related Class Notional Amount, excluding
accrued interest, but adding accrued interest to the price for purposes of
calculating yield), the pre-tax yield to maturity of the Class X-A1, Class X-A2
and Class X-B Certificates will be less than 0%, respectively. If the rate of
prepayments on the related Mortgage Loans were to exceed the applicable levels
for as little as one month, while equaling such level for all other months, the
Class X-A1, Class X-A2 and Class X-B Certificateholders would not fully recoup
their initial investment.
The pre-tax yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Class X-A1, Class X-A2 and Class X-B
Certificates, would cause the discounted present value of such assumed stream of
cash flows to the Closing Date to equal the assumed purchase prices (plus
accrued interest), and converting such monthly rates to CBE rates. Such
calculation does not take into account the interest rates at which funds
received by Certificateholders as distributions on the Class X-A1, Class X-A2
and Class X-B Certificates may be reinvested and consequently does not purport
to reflect the return on any investment in such Certificates when such
reinvestment rates are considered.
It is highly unlikely that the Mortgage Loans will prepay at the same rate
until maturity or that all of the Mortgage Loans will prepay at the same rate or
time or that prepayments will be spread evenly among Mortgage Loans with
differing gross margins. As a result of these factors, the pre-tax yields on the
Class X-A1, Class X-A2 and Class X-B Certificates are likely to differ from
those shown in such tables, even if all of the related Mortgage Loans prepay at
the indicated percentages of CPR. No representation is made as to the actual
rate of principal payments on the related Mortgage Loans (or the Mortgage Rates
thereon) for any period or over the lives of the Class X-A1, Class X-A2 and
Class X-B Certificates or as to the yields on such Certificates. Investors must
make their own decisions as to the appropriate prepayment assumptions to be used
in deciding whether to purchase such Certificates.
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USE OF PROCEEDS
The net proceeds from the sale of the Offered Certificates will be
applied by the Depositor to pay for the acquisition of the Mortgage Loans from
the Seller. See "Use of Proceeds" in the accompanying prospectus and "Method of
Distribution" in this prospectus supplement.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes the Trust Fund, exclusive of the Reserve
Fund and rights in the Additional Collateral, will comprise multiple REMICs in a
tiered structure. Elections will be made to treat each such REMIC as a REMIC for
federal income tax purposes. The Certificates, other than the Class A-R
Certificate and the Class LT-R Certificate, will represent ownership of one or
more regular interests, the Class A-R Certificate will represent ownership of
the sole residual interest in the upper-tier REMIC (the "Upper-Tier REMIC") and
the Class LT-R Certificate will represent ownership of the sole residual
interest in each remaining REMIC. All prospective investors should review the
discussion under "Federal Income Tax Consequences" in the accompanying
prospectus.
The regular interests may be treated as having been issued with original
issue discount. The prepayment assumption that will be used for purposes of
computing original issue discount, if any, for federal income tax purposes is a
CPR of 20%. No representation is made that the Mortgage Loans will, in fact,
prepay at this rate or any other rate.
Under federal income tax law, a Certificateholder, beneficial owner,
financial intermediary or other recipient of a payment on behalf of a beneficial
owner may be subject to backup withholding at a rate generally equal to the
fourth lowest rate of income tax then in effect. See "Federal Income Tax
Consequences -- Backup Withholding" in the accompanying prospectus for a general
discussion of the mechanics of backup withholding.
ADDITIONAL TAX CONSIDERATIONS APPLICABLE TO THE LIBOR CERTIFICATES
In addition to representing ownership of one or more regular interests in
a REMIC, each LIBOR Certificate will represent a beneficial interest in the
right to receive payments from the Reserve Fund pursuant to the provisions of
the Pooling and Servicing Agreement. For information reporting purposes, the
Trustee will treat the entitlement to such payments as an interest in interest
rate cap contracts written by the Class X-A1, Class X-A2 and Class X-B
Certificateholders in favor of the holders of the related LIBOR Certificates
(the "Interest Rate Cap Agreements"), and, under the terms of the Pooling and
Servicing Agreement, each holder of a LIBOR Certificate and the Class X-A1,
Class X-A2 and Class X-B Certificateholders will agree, by virtue of their
purchase of such Certificates, to adopt a tax reporting position consistent with
that characterization. Moreover, the Reserve Fund will be treated as an outside
reserve fund within the meaning of Treasury Regulation Section 1.860G-2(h) that
is beneficially owned by the Class X-A1, Class X-A2 and Class X-B
Certificateholders. Alternative characterizations of such rights are, however,
possible. For instance, the right to receive such payments could be classified
for federal income tax purposes as an interest in a partnership formed among the
S-122
affected Certificateholders to share cash flows from the Class X-A1, Class X-A2
and Class X-B Certificates. Such an alternative characterization would result in
tax treatment of payments of Net WAC Shortfalls that would differ from that
which is described below. Prospective investors in the LIBOR Certificates should
consult their tax advisors regarding the tax treatment of the rights of the
holders of such Certificates to receive payments in respect of Net WAC
Shortfalls.
A holder of a LIBOR Certificate must allocate its purchase price for such
Certificate between its two components -- the regular interest component and the
Interest Rate Cap Agreements component. For information reporting purposes, the
Securities Administrator will assume that, with respect to a LIBOR Certificate,
the Interest Rate Cap Agreements component will have only nominal value relative
to the value of the regular interest component. The Internal Revenue Service
could argue, however, that the Interest Rate Cap Agreements component has
significant value, and if that argument were to be sustained, the regular
interest component could be viewed as having been issued with an additional
amount of original issue discount ("OID") (which could cause the total amount of
discount to exceed a statutorily defined de minimis amount). See "Federal Income
Tax Consequences -- REMIC Securities -- Taxation of Regular Interest Securities
- -- Original Issue Discount" in the accompanying prospectus.
Upon the sale, exchange, or other disposition of a LIBOR Certificate, the
holder must allocate the amount realized between the two components of such
Certificate based on the relative fair market values of those components at the
time of sale. Assuming that a LIBOR Certificate is held as a capital asset
within the meaning of Section 1221 of the Code, gain or loss on the disposition
of an interest in the Interest Rate Cap Agreements component should be capital
gain or loss, and, gain or loss on the disposition of the regular interest
component should, subject to the limitation described below, be capital gain or
loss. Except for any amounts of accrued but unrecognized market discount, and
except as provided in this paragraph, any gain or loss on the sale or exchange
of the regular interest component of a LIBOR Certificate realized by an investor
who holds such Certificate as a capital asset will be capital gain or loss and
will be long-term or short-term depending on whether the Certificate has been
held for the long-term capital gain holding period (currently more than one
year). Such gain will be treated as ordinary income (i) if the Certificate is
held as part of a conversion transaction, as described in Code Section 1258(c),
up to the amount of interest that would have accrued on the holder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate under Code Section 1274(d) in effect at the time the holder entered
into the transaction minus any amount previously treated as ordinary income with
respect to any prior disposition of property that was held as a part of such
transaction, (ii) in the case of a non-corporate taxpayer, to the extent such
taxpayer has made an election under Code Section 163(d)(4) to have net capital
gains taxed as investment income at ordinary income rates, or (iii) to the
extent that such gain does not exceed the excess, if any, of (a) the amount that
would have been includable in the gross income of the holder if its yield on
such Certificate were 110% of the applicable Federal rate as of the date of
purchase, over (b) the amount of income actually includable in the gross income
of such holder with respect to such Certificate. In addition, gain or loss
recognized from the sale of a LIBOR Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c). Long-term capital gains of certain non-corporate taxpayers are subject
to a lower minimum tax rate than ordinary income of such taxpayers for property
held for more than one year. The maximum tax rate for corporations is the same
with respect to both ordinary income and capital gains.
S-123
As indicated above, a portion of the purchase price paid by a holder to
acquire a LIBOR Certificate will be attributable to the Interest Rate Cap
Agreements component of such Certificate. The portion of the overall purchase
price attributable to the Interest Rate Cap Agreements component must be
amortized over the life of such LIBOR Certificate, taking into account the
declining balance of the related regular interest component. Treasury
regulations concerning notional principal contracts provide alternative methods
for amortizing the purchase price of an interest rate cap contract. Under one
method -- the level yield constant interest method -- the price paid for an
interest rate cap contract is amortized over the life of the cap as though it
were the principal amount of a loan bearing interest at a reasonable rate.
Certificateholders are urged to consult their tax advisors concerning the
methods that can be employed to amortize the portion of the purchase price paid
for the Interest Rate Cap Agreements component of a LIBOR Certificate.
Any payments received by a holder of a LIBOR Certificate from the Reserve
Fund will be treated as periodic payments received from an interest rate cap
agreement. To the extent the sum of such periodic payments for any year exceed
that year's amortized cost of the Interest Rate Cap Agreements component, such
excess is ordinary income. If for any year the amount of that year's amortized
cost exceeds the sum of the periodic payments, such excess is allowable as an
ordinary deduction. A beneficial owner's ability to recognize a net deduction
with respect to the Interest Rate Cap Agreement component is limited under
Sections 67 and 68 of the Code in the case of (i) estates and trusts and (ii)
individuals owning an interest in such component directly or through a
"pass-through entity" (other than in connection with such individual's trade or
business). Pass-through entities include partnerships, S corporations, grantor
trusts, REMICs and non-publicly offered regulated investment companies, but do
not include estates, nongrantor trusts, cooperatives, real estate investment
trusts and publicly-offered regulated investment companies. Further, such a
beneficial owner will not be able to recognize a net deduction with respect to
the Interest Rate Cap Agreement component in computing the beneficial owner's
alternative minimum tax liability.
The regular interest component of each LIBOR Certificate will be treated
as (i) assets described in Section 7701(a)(19)(C) of the Internal Revenue Code
of 1986, as amended (the "Code") and (ii) "real estate assets" under Section
856(c)(4)(A) of the Code, in the same proportion that the assets of the Trust
Fund, exclusive of the Reserve Fund, would be so treated. The Interest Rate Cap
Agreements component of the LIBOR Certificates will not be treated as assets
described in Section 7701(a)(19)(C) of the Code or "real estate assets" under
Section 856(c)(4)(A) of the Code.
ADDITIONAL TAX CONSIDERATIONS APPLICABLE TO THE CLASS X CERTIFICATES
For federal income tax purposes, the Class X-A1 Certificates will
represent (i) ownership of a REMIC regular interest and (ii) the obligation to
make payments on a notional principal contract benefiting the Class A-1 and
Class A-2 Certificateholders.
For federal income tax purposes, the Class X-A2 Certificates will
represent (i) ownership of a REMIC regular interest and (ii) the obligation to
make payments on a notional principal contract benefiting the Class A-3
Certificateholders.
S-124
For federal income tax purposes, the Class X-B Certificates will represent
(i) ownership of a REMIC regular interest and (ii) the obligation to make
payments on a notional principal contract benefiting the Class B-1 and Class B-2
Certificateholders.
THE CLASS A-R CERTIFICATES
Special tax considerations apply to an investment in the Class A-R
Certificates. In certain circumstances, the Class A-R Certificates can produce a
significantly less favorable after-tax return for a beneficial owner than would
be the case if (i) the Class A-R Certificate were taxable as a debt instrument,
or (ii) no portion of taxable income allocated to the Class A-R Certificate were
"excess inclusion" income. See "Federal Income Tax Consequences -- REMIC
Securities -- Taxation of Holders of Residual Interest Securities" in the
prospectus.
Under applicable Treasury regulations, if a Class A-R Certificate is a
"noneconomic residual interest," as described in the prospectus, the transfer of
a Class A-R Certificate to a U.S. Person will be disregarded for all federal tax
purposes unless no significant purpose of the transfer was to impede the
assessment of collection of tax. The prospectus describes a safe harbor set out
under existing regulations under which certain transfers of the Class A-R
Certificates would be presumed not to have a significant purpose of impeding the
assessment or collection of tax. See "Federal Income Tax Consequences -- REMIC
Securities -- Taxation of Holders of Residual Interest Securities --
Restrictions on Ownership and Transfer of Residual Interest Securities" in the
prospectus. Under final regulations issued by the Treasury Department on July
19, 2002 (the "Final Regulations") a transfer of a noneconomic residual interest
will not qualify under this safe harbor unless either (a) the present value of
the anticipated tax liabilities associated with holding the residual interest
does not exceed the present value of the sum of (i) any consideration given to
the transferee to acquire the interest, (ii) expected future distributions on
the interest, and (iii) any anticipated tax savings associated with holding the
interest as the REMIC generates losses, or (b) the transfer is to certain
domestic taxable corporations with sufficient amounts of both gross and net
assets where an agreement is made that all future transfers will be to taxable
domestic corporations in transactions that qualify for one of the "safe harbor"
provisions. Part (b) of this safe harbor is not available if the facts and
circumstances known to the transferor reasonably indicate that the taxes
associated with the non-economic residual interest will not be paid. In
addition, under the Final Regulations, the safe harbor applies only if the
transferee represents that income from the Class A-R Certificate will not be
attributed to a foreign permanent establishment or fixed base of the transferee
or another U.S. taxpayer. The Final Regulations apply to transfers of
non-economic residual interests on or after August 19, 2002, and thus will apply
to transfers of the Class A-R Certificates. The Final Regulations contain
additional detail regarding their application, and prospective investors in the
Class A-R Certificates should consult their own tax advisors regarding the
application of the Final Regulations to a transfer of the Class A-R
Certificates.
TAX RETURN DISCLOSURE REQUIREMENTS
Recent legislation and Treasury Department pronouncements directed at
abusive tax shelter activity appear to apply to transactions not conventionally
regarded as tax shelters. Taxpayers are required to report certain information
on Internal Revenue Service Form 8886 if they participate in a "reportable
transaction" (as defined under Section 6011 of the Code).
S-125
Pursuant to recently enacted legislation, a penalty in the amount of $10,000 in
the case of a natural person and $50,000 in any other case is imposed on any
taxpayer that fails to file timely an information return with the IRS with
respect to a "reportable transaction". The rules defining "reportable
transactions" are complex. In general, among other categories of transactions,
they include transactions that result in certain losses that exceed threshold
amounts and transactions that result in certain differences between the
taxpayer's tax treatment of an item and book treatment of that same item.
Holders of Offered Certificates are advised to consult their own tax advisers
regarding any possible disclosure obligations in light of their particular
circumstances.
ERISA MATTERS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and Section 4975 of the Code impose requirements on certain employee benefit
plans -- and on certain other retirement plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and collective
investment funds and separate accounts in which plans, accounts or arrangements
are invested -- and on persons who are fiduciaries with respect to these types
of plans and arrangements (together, "Plans").
ERISA prohibits "parties in interest" with respect to a Plan from engaging
in certain transactions involving the Plan and its assets unless a statutory,
regulatory or administrative exemption applies to the transaction. Section 4975
of the Code imposes certain excise taxes on prohibited transactions involving
plans described under that section; ERISA authorizes the imposition of civil
penalties for prohibited transactions involving plans not covered under Section
4975 of the Code. Any Plan fiduciary which proposes to cause a Plan to acquire
any of the Offered Certificates should consult with its counsel with respect to
the potential consequences under ERISA and the Code of the Plan's acquisition
and ownership of such Certificates. See "ERISA Considerations" in the
accompanying prospectus.
Certain employee benefit plans, including governmental plans and certain
church plans, are not subject to ERISA's requirements. Accordingly, assets of
those plans may be invested in the Offered Certificates without regard to the
ERISA considerations described in this prospectus supplement and in the
accompanying prospectus, subject to the provisions of other applicable federal
and state law. Any such plan which is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code may nonetheless be subject to the
prohibited transaction rules set forth in Section 503 of the Code.
Investments by Plans that are subject to ERISA are subject to ERISA's
general fiduciary requirements, including the requirement of investment prudence
and diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan. A fiduciary which decides to
invest the assets of a Plan in the Offered Certificates should consider, among
other factors, the extreme sensitivity of the investments to the rate of
principal payments (including prepayments) on the Mortgage Loans.
The U.S. Department of Labor has granted to Merrill Lynch, Pierce, Fenner
& Smith Incorporated and to NationsBank Corporation (predecessor in interest to
Bank of America Corporation, an affiliate of Banc of America Securities LLC)
Prohibited Transaction Exemption
S-126
("PTE") 90-29 (55 Fed. Reg. 21459 (1990)) and PTE 93-31 (58 Fed. Reg. 28620
(1993)), respectively, as most recently amended and restated by PTE 2002-41 (an
administrative exemption), which exempts from the application of the prohibited
transaction rules transactions relating to:
- the acquisition, holding and sale by Plans of certain securities
issued by a trust with respect to which Merrill Lynch, Pierce,
Fenner & Smith Incorporated and Banc of America Securities LLC or
any of their affiliates is the sole underwriter or the manager or
co-manager of the underwriting syndicate, and
- the servicing, operation and management of such trusts,
provided that the general conditions and certain other requirements set forth in
the exemption are satisfied.
Among the conditions which must be satisfied for the exemption to apply
are:
- The acquisition of the Offered 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.
- The Offered Certificates acquired by the Plan have received a rating
at the time of such acquisition that is one of the four highest
generic rating categories from a rating agency identified in the
exemption, such as S&P, Fitch Ratings or Moody's.
- The Trustee must not be an affiliate of any other member of the
"restricted group" (defined below in the second following
paragraph), other than the Underwriters.
- The sum of all payments made to and retained by the Underwriters in
connection with the distribution of the Offered Certificates
represents not more than reasonable compensation for Underwriting
the Offered Certificates; the sum of all payments made to and
retained by the Seller and the Depositor pursuant to the assignment
of the trust assets to the Trust Fund represents not more than the
fair market value of such assets; the sum of all payments made to
and retained by any Servicer represents not more than reasonable
compensation for the Servicer's services under the related Servicing
Agreement and reimbursements of such person's reasonable expenses in
connection therewith.
- The Plan investing in the Offered Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the SEC
under the Securities Act of 1933.
The Trust Fund must also meet each of the requirements listed below:
- The Mortgage Pool must consist solely of assets of the type that
have been included in other investment pools.
S-127
- Certificates representing beneficial ownership in such other
investment pools must have been rated in one of the four highest
generic rating categories by a rating agency for at least one year
prior to the Plan's acquisition of Offered Certificates.
- Certificates evidencing beneficial ownership 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
Offered Certificates.
Moreover, the exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire indebtedness of a trust holding receivables as to which
the fiduciary (or its affiliate) is an obligor provided, among other
requirements, that:
- in the case of an acquisition in connection with the initial
issuance of Certificates, at least 50% of each class of Certificates
in which Plans have invested and at least 50% of the aggregate
interests in the trust is acquired by persons independent of the
restricted group;
- such fiduciary (or its affiliate) is an obligor with respect to not
more than 5% of the fair market value of the obligations contained
in the trust;
- the Plan's investment in Offered Certificates of any class does not
exceed 25% of all of the Certificates of that class outstanding at
the time of the acquisition; and
- immediately after the acquisition, no more than 25% of the assets of
any Plan with respect to which such person is a fiduciary are
invested in securities representing indebtedness of one or more
issuers containing assets sold or serviced by the same entity.
This relief does not apply to Plans sponsored by members of the "restricted
group" consisting of the Depositor, the Master Servicer, any Servicer, the
Trustee, any indemnitor or any obligor with respect to Mortgage Loans included
in the assets of the Trust Fund constituting more than 5% of the aggregate
unamortized principal balance of the assets of the Trust Fund, or any affiliate
of these parties.
It is expected that the exemption will apply to the acquisition and
holding by Plans of the Offered Certificates (except for the Class A-R
Certificate) and that all conditions of the exemption other than those within
the control of the investors will be met.
The rating of a class of Offered Certificates may change. If a class of
Offered Certificates no longer has a rating of at least "BBB-," Certificates of
that class will no longer be eligible for relief under the exemption (although a
Plan that had purchased the Certificate when it had an investment-grade rating
would not be required by the exemption to dispose of it). However, certain
insurance company general accounts may be eligible to purchase Offered
Certificates pursuant to Sections I and III of Prohibited Transaction Class
Exemption ("PTCE") 95-60.
S-128
BECAUSE THE CHARACTERISTICS OF THE CLASS A-R CERTIFICATE MAY NOT MEET THE
REQUIREMENTS OF THE EXEMPTION DISCUSSED ABOVE OR ANY OTHER ISSUED EXEMPTION
UNDER ERISA INCLUDING PTCE 83-1, THE PURCHASE AND HOLDING OF THE CLASS A-R
CERTIFICATE BY A PLAN OR BY INDIVIDUAL RETIREMENT ACCOUNTS OR OTHER PLANS
SUBJECT TO SECTION 4975 OF THE CODE MAY RESULT IN PROHIBITED TRANSACTIONS OR THE
IMPOSITION OF EXCISE TAXES OR CIVIL PENALTIES. CONSEQUENTLY, THE INITIAL
ACQUISITION AND TRANSFER OF THE CLASS A-R CERTIFICATE WILL NOT BE REGISTERED BY
THE SECURITIES ADMINISTRATOR UNLESS THE SECURITIES ADMINISTRATOR ON BEHALF OF
THE TRUSTEE RECEIVES:
- a representation from the acquiror or transferee of the Class A-R
Certificate to the effect that the transferee is not an employee
benefit plan subject to section 406 of ERISA or a plan or
arrangement subject to section 4975 of the Code, nor a person acting
on behalf of any such plan or arrangement nor using the assets of
any such plan or arrangement to effect such transfer,
- if the purchaser is an insurance company, a representation that the
purchaser is an insurance company which is purchasing the Class A-R
Certificate with funds contained in an "insurance company general
account" (as such term is defined in Section V(e) of PTCE 95-60) and
that the purchase and holding of the Class A-R Certificate are
covered under Sections I and III of PTCE 95-60 or
- an Opinion of Counsel satisfactory to the certificate registrar to
the effect that the purchase and holding of such a Certificate by
the acquiror or transferee will not constitute or result in
prohibited transactions under Title I of ERISA or Section 4975 of
the Code and will not subject the certificate registrar, the
Trustee, the Master Servicer, the Depositor or the Securities
Administrator to any obligation in addition to those undertaken in
the Pooling and Servicing Agreement.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the exemption
described above and PTCE 83-1 described in the prospectus, and the potential
consequences in their specific circumstances prior to making an investment in
the Offered Certificates. Moreover, each Plan fiduciary should determine whether
under the general fiduciary standards of investment prudence and
diversification, an investment in the Offered Certificates is appropriate for
the Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
S-129
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement among the Seller, the Depositor and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Banc of America Securities LLC, Greenwich Capital Markets,
Inc. and Morgan Stanley & Co. Incorporated (together, the "Underwriters"), the
Depositor has agreed to sell to the Underwriters, and the Underwriters have
agreed to purchase from the Depositor, the initial Class Principal Amount of
each class of Offered Certificates, as set forth below. Distribution of the
Offered Certificates will be made by the Underwriters from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. In connection with the sale of the Offered Certificates, the
Underwriters may be deemed to have received compensation from the Depositor in
the form of underwriting discounts.
MERRILL LYNCH, BANC OF
PIERCE, FENNER & AMERICA SECURITIES GREENWICH CAPITAL MORGAN STANLEY &
CLASS SMITH INCORPORATED LLC MARKETS, INC. CO. INCORPORATED
- ----- ------------------ --- ------------- ----------------
A-1 ................ $ 173,594,000 $ 173,594,000 $ 43,398,500 $ 43,398,500
A-2 ................ $ 34,414,400 $ 34,414,400 $ 8,603,600 $ 8,603,600
A-3 ................ $ 68,277,600 $ 68,277,600 $ 17,069,400 $ 17,069,400
X-A1 ............... $ 260,010,500(1) $ 260,010,500(1) -- --
X-A2 ............... $ 85,347,000(1) $ 85,347,000(1) -- --
X-B ................ $ 15,031,000(1) -- -- --
A-R ................ $ 100 -- -- --
B-1 ................ $ 4,473,500 $ 4,473,500 -- --
B-2 ................ $ 3,042,000 $ 3,042,000 -- --
B-3 ................ $ 4,294,000 -- -- --
- -------------------
(1) Indicates the initial Class Notional Amount of such interest-only class.
The Underwriters intend to make a secondary market in the Offered
Certificates, but have no obligation to do so. There can be no assurance that a
secondary market for the Offered Certificates will develop or, if it does
develop, that it will continue or that it will provide Certificateholders with a
sufficient level of liquidity of investment. The Offered Certificates will not
be listed on any national securities exchange.
Immediately prior to the sale of the Mortgage Loans to the Depositor, some
of the Mortgage Loans were the subject of financing provided by affiliates of
the Underwriters. A portion of the proceeds from the sale of the Mortgage Loans
to the Depositor will be applied to repay such financings.
The Depositor and the Seller have agreed to indemnify the Underwriters
against, or make contributions to the Underwriters with respect to, certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
Expenses incurred by the Depositor in connection with this offering are
expected to be approximately $700,000.
S-130
Banc of America Securities LLC, one of the Underwriters, is an affiliate
of Bank of America, N.A., a servicer of a portion of the Mortgage Loans; and
Morgan Stanley & Co. Incorporated, one of the Underwriters, is an affiliate of
MSDWCC, a servicer of a portion of the Mortgage Loans.
After the initial distribution of the Offered Certificates, this
prospectus supplement and the accompanying prospectus may be used by Banc of
America Securities LLC or Morgan Stanley & Co. Incorporated, each an affiliate
of one of the Servicers, in connection with market making transactions in those
certificates. Each of Banc of America Securities LLC and Morgan Stanley & Co.
Incorporated may act as principal or agent in such transactions. Such
transactions will be at prices related to prevailing market prices at the time
of sale.
LEGAL MATTERS
The validity of the Certificates will be passed upon for the Depositor by
Tobin & Tobin, a professional corporation, San Francisco, California. Certain
tax matters will be passed upon for the Depositor by Chapman and Cutler LLP, San
Francisco, California. McKee Nelson LLP, Washington, D.C., will act as counsel
for the Underwriters.
RATINGS
It is a condition of the issuance of the Class A-1, Class A-2, Class A-3,
Class A-R, Class X-A1, Class X-A2 and Class X-B Certificates that they be rated
"AAA" by each of Fitch Ratings ("Fitch") and Standard and Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc. ("S&P") and "Aaa" by
Moody's Investors Service, Inc. ("Moody's" and collectively with Fitch and S&P,
the "Rating Agencies"). It is a condition to the issuance of the Class B-1
Certificates that they be rated "AA" by each of Fitch and S&P and "Aa2" by
Moody's. It is a condition to the issuance of the Class B-2 Certificates that
they be rated "A" by each of Fitch and S&P and "A2" by Moody's. It is a
condition to the issuance of the Class B-3 Certificates that they be rated "BBB"
by each of Fitch and S&P and "Baa2" by Moody's.
The ratings assigned to mortgage pass-through certificates address the
likelihood of the receipt of all payments on the mortgage loans by the related
certificateholders under the agreements pursuant to which such certificates are
issued. Such ratings take into consideration the credit quality of the related
mortgage pool, including any credit support providers, structural and legal
aspects associated with such certificates, and the extent to which the payment
stream on the mortgage pool is adequate to make the payments required by such
certificates. Ratings on such certificates do not, however, constitute a
statement regarding frequency of prepayments of the mortgage loans.
The ratings do not address the likelihood that any Net WAC Shortfalls or
unpaid Net WAC Shortfalls will be repaid to holders of the LIBOR Certificates.
S-131
The ratings assigned to the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A rating is not
a recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the Rating Agencies.
The Depositor has not requested a rating of the Offered Certificates by
any rating agency other than the Rating Agencies; there can be no assurance,
however, as to whether any other rating agency will rate the Offered
Certificates or, if it does, what rating would be assigned by such other rating
agency. The rating assigned by such other rating agency to the Offered
Certificates could be lower than the respective ratings assigned by the Rating
Agencies.
S-132
INDEX OF CERTAIN DEFINITIONS
A-1 Margin ....................................................... S-77
A-2 Margin ....................................................... S-77
A-3 Margin ....................................................... S-77
Accrual Period ................................................... S-73
Additional Collateral ............................................ S-25
Additional Collateral Loans ...................................... S-25
Aggregate Cut-off Date Balance ................................... S-21
Aggregate Subordinate Percentage ................................. S-84
Applicable Credit Support
Percentage .................................................... S-87
Apportioned Principal Balance .................................... S-75
Available Distribution Amount .................................... S-71
B-1 Margin ....................................................... S-77
B-2 Margin ....................................................... S-77
BBA .............................................................. S-81
BBAM ............................................................. S-81
Beneficial Owner ................................................. S-66
Book-Entry Certificates .......................................... S-66
Business Day ..................................................... S-65
CBE .............................................................. S-120
Cendant .......................................................... S-59
Certificate Distribution Amount .................................. S-71
Certificate Group ................................................ S-65
Certificate Interest Rate ........................................ S-76
Certificate Principal Amount ..................................... S-73
Certificateholder ................................................ S-66
Class Notional Amount ............................................ S-74
Class Principal Amount ........................................... S-73
Class Subordination Percentage ................................... S-87
Class X Certificates ............................................. S-64
Class X-A1 Pool 1 Component Sub
Account ....................................................... S-79
Class X-A1 Pool 2 Component Sub
Account ....................................................... S-79
Class X-A2 Sub Account ........................................... S-79
Class X-B Sub Account ............................................ S-79
Clean-Up Call Date ............................................... S-96
Clearstream Luxembourg ........................................... S-66
Clearstream Luxembourg
Participants .................................................. S-68
Closing Date ..................................................... S-63
Code ............................................................. S-124
Component Interest Rate .......................................... S-77
Corporate Trust Office ........................................... S-96
CPR .............................................................. S-113
Credit Scores .................................................... S-24
Credit Support Depletion Date .................................... S-91
Current Interest ................................................. S-73
Custodial Account ................................................ S-71
Cut-off Date ..................................................... S-20
Defective Mortgage Loan .......................................... S-56
Deficient Valuation .............................................. S-93
Definitive Certificates .......................................... S-66
Deleted Mortgage Loan ............................................ S-57
Depositor ........................................................ S-56
Designated Telerate Page ......................................... S-81
Determination Date ............................................... S-106
Distribution Account ............................................. S-71
Distribution Date ................................................ S-65
DTC .............................................................. S-66
Due Date ......................................................... S-23
Due Period ....................................................... S-75
Effective Loan-to-Value Ratio .................................... S-24
ERISA ............................................................ S-126
Euroclear ........................................................ S-66
Euroclear Operator ............................................... S-69
Euroclear Participants ........................................... S-69
European Depositaries ............................................ S-67
Expense Rate ..................................................... S-78
Final Regulations ................................................ S-125
Final Scheduled Distribution Date ................................ S-95
Financial Intermediary ........................................... S-67
Fitch ............................................................ S-131
FlexSourceTM Loans ............................................... S-25
GMACM ............................................................ S-97
Group 1 Certificates ............................................. S-65
Group 2 Certificates ............................................. S-65
Group 3 Certificates ............................................. S-65
Insurance Proceeds ............................................... S-71
Interest Distribution Amount ..................................... S-72
Interest Rate Cap Agreements ..................................... S-122
Interest Shortfall ............................................... S-76
Interest Transfer Amount ......................................... S-92
LIBOR Business Day ............................................... S-81
LIBOR Certificates ............................................... S-64
LIBOR01 .......................................................... S-81
Limited Purpose Surety Bond ...................................... S-25
Liquidated Mortgage Loan ......................................... S-93
I-1
Liquidation Proceeds ............................................. S-72
Loan-to-Value Ratio .............................................. S-24
Master Servicer .................................................. S-56
Master Servicing Fee ............................................. S-106
Master Servicing Fee Rate ........................................ S-106
Merrill Lynch .................................................... S-58
MLCC ............................................................. S-24
Monthly Advance .................................................. S-107
Moody's .......................................................... S-131
Mortgage ......................................................... S-57
Mortgage File .................................................... S-57
Mortgage Loan Purchase Agreement ................................. S-23
Mortgage Loans ................................................... S-21
Mortgage Note .................................................... S-56
Mortgage Pool .................................................... S-21
Mortgage Rate .................................................... S-78
Mortgaged Property ............................................... S-21
Net Interest Shortfall ........................................... S-74
Net Mortgage Rate ................................................ S-78
Net Prepayment Interest Shortfalls ............................... S-75
Net WAC Shortfall ................................................ S-79
Offered Certificates ............................................. S-64
OID .............................................................. S-123
One-Month LIBOR .................................................. S-56
One-Month LIBOR Determination
Date .......................................................... S-81
One-Month LIBOR Loans ............................................ S-21
Original Subordinate Class Principal
Amount ........................................................ S-85
Originators ...................................................... S-58
Overcollateralized Group ......................................... S-92
Participant ...................................................... S-67
Percentage Interest .............................................. S-97
Plans ............................................................ S-126
Pool 1 ........................................................... S-21
Pool 1 Component ................................................. S-64
Pool 1 Component Interest Rate ................................... S-74
Pool 1 Component Notional Amount ................................. S-74
Pool 1 Mortgage Loans ............................................ S-21
Pool 1 Net WAC ................................................... S-78
Pool 1 Subordinate Amount ........................................ S-76
Pool 2 ........................................................... S-21
Pool 2 Component ................................................. S-64
Pool 2 Component Interest Rate ................................... S-74
Pool 2 Component Notional Amount ................................. S-74
Pool 2 Mortgage Loans ............................................ S-21
Pool 2 Net WAC ................................................... S-78
Pool 2 Subordinate Amount ........................................ S-76
Pool 3 ........................................................... S-21
Pool 3 Mortgage Loans ............................................ S-22
Pool 3 Net WAC ................................................... S-78
Pool 3 Subordinate Amount ........................................ S-76
Pool Balance ..................................................... S-84
Pool Percentage .................................................. S-72
Pool Subordinate Amount .......................................... S-76
Pooling and Servicing Agreement .................................. S-56
Prepayment Interest Shortfall .................................... S-75
Prepayment Period ................................................ S-72
Principal Transfer Amount ........................................ S-92
Privately-Offered Certificates ................................... S-64
Pro Rata Senior Percentage ....................................... S-84
PTCE ............................................................. S-128
PTE .............................................................. S-127
Rating Agencies .................................................. S-131
Realized Loss .................................................... S-93
Record Date ...................................................... S-65
Relevant Depositary .............................................. S-67
Relief Act ....................................................... S-75
Relief Act Reduction ............................................. S-75
Replacement Mortgage Loan ........................................ S-57
Required Reserve Fund Deposit .................................... S-80
Reserve Fund ..................................................... S-79
Rules ............................................................ S-67
S&P .............................................................. S-131
Scheduled Payment ................................................ S-83
Securities Administrator ......................................... S-56
Seller ........................................................... S-56
Senior Certificates .............................................. S-63
Senior Percentage ................................................ S-83
Senior Prepayment Percentage ..................................... S-84
Senior Principal Distribution
Amount ........................................................ S-82
Senior Termination Date .......................................... S-83
Servicers ........................................................ S-97
Servicing Fee .................................................... S-106
Servicing Fee Rate ............................................... S-106
Six-Month LIBOR .................................................. S-56
Six-Month LIBOR Determination
Date .......................................................... S-81
Six-Month LIBOR Loans ............................................ S-21
Stated Principal Balance ......................................... S-79
Step-Down Test ................................................... S-85
I-2
Structuring Assumptions .......................................... S-113
Sub Account ...................................................... S-79
Subordinate Certificate Writedown
Amount ........................................................ S-93
Subordinate Certificates ......................................... S-64
Subordinate Class Percentage ..................................... S-88
Subordinate Classes .............................................. S-64
Subordinate Net WAC .............................................. S-78
Subordinate Percentage ........................................... S-88
Subordinate Prepayment Percentage ................................ S-88
Subordinate Principal Distribution
Amount ........................................................ S-87
Subsequent Recovery .............................................. S-93
Terms and Conditions ............................................. S-69
Total Transfer Amount ............................................ S-92
Trust Fund ....................................................... S-64
Trustee .......................................................... S-56
Two Times Test ................................................... S-84
Undercollateralized Group ........................................ S-92
Underwriters ..................................................... S-130
Upper-Tier REMIC ................................................. S-122
Yield Tables ..................................................... S-120
I-3
(This Page Intentionally Left Blank)
ANNEX I:
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Sequoia
Mortgage Trust 2004-11 Mortgage Pass-Through Certificates (the "Global
Certificates") will be available only in book-entry form. Investors in the
Global Certificates may hold such Global Certificates through any of DTC,
Clearstream Luxembourg or Euroclear. The Global Certificates 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 Certificates
through Clearstream Luxembourg and Euroclear will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurocertificate practice (i.e., seven calendar day
settlement).
Secondary market trading between investors holding Global Certificates
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior collateralized mortgage certificate
issues.
Secondary cross-market trading between Clearstream Luxembourg or Euroclear
and DTC Participants holding Certificates will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream Luxembourg and Euroclear (in such capacity) and as DTC Participants.
A holder that is not a United States person (as described below) of Global
Certificates will be subject to U.S. withholding taxes unless such holders meet
certain requirements and deliver appropriate U.S. tax documents to the
securities clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Certificates will be held in book-entry form by DTC in the name
of Cede & Co. as nominee of DTC. Investors' interests in the Global Certificates
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, Clearstream Luxembourg and
Euroclear will hold positions on behalf of their participants through their
respective Relevant Depositaries, which in turn will hold such positions in
accounts as DTC Participants.
Investors electing to hold their Global Certificates through DTC will
follow the settlement practices applicable to prior mortgage pass-through
certificate issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Certificates through Clearstream
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional eurocertificates, except that there will be no
temporary global certificate and no "lock-up" or
S-A-1
restricted period. Global Certificates 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.
TRADING BETWEEN DTC PARTICIPANTS. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior
collateralized mortgage certificate issues in same-day funds.
TRADING BETWEEN CLEARSTREAM LUXEMBOURG AND/OR EUROCLEAR PARTICIPANTS.
Secondary market trading between Clearstream Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurocertificates in same-day funds.
TRADING BETWEEN DTC SELLER AND CLEARSTREAM LUXEMBOURG OR EUROCLEAR
PURCHASER. When Global Certificates are to be transferred from the account of a
DTC Participant to the account of a Clearstream Luxembourg Participant or a
Euroclear Participant, the purchaser will send instructions to Clearstream I-1
Luxembourg or Euroclear through a Clearstream Luxembourg Participant or
Euroclear Participant at least one business day prior to settlement. Clearstream
Luxembourg or Euroclear will instruct the respective Relevant Depositary, as the
case may be, to receive the Global Certificates against payment. Payment will
include interest accrued on the Global Certificates from and including the last
coupon Distribution Date to and excluding the settlement date, on the basis of
either the actual number of days in such accrual period and a year assumed to
consist of 360 days or a 360-day year of twelve 30-day months as applicable to
the related class of Global Certificates. For transactions settling on the 31st
of the month, payment will include interest accrued to and excluding the first
day of the following month. Payment will then be made by the respective Relevant
Depositary of the DTC Participant's account against delivery of the Global
Certificates. After settlement has been completed, the Global Certificates 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 securities credit will
appear the next day (European time) and the cash debt will be back-valued to,
and the interest on the Global Certificates 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 Luxembourg or Euroclear cash debt 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 systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream Luxembourg
or Euroclear. Under this approach, they may take on credit exposure to
Clearstream Luxembourg or Euroclear until the Global Certificates are credited
to their accounts one day later.
S-A-2
As an alternative, if Clearstream Luxembourg or Euroclear has extended a
line of credit to them, Clearstream Luxembourg Participants or Euroclear
Participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Clearstream Luxembourg
Participants or Euroclear Participants purchasing Global Certificates would
incur overdraft charges for one day, assuming they cleared the overdraft when
the Global Certificates were credited to their accounts. However, interest on
the Global Certificates would accrue from the value date. Therefore, in many
cases the investment income on the Global Certificates earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each Clearstream Luxembourg
Participant's or Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Certificates
to the respective European Depositary 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 DTC Participants a
cross-market transaction will settle no differently than a trade between two DTC
Participants.
TRADING 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 Global Certificates are to be transferred by the
respective clearing system, through the respective Relevant Depositary, to a DTC
Participant. The seller will send instructions to Clearstream Luxembourg or
Euroclear through a Clearstream Luxembourg Participant or Euroclear Participant
at least one business day prior to settlement. In these cases Clearstream
Luxembourg or Euroclear will instruct the respective Relevant Depositary, as
appropriate, to deliver the Global Certificates to the DTC Participant's account
against payment. Payment will include interest accrued on the Global
Certificates from and including the last coupon payment to and excluding the
settlement date on the basis of either the actual number of days in such accrual
period and a year assumed to consist of 360 days or a 360-day year of twelve
30-day months as applicable to the related class of Global Certificates. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. The payment will
then be reflected in the account of the Clearstream Luxembourg Participant or
Euroclear Participant the following 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, I-2 when
settlement occurred in New York). Should the Clearstream Luxembourg Participant
or Euroclear Participant have a line of credit with its respective clearing
system and elect to be in debt in anticipation of receipt of the sale proceeds
in its account, the back-valuation will extinguish any overdraft incurred over
that one day period. If settlement is not completed on the intended value date
(i.e., the trade fails), receipt of the cash proceeds in the Clearstream
Luxembourg Participant's or Euroclear Participant's account would instead be
valued as of the actual settlement date.
Finally, day traders that use Clearstream Luxembourg or Euroclear and that
purchase Global Certificates from DTC Participants for delivery to Clearstream
Luxembourg Participants or Euroclear Participants should note that these trades
would automatically fail on the sale side unless affirmative action were taken.
At least three techniques should be readily available to eliminate this
potential problem:
S-A-3
(a) borrowing through Clearstream Luxembourg or Euroclear for one
day (until the purchase side of the day trade is reflected in their
Clearstream Luxembourg or Euroclear accounts) in accordance with the
clearing system's customary procedures;
(b) borrowing the Global Certificates in the U.S. from a DTC
Participant no later than one day prior to the settlement, which would
give the Global Certificates sufficient time to be reflected in their
Clearstream Luxembourg or Euroclear account in order to settle the sale
side of the trade; or
(c) staggering the value dates for the buy and sell sides of the
trade so that the value date for the purchase from the DTC Participant is
at least one day prior to the value date for the sale to the Clearstream
Luxembourg or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A holder that is not a "United States person" within the meaning of
Section 7701(a)(30) of the Internal Revenue Code of 1986 holding a book-entry
certificate through Clearstream, Euroclear or DTC may be subject to U.S.
withholding tax at a rate of 30% unless such holder provides certain
documentation to the Trustee or to the U.S. entity required to withhold tax (the
"U.S. withholding agent") establishing an exemption from withholding. A holder
that is not a United States person may be subject to 30% withholding unless:
I. the Securities Administrator, on behalf of the Trustee or the U.S.
withholding agent receives a statement --
(a) from the holder on Internal Revenue Service ("IRS") Form W-8BEN
(or any successor form) that --
(i) is signed by the certificateholder under penalty of
perjury,
(ii) certifies that such owner is not a United States person,
and (iii) provides the name and address of the certificateholder, or
(b) from a securities clearing organization, a bank or other
financial institution that holds customers' securities in the ordinary
course of its trade or business that --
(i) is signed under penalties of perjury by an authorized
representative of the financial institution,
(ii) states that the financial institution has received an IRS
Form W-8BEN (or any successor form) from the certificateholder or
that another financial institution acting on behalf of the
certificateholder has received such IRS Form W-8BEN (or any
successor form),
(iii) provides the name and address of the certificateholder,
and
(iv) attaches the IRS Form W-8BEN (or any successor form)
provided by the certificateholder;
S-A-4
II. the holder claims an exemption or reduced rate based on a treaty and
provides a properly executed IRS Form W-8BEN (or any successor form) to the
Securities Administrator or the U.S. withholding agent;
III. the holder claims an exemption stating that the income is effectively
connected to a U.S. trade or business and provides a properly executed IRS Form
W-8ECI (or any successor form) to the Securities Administrator or the U.S.
withholding agent; or
IV. the holder is a "nonwithholding partnership" and provides a properly
executed IRS Form W-8IMY (or any successor form) with all necessary attachments
to the Trustee or the U.S. withholding agent. Certain pass-through entities that
have entered into agreements with the Internal Revenue Service (for example
"qualified intermediaries") may be subject to different documentation
requirements; it is recommended that such holders consult with their tax
advisors when purchasing the Certificates.
A holder holding book-entry certificates through Clearstream or Euroclear
provides the forms and statements referred to above by submitting them to the
person through which he holds an interest in the book-entry certificates, which
is the clearing agency, in the case of persons holding directly on the books of
the clearing agency. Under certain circumstances a Form W-8BEN, if furnished
with a taxpayer identification number, ("TIN"), will remain in effect until the
status of the beneficial owner changes, or a change in circumstances makes any
information on the form incorrect. A Form W-8BEN, if furnished without a TIN,
and a Form W-8ECI will remain in effect for a period starting on the date the
form is signed and ending on the last day of the third succeeding calendar year,
unless a change in circumstances makes any information on the form incorrect.
In addition, all holders holding book-entry certificates through
Clearstream, Euroclear or DTC may be subject to backup withholding unless the
holder:
I. provides a properly executed IRS Form W-8BEN, Form W-8ECI or Form
W-8IMY(or any successor forms) if that person is not a United States person;
II. provides a properly executed IRS Form W-9 (or any substitute form) if
that person is a United States person; or
III. is a corporation, within the meaning of Section 7701(a) of the
Internal Revenue Code of 1986, or otherwise establishes that it is a recipient
exempt from United States backup withholding.
This summary does not deal with all aspects of federal income tax
withholding or backup withholding that may be relevant to investors that are not
"United States persons" within the meaning of Section 7701(a)(30) of the
Internal Revenue Code. Such investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
book-entry certificates.
The term "United States person" means (1) a citizen or resident of the
United States, (2) a corporation or partnership organized in or under the laws
of the United States or any state or the District of Columbia (other than a
partnership that is not treated as a United States person under any applicable
Treasury regulations), (3) an estate the income of which is includible in gross
S-A-5
income for United States tax purposes, regardless of its source, or (4) a trust
if a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States persons have
authority to control all substantial decisions of the trust. Notwithstanding the
preceding sentence, to the extent provided in regulations, certain trusts in
existence on August 20, 1996 and treated as United States persons prior to such
date that elect to continue to be so treated also will be considered United
States persons.
S-A-6
PROSPECTUS
SEQUOIA MORTGAGE FUNDING CORPORATION
OR
SEQUOIA RESIDENTIAL FUNDING, INC.
(DEPOSITOR)
$7,926,339,800
(AGGREGATE AMOUNT)
ASSET-BACKED SECURITIES
(ISSUABLE IN SERIES)
<Table>
THE TRUSTS
PLEASE CAREFULLY CONSIDER OUR
DISCUSSION OF SOME OF THE RISKS OF Each trust will be established to hold the assets
INVESTING IN THE SECURITIES UNDER transferred to it by the depositor, either Sequoia
"RISK FACTORS" BEGINNING ON PAGE 8. Mortgage Funding Corporation or Sequoia Residential
Funding, Inc. The assets of each trust will be
THE SECURITIES WILL REPRESENT specified in the prospectus supplement and may consist
OBLIGATIONS OF OR INTERESTS IN THE of:
RELATED TRUST ONLY AND DO NOT
REPRESENT AN INTEREST IN OR - fixed rate mortgage loans secured by senior and
OBLIGATION OF EITHER SEQUOIA junior liens on one- to four-family residential
MORTGAGE FUNDING CORPORATION OR properties;
SEQUOIA RESIDENTIAL FUNDING, INC.,
AS THE DEPOSITOR, OR ANY OF THEIR - adjustable rate mortgage loans secured by senior and
AFFILIATES. junior liens on one- to four-family residential
properties;
- mortgage pass-through securities issued or guaranteed
by Ginnie Mae, Fannie Mae or Freddie Mac;
- private mortgage-backed securities; and
- other assets described in the prospectus supplement.
</Table>
THE SECURITIES
The depositor, either Sequoia Mortgage Funding Corporation or Sequoia
Residential Funding, Inc., 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 will be issued in one or more classes
and each class will evidence beneficial ownership of a specified portion of
future payments on the assets in the trust 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 through several different methods, including
offerings through underwriters.
------------------------
THE SEC AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
September 17, 2004
TABLE OF CONTENTS
<Table>
Summary of Prospectus................................ 4
Risk Factors......................................... 8
The Depositor........................................ 13
The Trust............................................ 13
Use of Proceeds...................................... 28
Loan Program......................................... 28
Description of the Securities........................ 31
Credit Enhancement................................... 46
Yield and Prepayment Considerations.................. 53
The Agreements....................................... 56
Certain Legal Aspects of the Loans................... 73
Federal Income Tax Consequences...................... 84
State Tax Considerations............................. 104
ERISA Considerations................................. 104
Legal Investment..................................... 111
Method of Distribution............................... 112
Legal Matters........................................ 113
Financial Information................................ 113
Available Information................................ 113
Incorporation of Certain Documents by Reference...... 114
Rating............................................... 114
Index of Defined Terms............................... 116
</Table>
2
IMPORTANT NOTICE ABOUT INFORMATION IN THIS
PROSPECTUS AND EACH ACCOMPANYING
PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
- this prospectus, which provides general information, some of which may
not apply to a particular series; and
- 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.
IF THE TERMS OF YOUR SERIES OF SECURITIES AND ANY OTHER INFORMATION
CONTAINED HEREIN VARY BETWEEN THIS PROSPECTUS AND THE ACCOMPANYING PROSPECTUS
SUPPLEMENT, YOU SHOULD RELY ON THE INFORMATION IN 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.
You can find a listing of the pages on which many of the terms used in this
prospectus are defined under "Index of Defined Terms" beginning on page 114 of
this prospectus.
3
SUMMARY OF PROSPECTUS
- - This summary highlights material information from this prospectus 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, carefully read this entire prospectus and the accompanying
prospectus supplement.
- - This summary provides an overview of the structural elements, calculations,
cash flows and other information to aid your understanding and is qualified by
the full description of these calculations, cash flows and other information
in this prospectus and the accompanying prospectus supplement.
- - There are material risks associated with an investment in the securities. You
should read the section entitled "Risk Factors" beginning on page 8 of this
prospectus and in the accompanying prospectus supplement, and consider the
risk factors described in those sections, before making a decision to invest
in the securities.
TRUST
The issuer for a particular series of securities will be a trust formed by
the depositor.
DEPOSITOR
For any series of securities, either Sequoia Mortgage Funding Corporation,
a Delaware corporation, or Sequoia Residential Funding, Inc., a Delaware
corporation, as identified in the prospectus supplement. Each depositor's
principal offices are located at One Belvedere Place, Mill Valley, California
94941 and the telephone number is (415) 389-7373.
SERVICER
For any series of securities, the servicer named in the related prospectus
supplement. While we refer to a single servicer in this prospectus, for a
particular series of securities there may be more than one servicer, as set
forth in the prospectus supplement, as well as a master servicer to supervise
the performance of each servicer under the related servicing agreement.
If specified in the related prospectus supplement, the depositor may
appoint a special servicer for the series of securities.
TRUSTEE
For any series of securities, the trustee named in the prospectus
supplement.
In addition, if the trust issues bonds pursuant to a separate indenture,
the trust and the indenture will be administered by separate independent
trustees. In that case, the trust will be administered by an owner trustee and
the indenture will be administered by an indenture trustee, in each case as
named in the prospectus supplement.
THE SECURITIES
Each class or series of securities will be either:
- certificates representing interests in the assets of the trust related
to a certain series; or
- notes or bonds which are secured by the pledge of the trust assets
related to a certain series.
4
Each class or series of securities may have a different interest rate,
which may be a fixed or floating interest rate. The prospectus supplement will
specify the interest rate for each class or series of securities, or the initial
interest rate and the method for determining subsequent changes to the interest
rate.
A series may include one or more classes which:
- are stripped of regular interest payments and entitled only to principal
distributions, with disproportionate, nominal or no interest
distributions;
- are stripped of regular principal payments and entitled only to interest
distributions, with disproportionate, nominal or no principal
distributions;
- have different terms including different interest rates and different
timing, sequential order or priority of payments, amount of principal or
interest or both;
- will not distribute accrued interest but rather will add the accrued
interest to the note principal balance, or nominal balance, in the
manner described in the related prospectus supplement;
- are senior or subordinate to one or more other classes of securities in
respect of distributions of principal and interest and allocations of
losses on receivables; or
- have a feature entitling the class to a portion of or no principal
distributions for an initial period and then all or a different portion
of the principal distributions during subsequent periods.
A series of securities may provide that distributions of principal or
interest or both on any class may be made:
- upon 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 assets.
TRUST ASSETS
As specified in the prospectus supplement, the trust assets may consist
of:
- fixed rate mortgage loans secured by senior and junior liens on one-to
four-family residential properties;
- adjustable rate mortgage loans secured by senior and junior liens on
one- to four-family residential properties;
- mortgage pass-through securities issued or guaranteed by Ginnie Mae,
Fannie Mae or Freddie Mac;
- private mortgage-backed securities;
- closed-end and/or revolving home equity loans or certain balances
thereof secured by senior and junior liens on one- to four-family
residential properties; and
- other assets as described in detail elsewhere in the prospectus
supplement.
If the prospectus supplement specifies, the trustee may acquire additional
trust assets during a specified pre-funding period from monies in a pre-funding
account.
5
PAYMENT DATE
As described in the prospectus supplement, the securities will pay
principal and/or interest on specified dates. Payment dates will occur monthly,
quarterly, or semi-annually.
RECORD DATE
The prospectus supplement will describe a date preceding the payment date,
as of which the trustee or its paying agent will fix the identity of
securityholders. Securityholders whose identities are fixed on this date will
receive payments on the next succeeding payment date.
COLLECTION PERIOD
A period preceding each payment date -- for example, in the case of
monthly-pay securities, the calendar month preceding the month in which a
payment date occurs. As the prospectus supplement will more fully describe, the
servicer will remit collections received in respect of a collection period to
the related trustee prior to the related payment date.
CREDIT ENHANCEMENT
As described in the prospectus supplement, credit enhancement for the
trust assets or any class of securities may include any one or more of the
following:
- the subordination of one or more classes of the securities of such
series;
- a limited financial guaranty policy issued by an entity named in the
prospectus supplement;
- the establishment of one or more reserve accounts;
- the use of a cross-collateralization feature;
- use of a mortgage pool insurance policy;
- excess spread,
- over-collateralization;
- letter of credit;
- guaranteed investment contract;
- primary mortgage insurance,
- other pledged assets,
- corporate guarantees,
- surety bond;
- special hazard insurance policy;
- bankruptcy bond;
- FHA insurance or VA guarantee;
- any other method of credit enhancement contemplated in this prospectus
and described in the prospectus supplement; and
- any combination of the foregoing.
REGISTRATION OF SECURITIES
The trust may issue the securities as global securities registered in the
name of Cede & Co. as nominee of the Depository Trust Company, or another
nominee. In this case, securityholders will not receive definitive securities
representing their interests except in limited circumstances described in the
prospectus supplement.
OPTIONAL TERMINATION
As described in this prospectus and the prospectus supplement, the
servicer, the depositor, or if the prospectus supplement specifies, other
entities, may, at their respective options, cause the early
6
retirement or redemption of some or all of a series of securities.
MANDATORY TERMINATION
As described in this prospectus and the related prospectus supplement, the
trustee, the servicer, or if the related prospectus supplement specifies, other
entities, may be required to retire early all or any portion of a series of
securities. An indenture may require these parties to solicit competitive bids
for the purchase of the trust property or otherwise.
FEDERAL INCOME TAX CONSEQUENCES
The securities of each series generally will be structured, for federal
income tax purposes, as one of the following:
- regular interests or residual interests in a trust treated as a real
estate mortgage investment conduit or REMIC under Sections 860A through
860G of the Internal Revenue Code, or
- indebtedness issued by a real estate investment trust or its taxable
subsidiary.
You should consult your own tax advisor concerning your investment.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit sharing or other employee benefit plan
may wish to review with its legal advisors whether the purchase, holding or
disposition of securities could give rise to a prohibited transaction under
ERISA, or the Internal Revenue Code, and whether an exemption from the
prohibited transaction rules is available.
RATINGS
Each class of securities offered by a prospectus supplement will initially
be rated in one of the four highest rating categories of at least one nationally
recognized statistical rating agency. The ratings are not a recommendation to
purchase, hold or sell the securities and do not address the market price or
suitability of the securities for a particular investor. The ratings generally
address the likelihood of timely payment of interest and the ultimate payment of
principal on the securities by the stated maturity date. The ratings do not
generally address the rate of prepayments that may be experienced on the trust
assets or the effect on the rate of prepayments on the return of principal to
securityholders.
LEGAL INVESTMENT
So long as any class of securities is rated in one of the two highest
ratings categories by at least one nationally recognized statistical rating
agency, such class of securities will generally constitute "mortgage related
securities" under the Secondary Mortgage Market Enhancement Act of 1984. There
are other restrictions on the ability of certain types of investors to purchase
the securities that prospective investors should consider.
7
RISK FACTORS
INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN CONNECTION WITH THE
PURCHASE OF SECURITIES. YOU SHOULD ALSO CONSIDER THE RISK FACTORS DESCRIBED IN
THE PROSPECTUS SUPPLEMENT.
ABILITY TO RESELL SECURITIES MAY BE LIMITED
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 does develop,
that it will continue. Consequently, you may not be able to sell your securities
readily or at prices that will enable you to realize your desired yield. The
market values of the securities are likely to fluctuate; these fluctuations may
be significant and could result in significant losses to you.
The secondary market for asset-backed securities has experienced periods of
illiquidity and can be expected to do so in the future. Illiquidity can have a
severely adverse effect on the prices of securities that are especially
sensitive to prepayment, credit, or interest rate risk, or that have been
structured to meet the investment requirements of limited categories of
investors.
LIMITED SOURCE OF PAYMENTS -- NO RECOURSE TO DEPOSITOR, SELLERS, SERVICER OR
TRUSTEE
The assets of the trust are the sole source of distributions for the
securities. The securities do not represent an interest in or obligation of the
depositor, any seller, the servicer, the trustee or any of their affiliates,
except for the limited obligations of each seller with respect to certain
breaches of its representations and warranties and of the servicer with respect
to its servicing obligations. Neither the securities nor the trust assets will
be guaranteed by or insured by any governmental agency or instrumentality, the
depositor, any seller, the servicer, the trustee or any of their affiliates,
unless so specified in the supplement. Consequently, if payments on the trust
assets are insufficient to make all payments required on the certificates you
may incur a loss on your investment.
CREDIT ENHANCEMENT MAY NOT BE SUFFICIENT TO PROTECT YOU FROM LOSSES
Credit enhancement is intended to reduce the effect of delinquent payments
or loan losses on those classes of securities that have the benefit of the
credit enhancement. However, the amount of any credit enhancement may decline or
be depleted before the securities are paid in full. As a result, securityholders
may suffer losses. In addition, credit enhancement may not cover all potential
sources of loss, such as a loss resulting from fraud or negligence by a loan
originator or other party.
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PREPAYMENTS ARE UNPREDICTABLE AND AFFECT YIELD
The rate of principal distributions and yield to maturity on the securities
will be directly related to the rate of principal payments on the trust assets.
For example, the rate of principal payments on the loans will be affected by the
following:
- the amortization schedules of the loans;
- the rate of principal prepayments (including partial prepayments and
prepayments resulting from refinancing) by borrowers;
- liquidations or repurchases of defaulted loans by the servicer;
- repurchases of loans by the seller as a result of defective documentation
or breaches of representations and warranties; and
- the mandatory or optional purchase by the servicer or other entity with
such rights of all of the loans or some or all of the securities in
connection with an optional redemption of securities or termination of
the trust.
The rate of principal payments on loans is influenced by a variety of
economic, geographic, social and other factors. For example, if interest rates
for similar loans fall below the interest rates on the loans in the trust, the
rate of prepayment would generally be expected to increase. Conversely, if
interest rates on similar loans rise above the interest rates on the loans, the
rate of prepayment would generally be expected to decrease.
We cannot predict the rate at which borrowers will repay their loans.
Please consider the following:
- If you are purchasing a security at a discount, in particular, a
principal-only security, your yield may be lower than expected if
principal payments on the loans occur at a slower rate than you expected;
- If you are purchasing a security at a premium, in particular, an
interest-only security, your yield may be lower than expected if
principal payments on the loans occur at a faster rate than you expected
and you could lose your initial investment; and
- The earlier a payment of principal occurs, the greater the impact on your
yield. For example, if you purchase a security at a premium, although the
average rate of principal payments is consistent with your expectations,
if the rate of principal payments occurs initially at a rate higher than
expected, which would adversely impact your yield, a subsequent reduction
in the rate of principal payments will not offset any adverse yield
effect.
DECLINE IN PROPERTY VALUES MAY INCREASE LOAN LOSSES
Because your securities represent an interest in loans or are secured by
loans, your investment may be affected by a decline in property values. If the
outstanding balance of a loan and any secondary financing on the underlying
property is greater than the value of the property, there is an increased risk
of delinquency, default, foreclosure and loss. A
9
decline in property values could extinguish the value of a junior lien holder's
interest in a property. Losses on such loans that are not otherwise covered by
the credit enhancement described in the prospectus supplement will be borne by
the holder of one or more classes of securities.
DELAYS IN LIQUIDATION MAY ADVERSELY AFFECT YOU
Substantial delays may occur before defaulted loans are liquidated and the
proceeds forwarded to investors. Property foreclosure actions are regulated by
state statutes and rules and are subject to many of the delays and expenses that
characterize lawsuits if defenses or counterclaims are raised. As a result,
foreclosure actions can sometimes take several years to complete and the
liquidation proceeds may not cover the defaulted loan amount. In particular,
because the costs of liquidation do not vary based on the loan amount, the risk
of insufficient liquidation proceeds is greater with small loans. Some states
prohibit a mortgage lender from obtaining a judgment against the borrower for
amounts not covered by property proceeds if the property is sold outside of a
judicial proceeding.
In addition, 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 servicer to liquidate the property, which could
result in a delay in payments to you.
JUNIOR LIEN PRIORITY COULD RESULT IN PAYMENT DELAYS AND LOSSES
Loans may be secured by mortgages and deeds of trust that are junior in
priority. Junior liens receive proceeds from a sale of the related property only
after the senior liens have been paid. If the proceeds remaining after the
senior liens have been paid are insufficient to satisfy the loans, then:
- there may be a delay in payments to securityholders while a deficiency
judgment against the borrower is sought; and
- securityholders may incur a loss if a deficiency judgment cannot be
obtained or is not realized upon.
LOANS UNDERWRITTEN TO STANDARDS BELOW "A" QUALITY MAY RESULT IN UNEXPECTED
LOSSES
Loans supporting a series of securities may be comprised of mortgage loans
underwritten according to standards below "A" quality (e.g., Alt-A, A minus or
subprime). Such loans may be illiquid and present greater credit and other risks
than conforming mortgage loans. In addition, such mortgage loans may lack
standardized terms and may be secured by properties which are unique and more
difficult to value than typical residential properties. Loans may have been
underwritten primarily on the basis of loan-to-value ratios or favorable credit
factors rather than on the borrower's credit standing or income ratios.
Accordingly, the potential loss experience on non "A" quality mortgage loans
supporting a series of securities may be more difficult to evaluate compared to
the experience for "A" quality or other more standardized types of residential
and mixed-use properties. Actual losses incurred on such lower quality
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mortgage loans may exceed levels of credit enhancement thought to be sufficient
to protect securityholders from risk of loss.
STATE AND FEDERAL LAWS MAY LIMIT ABILITY TO COLLECT ON LOANS
Applicable federal and state laws regulate interest rates and other charges
and require certain disclosures. In addition, other laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the mortgage loans. Depending on the provisions of
the applicable law and the specific facts involved, violations may limit the
ability to collect all or part of the principal of or interest on the mortgage
loans. In some cases, the borrower may be entitled to a refund of amounts
previously paid and could subject the trust to damages and administrative
enforcement.
COSTS FOR CLEANING CONTAMINATED PROPERTY MAY RESULT IN LOSSES
Under certain state and federal laws, a contaminated property may give rise
to a lien on the property to assure the costs of cleanup. In addition these laws
may impose liability for cleanup costs on the lender if the lender was involved
in the operations of the borrower, even if the environmental damage was caused
by a prior owner. Any lien or costs attached to a contaminated property could
result in a loss to securityholders.
RATING OF THE SECURITIES DOES NOT ASSURE PAYMENT
It will be a condition to the issuance of the securities offered hereby
that they be rated in one of the four highest rating categories by each rating
agency identified in the prospectus supplement. The ratings of the securities
will be based on, among other things, the adequacy of the value of the trust
assets and any credit enhancement. The rating should not be deemed a
recommendation to purchase, hold or sell the securities, particularly since the
ratings do not address market price or suitability for an investor. There is no
assurance that the rating assigned to a security will remain in effect over the
life of that security, as the rating may be lowered or withdrawn.
CONSEQUENCES OF OWNING BOOK-ENTRY SECURITIES
LIMIT ON LIQUIDITY OF SECURITIES. Issuance of the securities in
book-entry form may reduce their liquidity in the secondary trading market
because investors may be unwilling to purchase securities for which they cannot
obtain physical certificates.
LIMIT ON ABILITY TO TRANSFER OR PLEDGE. Since transactions in the
book-entry securities can be effected only through the Depository Trust Company
("DTC"), participating organizations, indirect participants and certain banks,
your ability to transfer or pledge a book-entry security to persons or entities
that do not participate in the DTC system or otherwise to take actions in
respect of such securities, may be limited due to lack of a physical
certificate.
DELAYS IN DISTRIBUTIONS. You may experience some delay in the receipt of
distributions on book-entry securities because the distributions will be
forwarded by the trustee to DTC for DTC to credit the accounts of its
participants which will thereafter
11
credit them to your account either directly or indirectly through indirect
participants, as applicable.
PAYMENTS TO AND RIGHTS OF INVESTORS ADVERSELY AFFECTED BY INSOLVENCY OF SELLERS
OR SERVICER
Each seller and the depositor will treat the transfer of the loans from the
seller to the depositor as a sale for tax accounting purposes. The depositor and
the trust will treat the transfer of the loans from the depositor to the trust
as a sale for tax 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 argue that the transfer of the loans is a pledge of the
loans as security for a borrowing rather than a sale. Such an attempt, even if
unsuccessful, could result in delays in payments to securityholders.
In the event of a bankruptcy of the servicer, the bankruptcy trustee or
receiver may have the power to prevent the trustee or the securityholders from
appointing a successor servicer, which could result in a delay in payments to
securityholders.
TRUST ASSETS MAY NOT BE SUFFICIENT TO PAY SECURITIES
There is no assurance that the market value of the trust assets at any time
will equal the principal amount of the securities. In addition, under any
situation in which the trust assets are required to be sold, the proceeds
generally will be paid to cover administrative costs before being paid to you.
The net proceeds may be insufficient to pay the principal and interest on the
securities.
CONCENTRATION OF LOANS COULD ADVERSELY AFFECT YOUR INVESTMENT
Loans may be secured by properties that are concentrated in particular
geographic areas, as specified in the prospectus supplement. Consequently,
losses and prepayments on the loans and the resulting payments on the securities
may be affected significantly by changes in the housing markets and the regional
economies in these areas and by the occurrence of natural disasters in these
areas, such as earthquakes, hurricanes, tornadoes, tidal waves, mud slides,
fires and floods.
PRE-FUNDING ACCOUNTS MAY RESULT IN REINVESTMENT RISK TO INVESTORS
Amounts remaining in any pre-funding account at the end of the related
funding period will be distributed as prepayment of principal to investors on
the distribution date immediately following the end of the funding period in the
manner specified in the related prospectus supplement. Investors will bear any
reinvestment risk resulting from such prepayment.
THE ADDITION OF SUBSEQUENT MORTGAGE COLLATERAL TO PRE-FUNDING ACCOUNTS DURING
THE FUNDING PERIOD MAY ADVERSELY AFFECT THE PERFORMANCE OF THE SECURITIES
Although subsequent mortgage collateral must satisfy the characteristics
described in the related prospectus supplement, subsequent mortgage collateral
may have different
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characteristics, including, without limitation, a more recent origination date
than the initial mortgage collateral. As a result, the addition of subsequent
mortgage collateral to the pre-funding account may adversely affect the
performance of the related securities.
OWNERS OF ORIGINAL ISSUE DISCOUNT SECURITIES SHOULD CONSIDER FEDERAL INCOME TAX
CONSEQUENCES
An investor owning a security issued with original issue discount will be
required to include original issue discount in ordinary gross income for federal
income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income. Accrued but unpaid interest on accrual securities
will be treated as original issue discount for this federal income tax purpose.
THE DEPOSITOR
The prospectus supplement will identify whether the depositor is Sequoia
Mortgage Funding Corporation or Sequoia Residential Funding, Inc. Sequoia
Mortgage Funding Corporation is a Delaware corporation organized on January 31,
1997 and Sequoia Residential Funding, Inc., is a Delaware corporation organized
on September 1, 1999, in each case for the limited purpose of acquiring, owning
and transferring trust assets and selling interests therein or bonds secured
thereby. Sequoia Mortgage Funding Corporation is a qualified REIT subsidiary of
Redwood Trust, Inc. Sequoia Residential Funding, Inc. is a subsidiary of RWT
Holdings, Inc. RWT Holdings, Inc. is a taxable subsidiary of Redwood Trust, Inc.
Redwood Trust, Inc. is a publicly owned real estate investment trust and is
listed on the New York Stock Exchange under the symbol "RWT". Each depositor
maintains its principal office at One Belvedere Place, Mill Valley, California
94941. The telephone number is (415) 389-7373.
Neither the depositor nor any of the depositor's affiliates will insure or
guarantee distributions on the securities of any series.
THE TRUST
GENERAL
Either Sequoia Mortgage Funding Corporation or Sequoia Residential Funding,
Inc., the depositor, will establish a trust for each series of mortgage-backed
securities and convey to the related trustee certain assets, consisting of one
or more pools of loans as specified in the prospectus supplement. Each trust
will be created as of the first day of the month in which the securities are
issued or another date which will be specified in the prospectus supplement (the
"cut-off date"). All references in this prospectus to "pool," "certificates,"
"notes," "bonds," "securities," or "securityholders," should be deemed to apply
to one specific series, trust and prospectus supplement, unless otherwise noted.
The certificates of a series will represent interests in the assets of the
trust related to that series and the notes of a series will be secured by the
pledge of the trust assets related to that series. The trust assets for each
series will be held by the trustee for the benefit of the related
securityholders. The securities will be entitled to payment from the
13
assets of the trust or other assets pledged for the benefit of the
securityholders, as specified in the prospectus supplement, and will not be
entitled to payments in respect of the assets of any other trust established by
the depositor.
The trust assets will be acquired by the depositor, either directly or
through affiliates, from one or more sellers which may be affiliates of the
depositor, and conveyed without recourse by the depositor to the trust. Each
seller will have originated or acquired the loans as described in the prospectus
supplement. Loans acquired by the depositor will have been originated in
accordance with the underwriting criteria described under "Loan
Program -- Underwriting Standards" or as otherwise described in the prospectus
supplement.
The depositor will cause the trust assets to be assigned or pledged to the
trustee named in the prospectus supplement for the benefit of the holders of the
securities. For a fee, the servicer named in the prospectus supplement will
service the trust assets, either directly or through other servicing
institutions, or subservicers, pursuant to a pooling and servicing agreement
among the depositor, the servicer, the trustee and other entities named in the
prospectus supplement in the case of a series consisting of certificates, or
pursuant to a servicing agreement among the depositor, the servicer, the trust,
the trustee and other entities named in the prospectus supplement in the case of
a series consisting of bonds. With respect to loans serviced by the servicer
through a subservicer, the servicer will remain liable for its servicing
obligations under the related agreement as if the servicer were servicing such
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 notes or bonds, the trust agreement, the
indenture and the servicing agreement, or, in either case, such other agreements
containing comparable provisions as set forth in the prospectus supplement as
the context requires.
With respect to each trust, prior to the initial offering of the
securities, the trust will have no assets or liabilities. No trust is expected
to engage in any activities other than acquiring, managing and holding the trust
assets and other assets specified in the prospectus supplement and the proceeds
thereof, issuing securities and making payments and distributions thereon and
certain related activities. No trust is expected to have any source of capital
other than its assets and any related credit enhancement.
Generally, the only obligations of the depositor will be to obtain certain
representations and warranties from the sellers and to assign them to the
trustee. See "The Agreements -- Assignment of the Trust Assets." The obligations
of the 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 subservicers or sellers, or both,
as more fully described in this prospectus under "Loan Program --
Representations by Sellers; Repurchases" and "The Agreements -- Subservicing by
Sellers" and "-- Assignment of the Trust 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 servicer to
make advances may be
14
subject to limitations, to the extent provided in this prospectus and in the
prospectus supplement.
The following is a brief description of the assets expected to be included
in the trust. If specific information respecting the trust assets is not known
at the time the securities are offered, more general information of the nature
described below will be provided in the prospectus supplement, and specific
information will be set forth in a report on Form 8-K to be filed with the SEC
within fifteen days after the initial issuance of the securities. A copy of the
Agreements with respect to each series of securities will be available for
inspection at the corporate trust office of the trustee. A schedule of the loans
relating to each series will be attached to the Agreement delivered to the
trustee.
THE LOANS
The loans included in a trust will be mortgage loans or home equity loans
secured by one-to-four-family residential properties. The loans may be either
first or junior lien loans and may be either closed-end loans or revolving
credit line loans. As described in the prospectus supplement, the loans may be
underwritten to "A" quality standards or to standards below "A" quality (e.g.,
Alt-A, A minus or subprime).
The loans will have monthly payments due on the first day of each month or
on such other day of the month specified in the prospectus supplement. The
payment terms of the loans to be included in a trust will be described in the
prospectus supplement and may include any of the following features (or
combination thereof):
- Interest may be payable at a fixed rate, a rate adjustable from time to
time in relation to an index, 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, a rate that is convertible
from an adjustable rate to a fixed rate, or a rate that is convertible
from one index to another, in each case as specified in the prospectus
supplement. Changes to an adjustable rate may be subject to periodic
limitations, maximum rates, minimum rates or a combination of such
limitations. Accrued interest may be deferred and added to the principal
of a loan for such periods and under such circumstances as may be
specified in the prospectus supplement.
- 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.
Certain loans may provide for monthly payments of interest but no
payments of principal for either the first five or ten years or any other
period specified after origination. Certain loans may require payment of
all or a substantial portion of the principal upon maturity, commonly
referred to as a "balloon payment". Principal may include interest that
has been deferred and added to the principal balance of the loan.
- 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.
15
Loans may include limits on periodic increases or decreases in the amount
of monthly payments and may include maximum or minimum amounts of monthly
payments.
- Prepayments of principal may be subject to a prepayment fee, which may be
fixed for the life of the loan or may change over time. Certain loans may
permit prepayments after expiration of certain periods, commonly referred
to as "lockout periods". 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 which permit the
mortgagee to demand payment of the entire loan in connection with the
sale or certain transfers of the related property. Other loans may be
assumable by persons meeting the then applicable standards set forth in
the underlying loan documents.
A trust may contain buydown loans. A buydown loan includes provisions
whereby a third party partially subsidizes the monthly payments of the borrower
on the related loan during the early years of repayment under the loan, the
partial subsidy being made 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. The underlying assumption of a buydown plan is that the income of the
borrower will increase during the buydown period as a result of normal increases
in compensation and inflation, so that the borrower will be able personally to
make the full loan payments at the end of the buydown period without the
continued assistance of the partial subsidy. To the extent that this assumption
as to increased income is not fulfilled, the possibility of default on a buydown
loan is increased. The prospectus supplement will contain information with
respect to any buydown loan concerning limitations on the interest rate paid by
the borrower initially, on annual increases in the interest rate and on the
length of the buydown period.
The real property that secures repayment of the loans is referred to in
this prospectus as the mortgaged properties. In the case of home equity loans,
such liens generally will be subordinated to one or more senior liens on the
related mortgaged properties as described in the prospectus supplement. Loans
will be secured by mortgages or deeds of trust or other similar security
instruments creating a lien on a mortgaged property. Some liens will be
subordinated to one or more senior liens on the related mortgaged properties as
described in the prospectus supplement. The properties relating to loans will
consist of detached or semi-detached one- to four-family dwelling units,
townhouses, rowhouses, individual condominium units, manufactured homes,
individual units in planned unit developments, and certain other dwelling units.
Such properties may include vacation and second homes, investment properties and
dwellings situated on leasehold estates. The loans may include cooperative
apartment loans secured by security interests in shares issued by private,
nonprofit, cooperative housing corporations and in the related proprietary lease
or occupancy agreements granting exclusive rights to occupy specific dwelling
units in the cooperatives' building. In the case of leasehold interests, the
term of the leasehold will exceed the scheduled maturity of the loan by at least
five years, unless otherwise specified in the prospectus supplement.
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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 and/or certain principal balances
may be covered wholly or partially by primary mortgage guaranty insurance
policies. The existence, extent and duration of any such coverage will be
described in the prospectus supplement.
Certain loans, in addition to being secured by real property, may be
secured by a security interest in a limited amount of additional collateral
owned by the borrower or a third-party guarantor. Such additional collateral may
no longer be required when the principal balance of such additional collateral
mortgage loan is reduced to a predetermined amount set forth in the related
pledge agreement or guaranty agreement, as applicable, or when the loan-to-value
ratio for such additional collateral mortgage loan is reduced to the applicable
loan-to-value ratio for such additional collateral mortgage loan by virtue of an
increase in the appraised value of the mortgaged property as determined by the
related servicer.
HOME EQUITY LOANS
As more fully described in the prospectus supplement, interest on each
revolving credit line loan, excluding introduction rates offered from time to
time during promotional periods, is computed and payable monthly on the average
daily outstanding principal balance of such loan. Principal amounts on a
revolving credit line loan may be drawn down (up to a maximum amount as set
forth in the prospectus supplement) or repaid under each revolving credit line
loan from time to time, but may be subject to a minimum periodic payment. As
specified in the prospectus supplement, amounts borrowed under a revolving
credit line loan after the related Cut-off Date may also be transferred to the
trust and comprise part of the trust assets.
The full amount of a closed-end loan is advanced at the origination of the
loan and generally is repayable in equal (or substantially equal) installments
so that the loan either is fully amortized at its stated maturity or, if the
loan is a balloon loan, requires the payment of all or a substantial portion of
the principal upon maturity. As more fully described in the prospectus
supplement, interest on each closed-end loan is calculated on the basis of the
outstanding principal balance of such loan multiplied by the related loan rate
thereon and further multiplied by either a fraction, the numerator of which is
the number of days in the period elapsed since the preceding payment of interest
was made and the denominator of which is the number of days in the annual period
for which interest accrues on such loan, or a fraction which is 30 over 360.
Except to the extent provided in the prospectus supplement, the original terms
to stated maturity of closed-end loans generally will not exceed 360 months.
Under certain 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
17
must begin paying at least the minimum monthly payment of a specified percentage
of the average outstanding balance of the loan.
Each prospectus supplement will contain information to the extent then
specifically known to the depositor, with respect to the loans contained in the
pool, generally including:
- the aggregate outstanding principal balance and the average outstanding
principal balance of the loans as of the applicable cut-off date;
- the type of property securing the loan (e.g., single family residences,
individual units in condominium apartment buildings, two- to four-family
dwelling units, other real property or home improvements);
- the original terms to maturity of the loans;
- the largest principal balance of any of the loans;
- the smallest principal balance of any of the loans;
- the earliest origination date and latest maturity date of any of the
loans;
- the loan-to-value ratios or combined loan-to-value ratios, as applicable,
of the loans;
- the loan rates or annual percentage rates or range of loan rates or
annual percentage rates borne by the loans;
- the maximum and minimum per annum loan rates; and
- the geographical location of real property related to the loans.
If specific information regarding 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 prospectus
supplement, and specific information will be set forth in a report filed on Form
8-K to be filed with the SEC within 15 days of initial issuance of the
securities.
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 principal balance of
the loan and the denominator of which is the collateral value of the 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 principal balance of the
loan and (b) the outstanding principal balance of any senior mortgage loan(s) to
(ii) the collateral value of the property. The effective loan-to-value ratio of
a loan at any given time is the fraction, expressed as a percentage, the
numerator of which is the principal balance of the loan, less the amount secured
by additional collateral, if any, and the denominator of which is the collateral
value of the property.
The "collateral value" of a property, other than with respect to certain
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 at origination of such loan and (b) the sales price for
the property if the proceeds of the
18
loan are used to purchase the related property. In the case of a refinance loan,
the collateral value of the related property is the appraised value of the
property as determined by an appraisal obtained at the time of refinancing.
No assurance can be given that collateral values of the properties have
remained or will remain at the levels at which they are originally calculated.
If the residential real estate market should experience an overall decline in
property values such that the sum of the outstanding principal balances of the
loans and any primary or secondary financing on the properties, as applicable,
in a particular pool become equal to or greater than the value of the
properties, the actual rates of delinquencies, foreclosures and losses
experienced with respect to that pool 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 such losses
are not covered by subordination provisions or alternative arrangements, such
losses will be borne by the securityholders of the affected series to the extent
that the credit enhancement provisions relating to the series do not protect the
securityholders from such losses.
AGENCY SECURITIES
GINNIE MAE. Ginnie Mae, formerly the Government National Mortgage
Association, is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. Section 306(g) of Title
II of the National Housing Act of 1934, as amended, authorizes Ginnie Mae to
guarantee the timely payment of the principal of and interest on certificates
which represent an interest in a pool of FHA loans, which are mortgage loans
insured by the FHA under the National Housing Act or under Title V of the
Housing Act of 1949, or VA loans, which are mortgage loans partially guaranteed
by the VA under the Servicemen's Readjustment Act of 1944, as amended, or
Chapter 37 of Title 38 of the United States Code.
Section 306(g) of the National 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 guaranty under this subsection." In order
to meet its obligations under any such guarantee, Ginnie Mae may, under Section
306(d) of the National Housing Act, borrow from the United States Treasury in an
unlimited amount which is at any time sufficient to enable Ginnie Mae to perform
its obligations under its guarantee.
GINNIE MAE CERTIFICATES. Each Ginnie Mae certificate held in a trust fund
will be a "fully modified pass-through" mortgage-backed certificate issued and
serviced by a Ginnie Mae issuer that is a mortgage banking company or other
financial concern approved by Ginnie Mae or approved by Fannie Mae as a
seller-servicer of FHA loans and/or VA loans. The Ginnie Mae certificates may be
either Ginnie Mae I certificates issued under the Ginnie Mae I program or Ginnie
Mae II certificates issued under the Ginnie Mae II program. The mortgage loans
underlying the Ginnie Mae certificates will consist of FHA loans and/or VA
loans. Each such mortgage is secured by a one- to
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four-family or multifamily residential property. Ginnie Mae will approve the
issuance of each Ginnie Mae certificate in accordance with a guaranty agreement
between Ginnie Mae and the Ginnie Mae issuer. Pursuant to its guaranty
agreement, a Ginnie Mae issuer will be required to advance its own funds in
order to make timely payments of all amounts due on each Ginnie Mae certificate,
even if the payments received by the Ginnie Mae issuer on the underlying FHA
loans or VA loans are less than the amounts due on the related Ginnie Mae
certificate.
The full and timely payment of principal of and interest on each Ginnie Mae
certificate will be guaranteed by Ginnie Mae, which obligation is backed by the
full faith and credit of the United States. Each Ginnie Mae certificate will
have an original maturity of not more than 30 years, but may have original
maturities of substantially less than 30 years. Each Ginnie Mae certificate will
be based on and backed by a pool of FHA loans or VA loans secured by one- to
four-family residential properties and will provide for the payment by or on
behalf of the Ginnie Mae issuer to the registered holder of the Ginnie Mae
certificate scheduled monthly payments of principal and interest equal to the
registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan or VA Loan underlying
the Ginnie Mae certificate, less the applicable servicing and guarantee fee
which together equal the difference between the interest on the FHA loan or VA
loan and the pass-through rate on the Ginnie Mae certificate. In addition, each
payment will include proportionate pass-through payments of any prepayments of
principal on the FHA loans or VA loans underlying the Ginnie Mae certificate and
liquidation proceeds in the event of a foreclosure or other disposition of any
such FHA loans or VA loans.
If a Ginnie Mae issuer is unable to make the payments on a Ginnie Mae
certificate as they become due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payments. Upon notification and request, Ginnie Mae will
make payments directly to the registered holder of the Ginnie Mae certificate.
In the event no payment is made by a Ginnie Mae issuer and the Ginnie Mae issuer
fails to notify and request Ginnie Mae to make the payment, the holder of the
Ginnie Mae certificate will have recourse only against Ginnie Mae to obtain
payment. The trustee or its nominee, as registered holder of the Ginnie Mae
certificates held in a trust fund, will have the right to proceed directly
against Ginnie Mae under the terms of the guaranty agreements relating to those
Ginnie Mae certificates for any amounts that are not paid when due.
All mortgage loans underlying a particular Ginnie Mae I certificate must
have the same interest rate (except for pools of mortgage loans secured by
manufactured homes) over the term of the loan. The interest rate on a Ginnie Mae
I certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying the Ginnie Mae I certificate, less one-half
percentage point per annum of the unpaid principal balance of the mortgage
loans.
Mortgage loans underlying a particular Ginnie Mae II certificate may have
per annum interest rates that vary from one another by up to one percentage
point. The interest rate on each Ginnie Mae II certificate will be between
one-half percentage point and one and one-half percentage points lower than the
highest interest rate on the
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mortgage loans included in the pool of mortgage loans underlying the Ginnie Mae
II certificate (except for pools of mortgage loans secured by manufactured
homes).
Regular monthly installment payments on each Ginnie Mae certificate held in
a trust fund will be comprised of interest due as specified on the Ginnie Mae
certificate plus the scheduled principal payments on the FHA loans or VA loans
underlying the Ginnie Mae certificate due on the first day of the month in which
the scheduled monthly installments on the Ginnie Mae certificate are due.
Regular monthly installments on each Ginnie Mae certificate are required to be
paid to the trustee as registered holder by the 15th day of each month in the
case of a Ginnie Mae I certificate, and are required to be mailed to the trustee
by the 20th day of each month in the case of a Ginnie Mae II certificate. Any
principal prepayments on any FHA loans or VA loans underlying a Ginnie Mae
certificate held in a trust fund or any other early recovery of principal on
such loan will be passed through to the trustee as the registered holder of the
Ginnie Mae certificate.
Ginnie Mae certificates may be backed by graduated payment mortgage loans
or by "buydown" mortgage loans for which funds will have been provided (and
deposited into escrow accounts) for application to the payment of a portion of
the borrowers' monthly payments during the early years of such mortgage loans.
Payments due the registered holders of Ginnie Mae certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other Ginnie Mae certificates and will include amounts to
be collected from both the borrower and the regulated escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of such mortgage loans, will be less than the
amount of stated interest on such mortgage loans. The interest not so paid will
be added to the principal of the graduated payment mortgage loans and, together
with interest thereon, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae issuer will be the same irrespective of whether
the Ginnie Mae certificates are backed by graduated payment mortgage loans or
"buydown" mortgage loans. No statistics comparable to the FHA's prepayment
experience on level payment, non-"buydown" mortgage loans are available in
respect of graduated payment or "buydown" mortgages. Ginnie Mae certificates
related to a series of certificates may be held in book-entry form.
If specified in a prospectus supplement, Ginnie Mae certificates may be
backed by multifamily mortgage loans having the characteristics specified in the
prospectus supplement.
FREDDIE MAC. Freddie Mac, formerly the Federal Home Loan Mortgage
Corporation, is a shareholder-owned, government sponsored enterprise created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended.
Freddie Mac was established primarily for the purpose of increasing the
availability of mortgage credit for the financing of urgently needed housing. It
seeks to provide an enhanced degree of liquidity for residential mortgage
investments primarily by assisting in the development of secondary markets for
conventional mortgages. The principal activity of Freddie Mac currently consists
of the purchase of first lien conventional mortgage loans, or
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participation interests in the mortgage loans, and the sale of the mortgage
loans or participations so purchased in the form of mortgage securities,
primarily Freddie Mac certificates. Freddie Mac is confined to purchasing, so
far as practicable, mortgage loans that it deems to be of such quality, type and
class as to meet generally the purchase standards imposed by private
institutional mortgage investors.
FREDDIE MAC CERTIFICATES. Each Freddie Mac certificate represents an
undivided interest in a pool of mortgage loans that may consist of first lien
conventional loans, FHA loans or VA loans. Freddie Mac certificates are sold
under the terms of a mortgage participation certificate agreement. A Freddie Mac
certificate may be issued under either Freddie Mac's Cash Program or its
Guarantor Program.
Mortgage loans underlying the Freddie Mac certificates held by a trust fund
will consist of mortgage loans with original terms to maturity of from ten to 40
years. Each such mortgage loan must meet the applicable standards set forth in
the legislation that established Freddie Mac. The pool of loans backing a
Freddie Mac certificate may include whole loans, participation interests in
whole loans and undivided interests in whole loans and/or participations
comprising another Freddie Mac pool. Under the Guarantor Program, however, the
pool of loans backing a Freddie Mac certificate may include only whole loans or
participation interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans represented by that Freddie Mac certificate, whether or not
received. Freddie Mac also guarantees to each registered holder of a Freddie Mac
certificate that the holder will collect all principal on the underlying
mortgage loans, without any offset or deduction, to the extent of such holder's
pro rata share thereof, but does not, except if and to the extent specified in
the related prospectus supplement for a series of certificates, guarantee the
timely payment of scheduled principal. Under Freddie Mac's Gold PC Program,
Freddie Mac guarantees the timely payment of principal based on the difference
between the pool factor, published in the month preceding the month of
distribution, and the pool factor published in such month of distribution.
Pursuant to its guarantees, Freddie Mac indemnifies holders of Freddie Mac
certificates against any diminution in principal by reason of charges for
property repairs, maintenance and foreclosure. Freddie Mac may remit the amount
due on account of its guaranty of collection of principal at any time after
default on an underlying mortgage loan, but not later than (i) 30 days following
foreclosure sale, (ii) 30 days following payment of the claim by any mortgage
insurer or (iii) 30 days following the expiration of any right of redemption,
whichever occurs later, but in any event no later than one year after demand has
been made upon the mortgagor for accelerated payment of principal. In taking
actions regarding the collection of principal after default on the mortgage
loans underlying Freddie Mac certificates, including the timing of demand for
acceleration, Freddie Mac reserves the right to exercise its judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for Freddie Mac to
determine that a mortgage loan should be accelerated varies with the
22
particular circumstances of each mortgagor, and Freddie Mac has not adopted
standards which require that the demand be made within any specified period.
Freddie Mac certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of Freddie Mac under its
guarantee are obligations solely of Freddie Mac and are not backed by, or
entitled to, the full faith and credit of the United States. If Freddie Mac were
unable to satisfy such obligations, distributions to holders of Freddie Mac
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on such mortgage loans.
Registered holders of Freddie Mac certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial repayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or the seller thereof.
Freddie Mac is required to remit each registered Freddie Mac Certificateholder's
pro rata share of principal payments on the underlying mortgage loans, interest
at the Freddie Mac pass-through rate and any other sums such as prepayment fees,
within 60 days of the date on which those payments are deemed to have been
received by Freddie Mac.
Under Freddie Mac's Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a Freddie Mac certificate
may exceed the pass-through rate on the Freddie Mac certificate. Under this
program, Freddie Mac purchases groups of whole mortgage loans from sellers at
specified percentages of their unpaid principal balances, adjusted for accrued
or prepaid interest, which, when applied to the interest rate of the mortgage
loans and participations purchased, results in the yield (expressed as a
percentage) required by Freddie Mac. The required yield, which includes a
minimum servicing fee retained by the servicer, is calculated using the
outstanding principal balance. The range of interest rates on the mortgage loans
and participations in a particular Freddie Mac pool under the Cash Program will
vary since mortgage loans and participations are purchased and assigned to a
Freddie Mac pool based upon their yield to Freddie Mac rather than on the
interest rate on the underlying mortgage loans. Under Freddie Mac's Guarantor
Program, the pass-through rate on a Freddie Mac certificate is established based
upon the lowest interest rate on the underlying mortgage loans, minus a minimum
servicing fee and the amount of Freddie Mac's management and guaranty income as
agreed upon between the related seller and Freddie Mac.
Freddie Mac certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a Freddie Mac
certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser becomes a registered
holder of Freddie Mac certificates.
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Thereafter, such remittance will be distributed monthly to the registered holder
so as to be received normally by the 15th day of each month. The Federal Reserve
Bank of New York maintains book-entry accounts with respect to Freddie Mac
certificates sold by Freddie Mac, and makes payments of principal and interest
each month to the registered Freddie Mac certificateholders in accordance with
the holders' instructions.
FANNIE MAE. Fannie Mae, formerly the Federal National Mortgage
Association, is a federally chartered and privately owned corporation organized
and existing under the Federal National Mortgage Association Charter Act, as
amended. 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
mortgage loans from lenders, thereby replenishing their funds for additional
lending. Fannie Mae acquires funds to purchase mortgage loans from many capital
market investors that may not ordinarily invest in mortgages, thereby expanding
the total amount of funds available for housing. Operating nationwide Fannie Mae
helps to redistribute mortgage funds from capital-surplus to capital-short
areas.
FANNIE MAE CERTIFICATES. Fannie Mae certificates are Guaranteed Mortgage
Pass-Through Certificates representing fractional undivided interests in a pool
of mortgage loans formed by Fannie Mae. Each mortgage loan must meet the
applicable standards of the Fannie Mae purchase program. Mortgage loans
comprising a pool are either provided by Fannie Mae from its own portfolio or
purchased pursuant to the criteria of the Fannie Mae purchase program.
Mortgage loans underlying Fannie Mae certificates held by a trust fund will
consist of conventional mortgage loans, FHA loans or VA loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a Fannie Mae certificate are expected to be from eight to 15
years or from 20 to 40 years. The original maturities of substantially all of
the fixed rate level payment FHA loans or VA loans are expected to be 30 years.
Mortgage loans underlying a Fannie Mae certificate may have annual interest
rates that vary by as much as two percentage points from one another. The rate
of interest payable on a Fannie Mae certificate is equal to the lowest interest
rate of any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and Fannie Mae's guaranty fee.
Under a regular servicing option pursuant to which the mortgagee or each other
servicer assumes the entire risk of foreclosure losses, the annual interest
rates on the mortgage loans underlying a Fannie Mae certificate will be between
25 basis points and 250 basis points greater than is its annual pass-through
rate. Under a special servicing option pursuant to which Fannie Mae assumes the
entire risk for foreclosure losses, the annual interest rates on the mortgage
loans underlying a Fannie Mae certificate will generally be between 30 basis
points and 255 basis points greater than the annual Fannie Mae certificate
pass-through rate. If specified in the related prospectus supplement, Fannie Mae
certificates may be backed by adjustable rate mortgages.
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Fannie Mae guarantees to each registered holder of a Fannie Mae certificate
that it will distribute amounts representing the holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by the Fannie Mae certificate on the underlying mortgage loans,
whether or not received, and the holder's proportionate share of the full
principal amount of any foreclosed or other finally liquidated mortgage loan,
whether or not such principal amount is actually recovered. The obligations of
Fannie Mae under its guarantees are obligations solely of Fannie Mae and are not
backed by, or entitled to, the full faith and credit of the United States.
Although the Secretary of the Treasury of the United States has discretionary
authority to lend Fannie Mae up to $2.25 billion outstanding at any time,
neither the United States nor any of its agencies or instrumentalities is
obligated to finance Fannie Mae's operations or to assist Fannie Mae in any
other manner. If Fannie Mae were unable to satisfy its obligations,
distributions to holders of Fannie Mae certificates would consist solely of
payments and other recoveries on the underlying mortgage loans and, accordingly,
monthly distributions to holders of Fannie Mae certificates would be affected by
delinquent payments and defaults on such mortgage loans.
Fannie Mae certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 (other than Fannie Mae certificates backed by
pools containing graduated payment mortgage loans or mortgage loans secured by
multifamily projects) are available in book-entry form only. Distributions of
principal and interest on each Fannie Mae certificate will be made by Fannie Mae
on the 25th day of each month to the persons in whose name the Fannie Mae
certificate is entered in the books of the Federal Reserve Banks (or registered
on the Fannie Mae certificate register in the case of fully registered Fannie
Mae certificates) as of the close of business on the last day of the preceding
month. With respect to Fannie Mae certificates issued in book-entry form,
distributions will be made by wire and, with respect to fully registered Fannie
Mae certificates, distributions will be made by check.
STRIPPED MORTGAGE-BACKED SECURITIES. Agency securities may consist of one
or more stripped mortgage-backed securities as described in this prospectus and
in the related prospectus supplement. Each agency security of this type will
represent an undivided interest in all or part of 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 on certain Freddie Mac,
Fannie Mae or Ginnie Mae certificates. The underlying securities will be held
under a trust agreement by Freddie Mac, Fannie Mae or Ginnie Mae, each as
trustee, or by another trustee named in the related prospectus supplement.
Freddie Mac, Fannie Mae or Ginnie Mae will guaranty each stripped agency
security to the same extent as such entity guarantees the underlying securities
backing the stripped agency security, unless otherwise specified in the related
prospectus supplement.
OTHER AGENCY SECURITIES. If specified in the related prospectus
supplement, a trust fund may include other mortgage pass-through certificates
issued or guaranteed by Freddie Mac, Fannie Mae or Ginnie Mae. The
characteristics of any such mortgage pass-through certificates will be described
in the related prospectus supplement. If
25
specified in the related prospectus supplement, a combination of different types
of agency securities may be held in a trust fund.
PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL. Private mortgage-backed securities may consist of
- pass-through certificates or participation certificates evidencing an
undivided interest in a pool of single family loans, home equity loans,
multifamily loans, manufactured housing contracts or home improvement
contracts,
- collateralized mortgage obligations secured by single family loans, home
equity loans, multifamily loans, manufactured housing contracts or home
improvement contracts, or
- other private mortgage-backed securities.
Private mortgage-backed securities may include stripped mortgage-backed
securities representing an undivided interest in all or a part of 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 on certain mortgage loans.
The private mortgage-backed securities will have been issued pursuant to a
pooling and servicing agreement, an indenture or similar agreement. Unless
otherwise specified in the related prospectus supplement, the seller/servicer of
the underlying loans will have entered into a private mortgage-backed securities
Agreement with a trustee under that agreement. The trustee or its agent, or a
custodian, will possess the mortgage loans underlying the private
mortgage-backed securities. The loans underlying the private mortgage-backed
securities will be serviced by a servicer directly or by one or more
subservicers which may be subject to the supervision of the servicer. Unless
otherwise specified in the related prospectus supplement, the private mortgage-
backed securities servicer will be a Fannie Mae- or Freddie Mac-approved
servicer and, if FHA loans underlie the private mortgage-backed securities,
approved by HUD as an FHA mortgagee.
The private mortgage-backed securities issuer 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, among
other things, establishing trusts and acquiring and selling housing loans to
trusts and selling beneficial interests in trusts. If specified in the related
prospectus supplement, the issuer may be an affiliate of the depositor. The
obligations of the PLS issuer will generally be limited to certain
representations and warranties with respect to the assets it conveys to the
related trust. Unless otherwise specified in the related prospectus supplement,
the PLS issuer will not have guaranteed any of the assets conveyed to the
related trust or any of the private mortgage-backed securities issued under the
PLS agreement. Additionally, although the 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, unless the related prospectus supplement specifies otherwise.
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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 trustee or the servicer. The issuer or the servicer may have
the right to repurchase assets underlying the private mortgage-backed securities
after a particular date or under other circumstances specified in the related
prospectus supplement.
UNDERLYING LOANS. The 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 loans may be
secured by one- to four-family residential property, small mixed-use property,
five- to eight-family residential property, multifamily property, manufactured
homes 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.
CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES. Credit
support in the form of reserve funds, subordination of other private
mortgage-backed securities issued under the private mortgage-backed securities
agreement, letters of credit, surety bonds, insurance policies or other types of
credit support may be provided with respect to the loans underlying the private
mortgage-backed securities or with respect to the private mortgage-backed
securities themselves.
ADDITIONAL INFORMATION. If the trust fund for a series of securities
includes private mortgage-backed securities, the related prospectus supplement
will generally specify
- the aggregate approximate principal amount and type of private
mortgage-backed securities to be included in the trust fund,
- the maximum original term-to-stated maturity of the private
mortgage-backed securities,
- the weighted average term-to-stated maturity of the private
mortgage-backed securities,
- the pass-through or certificate rate of the private mortgage-backed
securities,
- the weighted average pass-through of interest rate of the private
mortgage-backed securities,
- the issuer, the servicer (if other than the issuer) and the trustee,
- certain characteristics of any credit support such as reserve funds,
insurance policies, surety bonds, letters of credit or guaranties
relating to the loans underlying the private mortgage-backed securities
themselves,
- the terms on which the loans underlying the private mortgage-backed
securities may, or are required to, be purchased prior to their stated
maturity or the stated maturity of the private mortgage-backed
securities, and
27
- the terms on which mortgage loans may be substituted for those originally
underlying the private mortgage-backed securities.
In addition, the related prospectus supplement will provide information
about the loans which comprise the underlying assets of the private
mortgage-backed securities, generally including
- the payment features of the mortgage loans,
- the approximate aggregate principal balance, if known, of underlying
loans insured or guaranteed by a governmental entity,
- the servicing fee or range of servicing fees with respect to the loans,
and
- the minimum and maximum stated maturities of the underlying loans at
origination.
SUBSTITUTION OF TRUST ASSETS
Substitution of trust assets may be permitted in the event of breaches of
representations and warranties with respect to certain trust assets or in the
event the documentation with respect to any trust asset is determined by the
trustee to be incomplete or as further specified in the prospectus supplement.
The period during which such substitution will be permitted generally will be
indicated in the prospectus supplement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the securities will be
applied by the depositor to the purchase of trust assets or will be used by the
depositor for general corporate purposes. 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
assets acquired by the depositor, prevailing interest rates, availability of
funds and general market conditions.
LOAN PROGRAM
The loans will have been purchased by the depositor, either directly or
through affiliates, from sellers. Unless otherwise specified in the prospectus
supplement, the loans acquired by the depositor will have been originated in
accordance with the underwriting criteria described below.
UNDERWRITING STANDARDS
Each seller will represent and warrant that all loans originated and/or
sold by it to the depositor will have been underwritten in accordance with
standards described in the prospectus supplement.
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 mortgage loan is required to fill out a detailed application
designed to provide to the underwriting
28
officer pertinent credit information. 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 or other significant public records. In most cases, an employment
verification is obtained from an independent source (typically the borrower's
employer), which verification reports the length of employment with that
organization, the borrower's current salary and whether it is expected that the
borrower will continue such employment in the future. 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 as collateral, an appraisal
will generally be made of each property considered for financing. The appraiser
is required to inspect the property and verify that it is in good repair and
that construction, if new, has been completed. The appraisal is 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.
Once all applicable employment, credit and property information is
received, a determination generally is made as to whether the prospective
borrower has sufficient monthly income available:
- to meet the borrower's monthly obligations on the proposed mortgage loan
(generally determined on the basis of the monthly payments due in the
year of origination) and other expenses related to the property (such as
property taxes and hazard insurance), and
- to meet monthly housing expenses and other financial obligations and
monthly living expenses.
The underwriting standards applied by a seller, particularly with respect to the
level of loan documentation and the borrower's income and credit history, may be
varied in appropriate cases where factors such as low combined loan-to-value
ratios or other favorable credit aspects exist.
If specified in the prospectus supplement, a portion of the loans in the
pool may have been originated under a limited documentation program. Under a
limited documentation program, more emphasis is placed on the value and adequacy
of the property as collateral and other assets of the borrower than on credit
underwriting. Under a limited documentation program, certain credit underwriting
documentation concerning income or income verification and/or employment
verification is waived. The prospectus supplement will indicate the types of
limited documentation programs pursuant to which the loans were originated and
the underwriting standards applicable to such limited documentation programs.
In the case of a loan secured by a leasehold interest in real property, the
title to which is held by a third party lessor, the seller will represent and
warrant, among other
29
things, that the remaining term of the lease and any sublease is at least five
years longer than the remaining term on the related mortgage note.
Certain of the types of loans that may be included in a trust may involve
additional uncertainties not present in traditional types of loans. For example,
certain of such loans may provide for escalating or variable payments by the
borrower. These types of 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, however, a borrower's income may not be sufficient to permit
continued loan payments as such payments increase. These types of loans may also
be underwritten primarily upon the basis of combined loan-to-value ratios or
other favorable credit factors.
QUALIFICATIONS OF SELLERS
Each seller must be an institution experienced in originating and servicing
loans of the type contained in the 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
Federal Deposit Insurance Corporation.
QUALITY CONTROL
A quality control program has been developed to monitor the quality of loan
underwriting at the time of acquisition and on an ongoing basis. All loans
purchased will be subject to this quality control program. A legal document
review of each loan acquired will be conducted to verify the accuracy and
completeness of the information contained in the mortgage notes, security
instruments and other pertinent documents in the file. A sample of loans to be
acquired, selected by focusing on those loans with higher risk characteristics,
will normally be submitted to a third party nationally recognized underwriting
review firm for a compliance check of underwriting and review of income, asset
and appraisal information.
REPRESENTATIONS BY SELLERS; REPURCHASES
Each seller will have made representations and warranties in respect of the
loans sold by such seller and evidenced by all, or a part, of a series of
securities. Such representations and warranties may include, among other things:
- that title insurance (or in the case of properties located in areas where
such policies are generally not available, an attorney's certificate of
title) and any required hazard insurance policy were effective at
origination of each loan 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;
- that the seller had good title to each such loan and such 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;
30
- 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;
- that there were no delinquent tax or assessment liens against the
property;
- that no required payment on a loan was delinquent more than the number of
days specified in the prospectus supplement; and
- that each loan was made in compliance with, and is enforceable under, all
applicable state and federal laws and regulations in all material
respects.
The servicer or the trustee 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 such
loan. Unless otherwise specified in the prospectus supplement, if such seller
cannot cure such breach within the time period specified in the prospectus
supplement following notice from the servicer or the trustee, as the case may
be, then such seller will be obligated to repurchase such loan from the trust at
a 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 servicer)
and may elect to substitute for such loan a replacement loan that satisfies the
criteria specified in the prospectus supplement.
If a REMIC election is being made with respect to a trust, the servicer,
the trustee 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 such repurchase or substitution and the trustee must have received a
satisfactory opinion of counsel that any such substitution will not cause the
trust to lose its status as a REMIC or otherwise subject the trust to a
prohibited transaction tax. 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 servicer 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.
DESCRIPTION OF THE SECURITIES
Each series of securities issued in the form of certificates will be issued
pursuant to either a pooling and servicing agreement or a trust agreement among
the depositor, the servicer and the trustee or pursuant to agreements containing
comparable provisions, as described in the prospectus supplement. A form of
pooling and servicing agreement and trust agreement have been filed as an
exhibit to the registration statement of which this prospectus forms a part.
Each series of securities issued in the form of bonds will be
31
issued pursuant to an indenture between the related trust and the entity named
in the prospectus supplement as trustee or pursuant to agreements containing
comparable provisions, as described in the prospectus supplement, and the
related loans will be serviced by the servicer pursuant to a servicing
agreement. A form of indenture 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 or bonds and certificates.
The provisions of each Agreement will vary depending upon the nature of the
securities to be issued thereunder and the nature of the trust. The following
are descriptions of the material provisions which may appear in each Agreement.
The descriptions are subject to, and are qualified in their entirety by
reference to, all of the provisions of the specific Agreement applicable to
series of securities. 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 such series addressed to the depositor, One
Belvedere Place, Mill Valley, California 94941, Attention: Secretary.
GENERAL
Unless otherwise described in the prospectus supplement, the securities of
each series:
- will be issued in book-entry or fully registered form, in the authorized
denominations specified in the prospectus supplement;
- will, in the case of certificates, evidence specified beneficial
ownership interests in the assets of the trust;
- will, in the case of notes or bonds, be secured by the assets of the
trust; and
- will not be entitled to payments in respect of the assets included in any
other trust established by the depositor.
Unless otherwise specified in the prospectus supplement, the securities
will not represent obligations of the depositor or any affiliate of the
depositor. Certain of the loans may be guaranteed or insured as set forth in the
prospectus supplement. Each trust will consist of, to the extent provided in the
related Agreement:
- the trust assets subject to the related Agreement, including all payments
of interest and principal received with respect to the loans after the
cut-off date;
- such assets as from time to time are required to be deposited in the
related Collection Account;
- 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 prospectus supplement, a trust may also include one
or more of the following: reinvestment income on payments received on the trust
assets, a reserve
32
account, a mortgage pool insurance policy, a special hazard insurance policy, a
bankruptcy bond, one or more letters of credit, a surety bond, guaranties, a
demand note 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
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 such 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 in
the 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 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 assets, in each case as specified
in the prospectus supplement. The timing and amounts of such distributions may
vary among classes or over time as specified in the 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 or
the payment agent on each payment date in proportion to the percentages
described in the prospectus supplement. Payment dates will occur either monthly,
quarterly, semi-annually or at other specified intervals and will occur on the
dates as are described in the prospectus supplement. Distributions will be made
to the persons in whose names the securities are registered at the close of
business on the record date relating to payment date. Distributions will be made
in the manner described in the prospectus supplement to the persons entitled
thereto at the address appearing in the register maintained for securityholders;
provided, however, that, unless otherwise provided in the prospectus supplement,
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 such final
distribution.
The securities will be freely transferable and exchangeable at the
corporate trust office of the trustee specified in the 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.
The sale or transfer of certain classes of securities to employee benefit
plans and retirement arrangements that are subject to the provisions of Title I
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or
Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code"), may
be restricted. The prospectus supplement for each series of securities will
describe any such restrictions.
33
As to each series, an election may be made to treat the related trust or
designated portions thereof as one or more REMICs as defined in the Code. The
prospectus supplement will specify whether a REMIC election is to be made.
Alternatively, the Agreement for a series of securities may provide that a REMIC
election may be made at the discretion of the depositor or the servicer and may
only be made if certain conditions are satisfied. As to any such series, the
terms and provisions applicable to the making of a REMIC election will be set
forth in the prospectus supplement. If such an election is made with respect to
a series of securities, one of the classes will be designated as evidencing the
sole class of residual interests in the REMIC. All other classes of securities
in such a series will constitute regular interests in the REMIC. As to each
series of securities with respect to which a REMIC election is to be made; the
servicer, the trustee and/or a holder of the residual certificate will be
obligated to take all actions required in order to comply with applicable laws
and regulations.
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 such series. 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 that 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
collection account, including any funds transferred from any reserve account. As
between securities of different classes and as between distributions of
principal (and, if applicable, between distributions of principal prepayments
and scheduled payments of principal) and interest, distributions made on any
payment date will be applied as specified in the 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 payment date
will be made from the available funds described below, in accordance with the
terms described in the prospectus supplement and specified in the Agreement.
Available funds for each payment date will generally equal the amount on deposit
in the related Collection Account on such payment date (net of related fees and
expenses payable by the related trust) other than amounts to be held therein for
distribution on future payment 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
34
from the date, at the pass-through rate or interest rate, as applicable, and for
the periods specified in the related prospectus supplement. The pass-through
rate or interest rate applicable to each class of securities will be specified
in the related prospectus supplement as either a fixed rate or adjustable rate.
Other than with respect to a class of securities that provides for interest that
accrues but is not currently payable ("accrual securities"), to the extent funds
are available for the payment of interest on a class of securities, interest
accrued during each specified period on that class of securities entitled to
interest will be distributable on the payment dates specified in the prospectus
supplement until the aggregate class security balance of those securities has
been distributed in full or, in the case of securities entitled only to
distributions allocable to interest, until the aggregate notional amount of
those securities is reduced to zero or for the period of time designated in the
prospectus supplement. Except in the case of the accrual securities, the
original class security balance of each security will equal the aggregate
distributions allocable to principal to which such 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 such 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 payment date will
include all interest accrued during the period specified in the prospectus
supplement. In the event interest accrues over a period ending two or more days
prior to a payment 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 such payment 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, as specified in the
prospectus supplement, any interest that has accrued but is not paid on a given
payment date may be added to the aggregate class security balance of such class
of securities on that payment date and thereafter may itself accrue interest as
part of the aggregate class security balance. Distributions of interest on any
class of accrual securities will commence only after the occurrence of the
events specified in such prospectus supplement. Prior to the occurrence of those
specified events, the beneficial ownership interest in the trust or the
principal balance, as applicable, of such class of accrual securities, as
reflected in the aggregate class security balance of such class of accrual
securities, will increase on each payment date by the amount of interest that
accrued on that class of accrual securities during the preceding interest
accrual period.
DISTRIBUTIONS OF PRINCIPAL.
The prospectus supplement will specify the method by which the amount of
principal to be distributed on the securities on each payment date will be
calculated and the manner in which such 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 equal the aggregate original
35
class security balance specified in the related prospectus supplement for that
class, reduced by all distributions allocable to principal previously made to
the holders of that class of securities and by any allocations of realized
losses to that class, and, in the case of accrual securities, increased by all
interest accrued but not then distributable on such accrual securities, as
specified in the prospectus supplement. The aggregate class security balance for
adjustable rate securities may also be subject to the effects of negative
amortization.
If so provided in the prospectus supplement, one or more classes of
securities will be entitled to receive all or a disproportionate percentage of
the principal prepayments made with respect to a payment date in the percentages
and under the circumstances or for the periods specified in that prospectus
supplement. This allocation of principal prepayments to that class or those
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 issued by the related trust. 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 those
other classes of securities.
UNSCHEDULED DISTRIBUTIONS.
If specified in the prospectus supplement, the securities will be subject
to receipt of distributions before the next scheduled payment date under the
circumstances and in the manner described below and in such prospectus
supplement. If applicable, the trustee will be required to make these
unscheduled distributions on the day and in the amount specified in the
prospectus supplement if, due to substantial payments of principal (including
principal prepayments, redemptions of securities or termination of the trust) on
the trust assets, the trustee or the servicer determines that the funds
available or anticipated to be available from the collection account and, if
applicable, any reserve account, on the next scheduled payment date may be
insufficient to make required distributions on the securities on that payment
date. Unless otherwise specified in the prospectus supplement, the amount of any
such 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 payment date. Unless otherwise specified in the
prospectus supplement, the unscheduled distributions will include interest at
the applicable pass-through rate, if any, or interest rate, if any, on the
portion of the unscheduled distribution that is allocable to principal for the
period and to the date specified in the prospectus supplement.
ADVANCES
To the extent provided in the prospectus supplement, the servicer will be
required to advance on or before each payment date (from its own funds, funds
advanced by subservicers or funds held in the collection 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 specified in the prospectus
supplement) and were not advanced by any subservicer,
36
subject to the servicer's determination that such advances may be recoverable
out of late payments by borrowers, liquidation proceeds, insurance proceeds or
otherwise.
In making advances, the servicer will endeavor to maintain a regular flow
of scheduled interest and principal payments to securityholders, rather than to
guarantee or insure against losses. If advances are made by the servicer from
cash being held for future distribution to securityholders, the servicer will
replace the funds advanced on or before any future payment date to the extent
that funds in the applicable collection account on that payment date would be
less than the amount required to be available for distributions to
securityholders on that date. Any funds advanced with respect to a given loan
will be reimbursable to the servicer out of recoveries on that loan (which
recoveries will include late payments made by the related borrower, any related
insurance proceeds, liquidation proceeds or proceeds of any loan purchased by
the depositor, a subservicer or a seller pursuant to the related Agreement).
Advances by the servicer (and any advances by a subservicer) also will be
reimbursable to the servicer (or subservicer) from cash otherwise distributable
to securityholders (including the holders of senior securities) to the extent
that the servicer determines that any advances previously made are not
ultimately recoverable from recoveries on the related loans.
To the extent provided in the prospectus supplement, the servicer also will
be obligated to make advances in respect of certain taxes and insurance premiums
not paid by borrowers on a timely basis, but only to the extent those advances
would be recoverable out of insurance proceeds, liquidation proceeds or
otherwise. These advances are reimbursable to the servicer to the extent
permitted by the related Agreement. The obligations of the servicer to make
advances may be supported by a cash advance reserve account, a surety bond or
other arrangement of the type described in this prospectus under "Credit
Enhancement," and in each case as described in the prospectus supplement.
To the extent provided in the prospectus supplement, the servicer will be
required to advance all funds required for draws by borrowers under revolving
lines of credit.
If specified in the prospectus supplement, in the event the servicer or a
subservicer fails to make a required advance, the trustee, in its capacity as
successor servicer, will be obligated to make the advance. If the trustee makes
this type of advance, it will be entitled to reimbursement to the same extent
and in the same manner that the servicer or a subservicer would have been
entitled to reimbursement if it had made the advance.
COMPENSATING INTEREST
Payments may be received on loans in the trust which represent either a
principal prepayment in full or a principal payment which is in excess of the
scheduled monthly payment and which is not intended to cure a delinquency. If
specified in the prospectus supplement, the servicer will be required to remit
to the trustee with respect to each of these types of payments during any due
period an amount equal to either (1) the excess, if any, of (a) 30 days'
interest on the principal balance of the related loan at the loan rate net of
the per annum rate at which the servicer's servicing fee accrues, over (b) the
amount of interest actually received on the loan during the related due period,
net of the
37
servicer's servicing fee or (2) such other amount as described in the prospectus
supplement. This amount remitted to the trustee by the servicer will be limited
to amounts otherwise payable to the servicer as servicing compensation.
REPORTS TO SECURITYHOLDERS
Prior to or concurrently with each distribution on a payment date, the
servicer or the trustee will furnish to each securityholder of record of the
related series a statement setting forth, to the extent applicable to such
series of securities, among other things:
- the amount of the distribution made on that payment date that is
allocable to principal, separately identifying the aggregate amount of
any principal prepayments and, if specified in the prospectus supplement,
any applicable prepayment penalties included therein;
- the amount of the distribution made on that payment date that is
allocable to interest;
- the amount of any advance made during the related due period;
- the aggregate amount (a) otherwise allocable to the subordinated
securityholders on that payment date, and (b) withdrawn from the reserve
account, if any, that is included in the amounts distributed to the
senior securityholders;
- the outstanding principal balance or notional amount, as applicable, of
each class of the related series after giving effect to all distributions
of principal on that payment date;
- the percentage or amount of principal payments on the loans (excluding
prepayments), if any, which each class will be entitled to receive on the
related payment date;
- the percentage or amount of principal prepayments on the loans, if any,
which each such class will be entitled to receive on the related payment
date;
- the amount of the servicing compensation retained or withdrawn from the
collection account by the servicer, and the amount of additional
servicing compensation received by the servicer attributable to
penalties, fees, excess liquidation proceeds and other similar charges
and items;
- the number and aggregate principal balances of loans which are:
- not in foreclosure but are delinquent (A) 31 to 60 days, (B) 61 to 90
days and (C) 91 or more days, as of the close of business on the last
day of the calendar month preceding that payment date; and
- in foreclosure and are delinquent (A) 31 to 60 days, (B) 61 to 90
days and (C) 91 or more days, as of the close of business on the last
day of the calendar month preceding that payment date;
- the remaining principal balance of any loan secured by real estate
acquired through foreclosure or grant of a deed in lieu of foreclosure
and held as of the last day of the calendar month preceding that payment
date;
38
- the pass-through rate or interest rate, as applicable, if adjusted from
the date of the last statement, of any such class expected to be
applicable to the next distribution to such class;
- if applicable, the amount remaining in any reserve account at the close
of business on that payment date;
- the pass-through rate or interest rate, as applicable, as of the day
prior to the immediately preceding payment date; and
- any amounts remaining under letters of credit, pool insurance policies or
other forms of credit enhancement after distributions made on that
payment date.
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 servicer or the trustee will mail to each securityholder of
record at any time during that calendar year a report of 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 generally fall into different categories. The following chart identifies
and generally defines certain of the more typical categories of security
classes. The prospectus supplement for a series of securities may identify the
classes which comprise that series by reference to the following categories.
<Table>
<Caption>
CATEGORIES OF CLASSES DEFINITION
PRINCIPAL TYPES
Accretion Directed........................ A class that receives principal payments that
are funded from collections that would have
otherwise funded interest payments on the
accreted interest from specified accrual
classes. An accretion directed class also may
receive principal payments from principal paid
on the trust assets.
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
identified as falling into one or more of the
categories in this chart.
</Table>
39
<Table>
<Caption>
CATEGORIES OF CLASSES DEFINITION
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 PACs........... A class that is designed to receive principal
payments using a predetermined principal
balance schedule derived by assuming two
constant prepayment rates for the trust
assets. These two rates are the endpoints for
the "structuring range" for the planned
principal class. The planned principal classes
in any series of securities 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 securities will
be narrower than that for the primary planned
principal class of such series.
Scheduled Principal Class................. A class that is designated 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 trust assets. Theses
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 receive payments of principal, when
amounts are available to make payments of
principal, continuously from the first payment
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.
</Table>
40
<Table>
<Caption>
CATEGORIES OF CLASSES DEFINITION
Strip..................................... A class that receives a constant proportion,
or "strip," of the principal payments on the
trust assets. The constant proportion of such
principal payments may or may not vary for
each trust asset included in the trust and
will be calculated in the manner described in
the prospectus supplement. These classes may
also receive payments of interest.
Support Class (or companion class)........ A class that receives principal payments on
any payment date only if scheduled payments
have been made on specified planned principal
classes, targeted principal classes and/or
scheduled principal classes.
Targeted Principal Class.................. A class that is designated to receive
principal payments using a predetermined
principal balance schedule derived by assuming
a single constant prepayment rate for the
trust assets.
INTEREST TYPES
Accrual................................... A class that adds accrued interest otherwise
distributable on the class to the principal
balance of the class on each applicable
payment date. The accretion may continue until
some specified event has occurred or until the
class is retired.
Fixed Rate................................ A class with a pass-through rate or 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 that
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 such
index.
</Table>
41
<Table>
<Caption>
CATEGORIES OF CLASSES DEFINITION
Interest Only or IO....................... A class that receives some or all of the
interest payments made on the trust assets and
little or no principal. Interest only
certificates 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 an amount used as a reference to calculate
the amount of interest due on an interest only
security but is never actually paid out as
principal on the class.
Partial Accrual........................... A class that adds a portion of the amount of
accrued interest thereon to the principal
balance of the class on each applicable
payment date, with the remainder of the
accrued interest to be distributed currently
as interest on the class on each applicable
payment date. The accretion of designated
amounts of the interest may continue until a
specified event has occurred or until the
class is retired.
Principal Only or PO...................... A class that does not bear interest and is
entitled to receive only distributions in
respect of principal.
Variable Rate............................. A class with a pass-through rate of 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
loans in the trust).
</Table>
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the 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,
or "beneficial owners," will hold their securities through DTC in the United
States, or Clearstream Banking, societe anonyme (formerly Cedelbank), commonly
known as Clearstream, Luxembourg, or the Euroclear system, in Europe.
Clearstream, Luxembourg and Euroclear will hold omnibus positions for
Clearstream, Luxembourg participants and Euroclear participants, respectively,
through customers' securities accounts in Clearstream, Luxembourg's and
Euroclear's names on the books of their respective depositaries. The
depositaries will hold these positions in customers' collection accounts in the
depositaries names on DTC's books. The prospectus supplement will state if the
securities will be in physical rather than book-entry form.
42
DTC is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a clearing
corporation within the meaning of the Uniform Commercial Code and a clearing
agency registered under Section 17A of the Securities Exchange Act. DTC was
created to hold securities for its participants and facilitate the clearance and
settlement of securities transactions between its participants through
electronic book-entry changes in their accounts, eliminating the need for
physical movement of certificates. DTC's participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
other organizations. Indirect access to the DTC system also is available to
indirect participants such as brokers, dealers, banks and trust companies that
clear through or maintain a custodial relationship with a DTC participant,
either directly or indirectly.
Transfers between DTC participants will occur according to DTC rules.
Transfers between Clearstream, Luxembourg participants and Euroclear
participants will occur according to their applicable rules and operating
procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Clearstream,
Luxembourg participants or Euroclear participants, on the other, will be
effected in DTC according to DTC rules on behalf of the relevant European
international clearing system by its depositary; however, those cross-market
transactions will require the counterparty to deliver instructions to the
relevant European international clearing system according to the counterparty
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 depositary to take
action to effect final settlement on its behalf by delivering or receiving
securities in DTC, and making or receiving payment according to normal
procedures for same-day funds settlement applicable to DTC. Clearstream,
Luxembourg participants and Euroclear participants may not deliver instructions
directly to the depositaries.
Because of time-zone differences, credits of securities in Clearstream,
Luxembourg or Euroclear resulting from a transaction with a DTC participant will
be made during the subsequent securities settlement processing, dated the
business day following the DTC settlement date, and the credits or any
transactions in the securities settled during the processing will be reported to
the relevant Clearstream, Luxembourg participant or Euroclear participant on
that business day. Cash received in Clearstream, Luxembourg or Euroclear
resulting from sales or securities by or through a Clearstream, Luxembourg
participant or a 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.
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.
43
Clearstream, Luxembourg holds securities for its customers and facilitates
the clearance and settlement of securities transactions between Clearstream,
Luxembourg customers through electronic book-entry changes in accounts of
Clearstream, Luxembourg customers, thereby eliminating the need for physical
movement of certificates. Transactions may be settled by Clearstream, Luxembourg
in any of 36 currencies, including U.S. dollars. Clearstream, Luxembourg
provides, 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 customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the operator of the Euroclear
System in Brussels to facilitate settlement of trades between Clearstream,
Luxembourg and Euroclear."
Euroclear was created in 1968 to hold securities for participants of
Euroclear and to clear and settle transactions between Euroclear participants
through simultaneous electronic book-entry delivery against payment, thereby
eliminating both the need for physical movement of securities and any risk from
lack of simultaneous transfers of securities and cash. Transactions may now be
settled in any of 37 currencies, including United States dollars. Euroclear
includes various other services, including securities lending and borrowing and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. Euroclear is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York, under contract with Euroclear Clearance Systems S.C., a Belgian
cooperative corporation. All operations are conducted by the Euroclear operator,
and all Euroclear securities clearance accounts and Euroclear cash accounts are
accounts with the Euroclear operator, not Euroclear Clearance. Euroclear
Clearance 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.
The Euroclear operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and
44
examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related operating procedures of the Euroclear system and applicable Belgian law.
The Terms and Conditions govern transfers of securities and cash within
Euroclear, withdrawals of securities and cash from Euroclear, and receipts of
payments with respect to securities in Euroclear. All securities in Euroclear
are held on a fungible basis without attribution of specific securities to
specific securities clearance accounts. The Euroclear operator acts under the
Terms and Conditions only on behalf of Euroclear participants, and has no record
of or relationship with persons holding through Euroclear participants.
Under a book-entry format, securityholders that are not DTC participants or
indirect participants but desire to purchase, sell or otherwise transfer
ownership of securities registered in the name of Cede, as nominee of DTC, may
do so only through participants and indirect participants. In addition, these
securityholders will receive all distributions of principal of and interest on
the securities from the trustee through DTC and its participants.
Securityholders may receive payments after the payment date because DTC will
forward these payments to its participants, which thereafter will be required to
forward these payments to indirect participants or securityholders. Unless and
until physical securities are issued, it is anticipated that the only
securityholder will be Cede, as nominee of DTC, and that the beneficial holders
of securities will not be recognized by the trustee as securityholders under the
Agreements. Securityholders which are not DTC participants will only be
permitted to exercise their rights under the Agreements through DTC or through
its participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among its
participants and is required to receive and transmit payments of principal of
and interest on the securities. DTC's participants and indirect participants are
required to make book-entry transfers and receive and transmit payments on
behalf of their respective securityholders. Accordingly, although
securityholders will not possess physical securities, the rules provide a
mechanism by which securityholders will receive distributions and will be able
to transfer their interests.
Unless and until physical securities are issued, securityholders who are
not DTC participants may transfer ownership of securities only through DTC
participants by instructing those participants to transfer securities, through
DTC for the account of the purchasers of the securities, which account is
maintained with their respective participants. Under DTC's 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. Similarly, the respective participants will
make debits or credits, as the case may be, on their records on behalf of the
selling and purchasing securityholders.
Because DTC can only act on behalf of its participants, who in turn act on
behalf of indirect participants and some banks, the ability of a securityholder
to pledge securities
45
to persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of the securities may be limited due to the lack of a
physical certificate for the securities.
DTC advises that it will take any action permitted to be taken by a
securityholder under the Agreements only at the direction of one or more of its
participants to whose account the securities are credited. Additionally, DTC
advises that it will take actions only at the direction of and on behalf of its
participants whose holdings include current principal amounts of outstanding
securities that satisfy the minimum percentage established in the Agreements.
DTC may take conflicting actions if directed by its participants.
Any securities initially registered in the name of Cede, as nominee of DTC,
will be issued in fully registered, certificated form to securityholders or
their nominees, rather than to DTC or its nominee only under the events
specified in the Agreements and described in the prospectus supplement. Upon the
occurrence of any of the events specified in this prospectus or in the
Agreements and the prospectus supplement, DTC will be required to notify its
participants of the availability through DTC of physical certificates. Upon
surrender by DTC of the securities and receipt of instruction for re-
registration, the trustee will issue the securities in the form of physical
certificates, and thereafter the trustee will recognize the holders of the
physical certificates as securityholders. Thereafter, payments of principal of
and interest on the securities will be made by the trustee directly to
securityholders in accordance with the procedures set forth in the Agreements.
The final distribution of any security whether physical certificates or
securities registered in the name of Cede, however, will be made only upon
presentation and surrender of the securities on the final payment date at the
office or agency specified in the notice of final payment to securityholders.
None of the depositor, the servicer, any finance subsidiary, or the trustee
will have any liability for any actions taken by DTC or its nominee or Cedel or
Euroclear, including, without limitation, actions for any aspect of the records
relating to or payments made on account of the securities held by Cede, as
nominee for DTC, or for maintaining, supervising or reviewing any records
relating to the securities.
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 assets. Credit
enhancement may be in the form of:
- the subordination of one or more classes of the securities of such
series;
- a limited financial guaranty policy issued by an entity named in the
prospectus supplement;
- the establishment of one or more reserve accounts;
46
- the use of a cross-collateralization feature;
- use of a mortgage pool insurance policy;
- excess spread,
- over-collateralization;
- letter of credit;
- guaranteed investment contract;
- primary mortgage insurance,
- other pledged assets,
- corporate guarantees,
- surety bond;
- special hazard insurance policy;
- bankruptcy bond;
- FHA insurance or VA guarantee;
- another method of credit enhancement contemplated in this prospectus and
described in the prospectus supplement; and
- any combination of the foregoing.
Unless otherwise specified in the prospectus supplement, 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 on the
securities. 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.
If specified in the prospectus supplement, the coverage provided by one or
more of the forms of credit enhancement described in this prospectus may apply
concurrently to two or more separate trusts. If applicable, the prospectus
supplement will identify the trusts to which such credit enhancement relates and
the manner of determining the amount of coverage provided to those trusts by the
credit enhancement and of the application of that coverage to the related
trusts.
SUBORDINATION
If specified in the prospectus supplement, protection afforded to holders
of one or more classes of securities of a series may be made by means of a
subordination feature. This protection may be accomplished by providing a
preferential right to holders of senior securities in a series to receive
distributions in respect of scheduled principal, principal prepayments, interest
or any combination thereof that otherwise would have been payable to holders of
subordinate securities in that series, under the circumstances and to the extent
specified in the prospectus supplement. Subordination protection may also be
afforded to the holders of senior securities by reducing the ownership interest
(if
47
applicable) of the related subordinate securities, which protection may or may
not be in conjunction with the protection described in the immediately preceding
sentence. Finally, protection may be afforded to the holders of senior
securities by application of a subordination feature in another manner as
described in the prospectus supplement.
If a subordination feature is present with respect to a given series,
delays in receipt of scheduled payments on the loans and losses on defaulted
loans may be borne first by the various classes of subordinate securities and
only 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 subordinate securities by
virtue of subordination and the amount of the distributions otherwise
distributable to the subordinate securityholders that will be distributable to
senior securityholders on any payment date all may be limited as specified in
the prospectus supplement. If aggregate distributions in respect of delinquent
payments on the loans or aggregate losses in respect of the related loans were
to exceed the amount specified in the prospectus supplement, then holders of
senior securities would experience losses.
As specified in the prospectus supplement, all or any portion of
distributions otherwise payable to holders of subordinate securities on any
payment date may instead be deposited into one or more reserve accounts
established with the trustee or distributed to holders of senior securities. The
prospectus supplement will describe whether deposits are made into a reserve
account on each payment date, only during specified periods, only until the
balance in the related reserve account has reached a specified amount, only to
replenish amounts in the related reserve account following payments from the
reserve account to holders of senior securities or otherwise. Amounts on deposit
in a reserve account may be released to the holders of certain classes of
securities at the times and under the circumstances specified in the prospectus
supplement.
If specified in the prospectus supplement, various classes of senior
securities and subordinate securities may themselves be subordinate in their
right to receive certain distributions to other classes of senior and
subordinate securities, respectively, through a cross-collateralization
mechanism or otherwise. As between classes of senior securities and as between
classes of subordinate securities, distributions may be allocated among the
classes:
- in the order of their scheduled final payment dates;
- in accordance with a schedule or formula;
- in relation to the occurrence of events; or
- otherwise, as specified in the prospectus supplement.
As between classes of subordinate securities, payments to holders of senior
securities on account of delinquencies or losses and payments to any reserve
account will be allocated as specified in the prospectus supplement.
48
INSURANCE POLICIES, SURETY BONDS, AND GUARANTIES
If provided in the prospectus supplement, deficiencies in amounts otherwise
payable on the securities or certain classes of securities will be covered by
insurance policies and/or surety bonds provided by one or more insurance
companies or sureties. These instruments may cover, with respect to one or more
classes of securities, 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 prospectus supplement.
In addition, if specified in the prospectus supplement, a trust may also include
a bankruptcy bond, a special hazard insurance policy, a demand note or other
insurance or guaranties for the purpose of:
- maintaining timely payments or providing additional protection against
losses on the assets included in such trust;
- paying administrative expenses; or
- establishing a minimum reinvestment rate on the payments made in respect
of those assets or 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 of these
types of instruments 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 Commission within 15 days of
issuance of the securities.
CROSS SUPPORT
If specified in the prospectus supplement, separate groups of assets
included in a trust may be evidenced by or secure only specified classes of the
related series of securities. If this is the case, credit support may be
provided by a cross support feature. This cross support feature would require
that cashflow received with respect to a particular group of assets first be
distributed as payments on the class of securities specifically related to those
assets, but after the necessary payments with respect to that class were made,
remaining cashflow from those assets would be available to make payments on one
or more other classes issued by the same trust. The prospectus supplement for a
series of securities which includes a cross support feature will describe the
manner and conditions for applying this cross support feature.
RESERVE ACCOUNTS
If specified in the prospectus supplement, credit support with respect to a
series of securities will be provided by the establishment and maintenance with
the related trustee, in trust, of one or more reserve accounts for the series.
The prospectus supplement will specify whether or not any reserve accounts so
established will be included in the trust for such series.
49
Amounts deposited in the reserve account for a series will be specified in
the prospectus supplement and may include:
- 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 of the foregoing in an
aggregate amount specified in the prospectus supplement; or
- amounts generated by the trust assets deposited from time to time to
which the subordinate securityholders, if any, would otherwise be
entitled.
Any amounts on deposit in the reserve account and the proceeds of any other
instrument deposited therein upon maturity will be held in cash or will be
invested in investments consisting of United States government securities and
other high-quality investments ("permitted investments"). Any instrument
deposited in a reserve account will name the trustee, in its capacity as trustee
for securityholders, or such other entity as is specified in the prospectus
supplement, as beneficiary and will be issued by an entity acceptable to each
rating agency that rates the securities. Additional information with respect to
instruments deposited in the reserve accounts will be set forth in the
prospectus supplement.
Any amounts on deposit in the reserve accounts and payments on instruments
deposited therein will be available for withdrawal from the reserve account for
distribution to the holders of securities of the related series for the
purposes, in the manner and at the times specified in the prospectus supplement.
POOL INSURANCE POLICIES
If specified in the prospectus supplement, a separate pool insurance policy
will be obtained for the pool and issued by the credit enhancer 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 those loans on the cut-off
date. As more fully described below, the servicer will present claims under the
pool insurance policy to the credit enhancer 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 pool insurance
policies generally will not cover losses due to a failure to pay or denial of a
claim under a primary mortgage insurance policy.
The pool insurance policies generally will provide that no claims may be
validly presented unless:
- any required primary mortgage insurance policy is in effect for the
defaulted loan and a claim thereunder has been submitted and settled;
- hazard insurance on the related property has been kept in force and real
estate taxes and other protection and preservation expenses have been
paid;
50
- 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
- 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 credit enhancer will have the
option either:
- 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 such purchase and certain expenses incurred by
the servicer on behalf of the trustee and securityholders, net of certain
amounts paid or assumed to have been paid under the related primary
mortgage insurance policy; or
- 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, 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 servicer will
not be required to expend its own funds to restore the damaged property unless
it determines that (a) such a restoration will increase the proceeds to
securityholders on liquidation of the loan after reimbursement of the servicer
for its expenses and (b) those expenses it incurs 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.
Like many primary insurance policies, the pool insurance policies may not
insure against loss sustained by reason of default arising from, among other
things:
- fraud or negligence in the origination or servicing of a loan, including
misrepresentation by the borrower, the originator or persons involved in
the origination of the loan;
- failure to construct a property in accordance with plans and
specifications or
- losses arising from special hazards, such as earthquakes, floods,
mudslides or vandalism.
A failure of coverage attributable to one of these events might result in a
breach of the related seller's representations regarding the loan and might give
rise to an obligation on the part of the seller to repurchase the defaulted loan
if it is unable to cure the breach. Many primary mortgage policies do not cover,
and no pool insurance policy will cover, a claim in respect of a defaulted loan
if the servicer of the loan was not approved by the applicable insurer either at
the time of default or thereafter.
51
The amount of coverage available under each pool insurance policy generally
will be reduced over the life of the related securities by the positive
difference, if any, between the aggregate dollar amount of claims paid under the
pool insurance policy minus the aggregate of the net amounts realized by the
credit enhancer upon disposition of the related foreclosed properties. The
amount of claims paid will include certain expenses incurred by the servicer as
well as accrued interest on delinquent loans to the date of payment of the claim
or another date set forth in the prospectus supplement. 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.
OVER-COLLATERALIZATION
Over-collateralization exists when the principal balance of the loans
supporting a class or classes of securities exceeds the principal balance of the
class or classes of securities themselves. If provided for in the prospectus
supplement, a portion of the interest payment received on the loans during a due
period may be paid to the securityholders on the related payment date as an
additional distribution of principal on a certain class or classes of
securities. This payment of interest as principal would accelerate the rate of
payment of principal on the class or classes of securities relative to the
principal balance of the loans in the related trust and thereby create or
increase over-collateralization.
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 prospectus
supplement. Under the letter of credit, the issuing 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
prospectus supplement of the aggregate principal balance of the loans on the
related cut-off date or of one or more classes of securities. If specified in
the 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 issuing Bank under the letter of credit for each series of
securities will expire at the earlier of the date specified in the prospectus
supplement or the termination of the trust. A copy of the letter of credit for a
series, if any, will be filed with the SEC as an exhibit to a Current Report on
Form 8-K to be filed within 15 days of issuance of the securities of the related
series.
52
OTHER INSURANCE, GUARANTIES, LETTERS OF CREDIT, AND SIMILAR INSTRUMENTS OR
AGREEMENTS
If specified in the prospectus supplement, a trust may also include
insurance, guaranties, letters of credit or similar arrangements for the purpose
of:
- maintaining timely payments or providing additional protection against
losses on the assets included in the trust;
- paying administrative expenses; or
- establishing a minimum reinvestment rate on the payments made in respect
of those assets or 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.
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 assets. The original terms to maturity of the loans in a
given pool will vary depending upon the type of loans included therein. Each
prospectus supplement will contain information with respect to the type and
maturities of the loans in the related pool. The 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 securities.
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, such loans are more
likely to be subject to higher prepayment rates than if prevailing interest
rates remain at or above such loan rates. Conversely, if prevailing interest
rates rise appreciably above the loan rates borne by the loans, such loans are
more likely to experience a lower prepayment rate than if prevailing rates
remain at or below such loan rates. However, there can be no assurance that such
will be the case.
The rate of prepayment on the loans cannot be predicted. Home equity loans
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 such loans. Generally, home equity loans are not
viewed by borrowers as permanent financing. Accordingly, such 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
53
traditional fully-amortizing first mortgage loans. The prepayment experience of
the trust may be affected by a wide variety of factors, including:
- general economic conditions;
- prevailing interest rate levels;
- availability of alternative financing;
- homeowner mobility;
- for junior liens, 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.
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 yield to an investor who purchases securities in the secondary market
at a price other 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 home equity loans may vary because, among other things,
borrowers may:
- 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 such month;
- make payments as high as the entire outstanding principal balance plus
accrued interest and the fees and charges thereon;
- fail to make the required periodic payments; or
- vary payments month to month due to seasonal purchasing and other
personal payment habits.
When a full prepayment is made on a loan, the borrower is charged interest
on the principal amount of the prepaid loan not for the entire month in which
the prepayment is made, but only for the number of days in the month actually
elapsed up to the date of the prepayment. The effect of prepayments in full will
be to reduce the amount of interest passed through or paid in the following
month to securityholders because interest on the principal amount of any prepaid
loan 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
prepaid loans on the first day of the month of receipt or the
54
month following receipt. In the latter case, partial prepayments will not reduce
the amount of interest passed through or paid in the month in which the partial
prepayment was made. Generally, neither full nor partial prepayments will be
passed through or paid to securityholders 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, which would give rise to corresponding delays in the receipt by
securityholders of the proceeds of a liquidation. 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 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 servicer will be entitled to deduct from related liquidation proceeds all
expenses reasonably incurred in attempting to recover amounts due and not yet
repaid on defaulted loans, 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 mortgage loan
being liquidated. Therefore, assuming that a servicer took the same steps in
realizing upon a defaulted mortgage loan having a small outstanding principal
balance as it would in the case of a defaulted mortgage loan having a large
outstanding principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the outstanding principal balance for the
former mortgage loan as opposed to the latter.
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 such 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 accrue on
each loan from the first day of the month (unless otherwise specified in the
prospectus supplement), the distribution of such interest will not be made
earlier than the month following the month of accrual.
Under certain circumstances, the servicer, the depositor, the holders of
the residual interests in a REMIC or any person specified in the prospectus
supplement may be obligated to or may have the option to purchase either the
assets of a trust or some or all of the securities and thereby effect earlier
retirement or redemption of the related series of securities.
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 assets at any time or over the lives of the securities.
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The prospectus supplement 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 the
Agreements which are not described elsewhere in this prospectus. The description
is subject to, and qualified in its entirety by reference to, the provisions of
each Agreement. Where particular provisions or terms used in the Agreements are
referred to, such provisions or terms are as specified in the Agreements. As
specified in the related prospectus supplement, certain of the rights of
securityholders described below may be exercised by the credit enhancer for the
related series of securities without the consent of the securityholders and
certain rights of securityholders may not be exercised without the written
consent of the credit enhancer.
ASSIGNMENT OF THE TRUST ASSETS
ASSIGNMENT OF THE LOANS. At the time of issuance of the securities, the
depositor will cause the loans to be assigned or pledged to the trustee for the
benefit of the securityholders, without recourse, together with all principal
and interest received by or on behalf of the depositor on or with respect to
such loans after the cut-off date, other than principal and interest due on or
before the cut-off date and other than any amounts specified in the prospectus
supplement. Concurrently with this sale, the trustee will 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. Such 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 annual percentage rate, the maturity of
the loan, the loan-to-value ratios, combined loan-to-value ratios or effective
loan-to-value ratios, as applicable, at origination and certain other
information.
Unless otherwise specified in the prospectus supplement, the related
Agreement will require that, within the time period specified therein, the
depositor will also deliver or cause to be delivered to the trustee or, if so
indicated in the prospectus supplement, a separate custodian appointed by the
trustee pursuant to a custodial agreement, as to each mortgage loan or home
equity loan, among other things:
- the mortgage note or credit line agreement endorsed without recourse in
blank or to the order of the trustee;
- the mortgage, deed of trust or similar instrument with evidence of
recording indicated thereon, except that in the case of any mortgage not
returned form the public recording office, the depositor will deliver or
cause to be delivered a copy of such mortgage together with a certificate
that the original of the mortgage was delivered to such recording office;
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- an assignment of the mortgage to the trustee, which assignment will be in
recordable form in the case of a mortgage assignment; and
- all other security documents, including those relating to any senior
interests in the property, that are specified in the prospectus
supplement or the related Agreement.
If specified in the prospectus supplement, the depositor will promptly
cause the assignments of the loans to be recorded in the appropriate public
office for real property records. If specified in the prospectus supplement,
some or all of the loan documents may not be delivered to the trustee until
after the occurrence of certain events specified in the prospectus supplement.
In lieu of delivering the mortgage or deed of trust and an assignment of
the mortgage to the trustee, for any loans registered on the MERS(R) System the
depositor will cause the trustee to be recorded as the beneficial owner of the
loans pursuant to the MERS rules for electronically tracking changes in
ownership rights.
The trustee or the appointed custodian will review the loan documents
within the time period specified in the prospectus supplement after receipt
thereof to ascertain that all required documents have been properly executed and
received, and the trustee will hold the loan documents in trust for the benefit
of the related securityholders. Unless otherwise specified in the prospectus
supplement, if any loan document is found to be missing or defective in any
material respect, the trustee or the custodian, as appropriate, will notify the
servicer and the depositor, and the servicer will notify the related seller. If
the related seller cannot cure the omission or defect within the time period
specified in the prospectus supplement after receipt of notice from the
servicer, the seller will be obligated to either purchase the related loan from
the trust at the purchase price or, if so specified in the prospectus
supplement, remove such loan from the trust and substitute in its place one or
more other loans that meets certain requirements as set forth in the prospectus
supplement. There can be no assurance that a seller will fulfill this purchase
or substitution obligation. Unless otherwise specified in the prospectus
supplement, 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 loan document.
Notwithstanding the foregoing provisions, with respect to a trust 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.
NO RECOURSE TO SELLERS; DEPOSITOR OR SERVICER. As described above under
"-- Assignment of the Loans," the depositor will cause the loans comprising the
trust to be assigned or pledged to the trustee, without recourse. However, each
seller will be obligated to repurchase or substitute for any loan as to which
certain representations and warranties are breached or for failure to deliver
certain documents relating to the loans as described in this prospectus under
"Assignment of the Loans" and "Loan Program -- Representations by Sellers;
Repurchases." These obligations to purchase or substitute constitute the sole
remedy available to the securityholders or the trustee for a breach of any such
representation or warranty or failure to deliver a constituent document.
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PAYMENTS ON LOANS; DEPOSITS TO COLLECTION ACCOUNT
The servicer will establish and maintain or cause to be established and
maintained with respect to the each trust a separate account or accounts for the
collection of payments on the trust assets in the trust (the "collection
account"). The prospectus supplement may provide for other requirements for the
collection account, but if it does not, then the collection account must be
either:
- maintained with a depository institution the short-term debt obligations
of which (or, in the case of a depository institution that is the
principal subsidiary of a holding company, the short-term debt
obligations of such holding company) are rated in one of the two highest
short-term rating categories by the rating agency that rated one or more
classes of the related series of securities;
- an account or accounts the deposits in which are fully insured by the
FDIC;
- an account or accounts the deposits in which are insured by the FDIC 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,
securityholders have a claim with respect to the funds in such account or
accounts, 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 such account or accounts are maintained; or
- an account or accounts otherwise acceptable to the rating agency.
The collateral eligible to secure amounts in the collection account is
limited to permitted investments. A collection account may be maintained as an
interest bearing account or the funds held therein may be invested pending each
succeeding payment date in Permitted Investments. The servicer, the trustee or
any other entity described in the prospectus supplement may be entitled to
receive interest or other income earned on funds in the collection account as
additional compensation and will be obligated to deposit in the collection
account the amount of any loss when realized. The collection account may be
maintained with the servicer or with a depository institution that is an
affiliate of the servicer, provided it meets the standards set forth above.
The servicer or trustee will deposit or cause to be deposited in the
collection account for each trust, to the extent applicable and unless otherwise
specified in the prospectus supplement and provided in the related Agreement,
the following payments and collections received or advances made by or on behalf
of it subsequent to the cut-off date (other than certain payments due on or
before the cut-off date and any excluded amounts):
- all payments on account of principal and interest (which may be net of
the applicable servicing compensation), including principal prepayments
and, if specified in the prospectus supplement, any applicable prepayment
penalties, on the loans;
- all net insurance proceeds, less any incurred and unreimbursed advances
made by the servicer, of the hazard insurance policies and any primary
mortgage insurance policies, to the extent such proceeds are not applied
to the restoration of the
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property or released to the mortgagor in accordance with the servicer's
normal servicing procedures;
- all proceeds received in connection with the liquidation of defaulted
loans, less any expenses of liquidation and any unreimbursed advances
made by the servicer with respect to the liquidated loans;
- 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;
- all advances as described in this prospectus under "Description of the
Securities -- Advances";
- all proceeds of any loan or property in respect thereof repurchased by
any seller as described under "Loan Program -- Representations by
Sellers; Repurchases" or "-- Assignment of Trust Assets" above and all
proceeds of any loan repurchased as described under "-- Termination;
Optional Termination" below;
- all payments required to be deposited in the collection account with
respect to any deductible clause in any blanket insurance policy
described under "-- Hazard Insurance" below;
- any amount required to be deposited by the servicer in connection with
losses realized on investments for the benefit of the servicer of funds
held in the collection account and, to the extent specified in the
prospectus supplement, any payments required to be made by the servicer
in connection with prepayment interest shortfalls; and
- all other amounts required to be deposited in the collection account
pursuant to the related agreement.
The servicer or the depositor, as applicable, may from time to time direct
the institution that maintains the collection account to withdraw funds from the
collection account for the following purposes:
- to transfer funds for the trustee for distribution of payments due on the
securities and other purposes set forth in the prospectus supplement;
- to pay to the servicer the purchase price of any additional balances
transferred to the trustee resulting from draws under revolving lines of
credit as set forth in the prospectus supplement;
- to pay to the servicer the servicing fees described in the prospectus
supplement and, as additional servicing compensation, earnings on or
investment income with respect to funds in the collection account
credited thereto;
- to reimburse the servicer for advances made with respect to a loan, but
only from amounts received that represent late payments of principal on,
late payments of interest on, insurance proceeds received with respect to
or liquidation proceeds received with respect to the same loan;
- to reimburse the servicer for any advances previously made which the
servicer has determined to be nonrecoverable;
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- to reimburse the servicer from insurance proceeds for expenses incurred
by the servicer and covered by insurance policies;
- to reimburse the servicer for unpaid servicing fees and unreimbursed
out-of-pocket costs and expenses incurred by the servicer in the
performance of its servicing obligations, such right of reimbursement
being limited to amounts received representing late recoveries of the
payments for which the original advances were made;
- to pay to the servicer, with respect to each loan or property acquired in
respect thereof that has been purchased by the servicer pursuant to the
Agreement, all amounts received thereon and not taken into account in
determining the principal balance of that repurchased loan,
- to reimburse the servicer or the depositor for expenses incurred and
reimbursable pursuant to the Agreement;
- to pay or reimburse the trustee or any other party as provided in the
prospectus supplement;
- to withdraw any amount deposited in the collection account that was not
required to be deposited therein; and
- to clear and terminate the collection account upon termination of the
Agreement.
In addition, unless otherwise specified in the prospectus supplement, on or
prior to the business day immediately preceding each payment date, the servicer
shall withdraw from the collection account the amount of available funds, to the
extent on deposit, for deposit in an account maintained by the trustee.
The applicable Agreement may require the servicer to establish and maintain
one or more escrow accounts into which mortgagors deposit amounts sufficient to
pay taxes, assessments, hazard insurance premiums or comparable items.
Withdrawals from the escrow accounts maintained for mortgagors may be made to
effect timely payment of taxes, assessments and hazard insurance premiums or
comparable items, to reimburse the servicer out of related assessments for
maintaining hazard insurance, to refund to mortgagors amounts determined to be
overages, to remit to mortgagors, if required, interest earned, if any, on
balances in any of the escrow accounts, to repair or otherwise protect the
property and to clear and terminate any of the escrow accounts. The servicer
will be solely responsible for administration of the escrow accounts and will be
expected to make advances to such accounts when a deficiency exists therein.
PRE-FUNDING ACCOUNT
If provided in the prospectus supplement, the servicer will establish and
maintain, in the name of the trustee on behalf of the securityholders, a
pre-funding account into which the depositor will deposit cash or other assets
on the closing date. The pre-funding account will be maintained with the
trustee. The deposit will not exceed 50% of the initial aggregate principal
amount of the securities.
The cash on deposit in the pre-funding account will be used by the trustee
to purchase additional loans for the trust from the depositor from time to time
during the funding period. Monies on deposit in the prefunding account will not
be available to
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cover losses on or in respect of the loans. The funding period for a trust will
begin on the closing date and will end on the date specified in the prospectus
supplement, which will not be later than one year after the closing date. Monies
on deposit in the pre-funding account may be invested in permitted investments
as specified in the related Agreement. Earnings on investment of funds in the
pre-funding account will be applied as specified in the prospectus supplement
and losses will be charged against the funds on deposit in the pre-funding
account. Any amounts remaining the pre-funding account at the end of the funding
period will be distributed to securityholders as a prepayment of principal, in
the manner and priority specified in the prospectus supplement.
In addition, if provided in the prospectus supplement, on the related
closing date the depositor will make a deposit to a capitalized interest
account, which will be maintained by the trustee. The funds on deposit in the
capitalized interest account will be used solely to cover shortfalls in interest
that may arise as a result of utilization of the pre-funding account. Monies on
deposit in the capitalized interest account will not be available to cover
losses on or in respect of the loans. To the extent that the entire amount on
deposit in the capitalized interest account has not been used to cover
shortfalls in interest by the end of the funding period, any remaining amounts
will be paid to the depositor.
SUBSERVICING BY SELLERS
The servicer may enter into subservicing agreements with any servicing
entity which will act as the subservicer for the loans, which subservicing
agreements will not contain any terms inconsistent with the related Agreement.
While each subservicing agreement will be a contract solely between the servicer
and the subservicer, the Agreement pursuant to which a series of securities is
issued will provide that, if for any reason the servicer for that series of
securities is no longer the servicer of the loans, the trustee or any successor
servicer must recognize the subservicer's rights and obligations under the
related subservicing agreement. Notwithstanding any subservicing arrangement,
unless otherwise provided in the prospectus supplement, the servicer will remain
liable for its servicing duties and obligations under the servicing agreement as
if the servicer alone were servicing the loans.
COLLECTION PROCEDURES
The servicer, directly or through one or more subservicers, 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, bankruptcy bond or alternative
arrangements, follow those collection procedures that are customary with respect
to loans that are comparable to the loans. Consistent with the above, the
servicer may, in its discretion:
- waive any prepayment charge, assumption fee, late payment or other charge
in connection with a loan; and
- to the extent not inconsistent with the rules applicable to REMIC, and
with the coverage of an individual loan by a pool insurance policy,
primary mortgage insurance policy, FHA insurance, VA guaranty, bankruptcy
bond or alternative arrangements, if applicable, suspend or reduce
regular monthly payment on the
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loan for a period of up to six months, or arrange with the related
borrower a schedule for the liquidation of delinquencies.
The servicer's obligation, if any, to make or cause to be made advances on a
loan will remain during any period of this type of arrangement.
Under the Agreement, the servicer will be required to enforce due-on-sale
clauses with respect to any loans to the extent contemplated by the terms of
those loans and permitted by applicable law. Where an assumption of, or
substitution of liability with respect to, a loan is required by law, upon
receipt of assurance that the primary mortgage insurance policy covering such
loan will not be affected, the servicer may permit the assumption of a loan,
pursuant to which the original borrower would remain liable on the related loan
note, or a substitution of liability with respect to the loan, pursuant to which
the new borrower would be substituted for the original borrower as being liable
on the loan note. Any fees collected for entering into an assumption or
substitution of liability agreement may be retained by the servicer as
additional servicing compensation. In connection with any assumption or
substitution, generally neither the loan rate borne by the related loan note nor
its payment terms may be changed.
HAZARD INSURANCE
Except as otherwise specified in the prospectus supplement, the servicer
will require the mortgagor or obligor on each loan to maintain a hazard
insurance policy providing coverage against loss by fire and other hazards which
are covered under the standard extended coverage endorsement customary for the
type of property in the state in which such property is located. This hazard
insurance coverage will be in an amount that is at least equal to the lesser of:
- the maximum insurable value of the improvements securing the loan from
time to time; and
- either the combined principal balance owing on the loan and any mortgage
loan senior to such loan or an amount such that the proceeds of the
policy shall be sufficient to prevent the mortgagor or obligor and/or the
lender from becoming a co-insurer, whichever is greater.
All amounts collected by the 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 servicer's normal servicing
procedures) will be deposited in the related collection account. In the event
that the servicer maintains a blanket policy insuring against hazard losses on
all the loans comprising part of a trust, it will conclusively be deemed to have
satisfied its obligation relating to the maintenance of hazard insurance. If the
blanket policy relating to a trust contains a deductible clause, the servicer
will be required to deposit from its own funds into the collection account an
amount equal to the amount which would have been deposited therein but for the
deductible clause.
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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 listed 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 of these types of policies are dictated by respective state
laws, and most hazard policies typically do not cover (among other things) 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; or
- theft and, in certain cases, vandalism.
The foregoing list is merely indicative of certain kinds of uninsured risks and
is not intended to be all inclusive.
If, however, any mortgaged property at the time of origination of the
related loan is located in an area identified by the Flood Emergency Management
Agency as having special flood hazards and flood insurance has been made
available, the servicer will cause to be maintained with a generally acceptable
insurance carrier a flood insurance policy in accordance with mortgage servicing
industry practice. Any flood insurance policy so maintained will provide
coverage in an amount at least equal to the lesser of the principal balance of
the loan and the minimum amount required under the terms of coverage to
compensate for any damage or loss on a replacement cost basis. The amount of
coverage provided will not be greater than the maximum amount of flood insurance
available for the related mortgaged property under either the regular or
emergency programs of the National Flood Insurance Program.
The hazard insurance policies covering properties securing the loans
typically contain a clause which in effect requires the insured at all times to
carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the 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 (a) the replacement costs of the improvements less physical
depreciation and (b) 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 servicer may cause to be
maintained on the
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improvements securing a loan declines as the principal balances owing on the
loan itself 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.
PRIMARY MORTGAGE INSURANCE
The servicer will maintain or cause to be maintained, as the case may be
and as permitted by law, in full force and effect, to the extent specified in
the prospectus supplement, a primary mortgage insurance policy with regard to
each loan for which that coverage is required. Unless required by law, the
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 that series that
have been rated.
Although the terms and conditions of primary mortgage insurance vary, the
amount of a claim for benefits under a primary mortgage insurance policy
covering a mortgage loan will consist of the insured percentage of the unpaid
principal amount of the covered loan and accrued and unpaid interest on the loan
and reimbursement of certain expenses, less:
- all rents or other payments collected or received by the insured (other
than the proceeds of hazard insurance) that are derived from or in any
way related to the property;
- hazard insurance proceeds in excess of the amount required to restore the
property and which have not been applied to the payment of the loan;
- amounts expended but not approved by the insurer of the related primary
mortgage insurance policy;
- claim payments previously made by the insurer; and
- unpaid premiums.
Primary mortgage insurance policies reimburse certain losses sustained by
reason of default in payments by borrowers. Primary mortgage insurance policies
will not insure against, and exclude from coverage, losses sustained by reason
of a default arising from or involving certain matters, including:
- fraud or negligence in origination or servicing of the loans, including
misrepresentation by the originator, mortgagor (or obligor) or other
persons involved in the origination of the loan;
- failure to construct the property subject to the loan in accordance with
specified plans;
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- physical damage to the property; and
- the related subservicer not being approved as a servicer by the insurer.
Evidence of each primary mortgage insurance policy will be provided to the
trustee simultaneously with the transfer to the trustee of the loan. The
servicer, on behalf of itself, the trustee and the securityholders, is required
to present claims to the insurer under any primary mortgage insurance policy and
to take reasonable steps that are necessary to permit recovery thereunder with
respect to defaulted loans. Amounts collected by the servicer on behalf of the
servicer, the trustee and the securityholders shall be deposited in the related
collection account for distribution as set forth above.
CLAIMS UNDER INSURANCE POLICIES AND OTHER REALIZATION UPON DEFAULTED LOANS
The servicer or subservicers, on behalf of the trustee and securityholders,
will present claims to the insurer under any applicable insurance policies. 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 servicer is not required to expend its own funds to restore the
damaged property unless it determines (a) that such restoration will increase
the proceeds to securityholders on liquidation of the loan after reimbursement
of the servicer for its expenses and (b) that the expenditure will be
recoverable by it from related insurance proceeds or liquidation proceeds.
If recovery on a defaulted loan under any insurance policy is not
available, or if the defaulted loan is not covered by an insurance policy, the
servicer will be obligated to follow or cause to be followed those normal
practices and procedures that it deems necessary or advisable to realize upon
the defaulted loan. If the net proceeds after reimbursable expenses of any
liquidation of the property securing the defaulted loan are less than the
principal balance of the loan plus interest accrued thereon that is payable to
securityholders, the trust will realize a loss in the amount of that difference
plus the aggregate of expenses incurred by the servicer in connection with the
liquidation proceedings and which are reimbursable under the Agreement.
The proceeds from any liquidation of a loan will be applied in the
following order of priority:
- first, to reimburse the servicer for any unreimbursed expenses incurred
by it to restore the related property and any unreimbursed servicing
compensation payable to the servicer with respect to the loan;
- second, to reimburse the 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.
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SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The servicer's primary compensation for its activities as servicer will
come from the payment to it, with respect to each interest payment on a loan, of
the amount specified in the prospectus supplement. As principal payments are
made on the loans, the portion of each monthly payment which represents interest
will decline, and thus servicing compensation to the servicer will decrease as
the loans amortize. Prepayments and liquidations of loans prior to maturity will
also cause servicing compensation to the servicer to decrease. Subservicers, if
any, will be entitled to a monthly servicing fee as described in the prospectus
supplement in compensation for their servicing duties. In addition, the servicer
or subservicer 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 collection
account (unless otherwise specified in the prospectus supplement).
The servicer will pay or cause to be paid certain ongoing expenses
associated with each trust and incurred by it in connection with its
responsibilities under the related Agreement, including, without limitation, and
only if specified in the prospectus supplement, payment of any fee or other
amount payable in respect of any credit enhancement arrangements, the trustee,
any custodian appointed by the trustee, the certificate registrar and any paying
agent, and payment of expenses incurred in enforcing the obligations of
subservicers and sellers. The servicer will be entitled to reimbursement of
expenses incurred in enforcing the obligations of subservicers and sellers under
certain limited circumstances.
EVIDENCE AS TO COMPLIANCE
Each Agreement will provide that the servicer at its expense shall cause a
firm of independent public accountants to furnish a report annually to the
trustee. Each annual report will state that the firm has performed certain
procedures specified in the related Agreement and that the review has disclosed
no items of noncompliance with the provisions of the Agreement which, in the
opinion of the firm, are material, except for any items of noncompliance that
are forth in such report.
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 an officer of
the servicer to the effect that the servicer has fulfilled its obligations under
the Agreement throughout the preceding year.
CERTAIN MATTERS REGARDING THE SERVICER AND THE DEPOSITOR
The servicer under each pooling and servicing agreement or servicing
agreement, as applicable, will be named in the prospectus supplement. The entity
serving as servicer may have normal business relationships with the depositor or
the depositor's affiliates.
Each Agreement will provide that the servicer may not resign from its
obligations and duties under the Agreement except upon (a) appointment of a
successor servicer and receipt by the trustee of a letter from the applicable
rating agency or rating agencies that the servicer's resignation and the
successor servicer's appointment will not result in
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a downgrade of the securities or (b) a determination that its performance of its
duties thereunder is no longer permissible under applicable law. The servicer
may, however, be removed from its obligations and duties as set forth in the
Agreement. No resignation by the servicer will become effective until the
trustee or a successor servicer has assumed the servicer's obligations and
duties under the Agreement.
Each Agreement generally will further provide that neither the servicer,
the depositor nor any director, officer, employee, or agent of the servicer or
the depositor (each, an "indemnified party") will be under any liability to the
related trust or securityholders for taking any action or for refraining from
taking any action in good faith pursuant to the Agreement, or for errors in
judgment; provided, however, that neither the servicer, the depositor nor any
such person will be protected against any liability which would otherwise be
imposed 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. Each Agreement generally will further provide
that each indemnified party will be entitled to indemnification by the related
trust 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
for the related series, other than any loss, liability or expense related to any
specific loan or loans (except 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 that indemnified party's duties thereunder or by reason of
reckless disregard by that indemnified party of obligations and duties
thereunder. In addition, each Agreement generally will provide that neither the
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 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 that event, the legal
expenses and costs of the action and any liability resulting therefrom will be
expenses, costs and liabilities of the trust, and the servicer or the depositor,
as the case may be, will be entitled to be reimbursed for those costs and
liabilities out of funds which would otherwise be distributed to
securityholders.
Except as otherwise specified in the prospectus supplement, any person into
which the servicer may be merged or consolidated, or any person resulting from
any merger or consolidation to which the servicer is a party, or any person
succeeding to the business of the servicer, will be the successor of the
servicer under each Agreement, provided that that person is qualified to sell
mortgage loans to, and service mortgage loans on behalf of, Fannie Mae or
Freddie Mac. Furthermore, the merger, consolidation or succession may not
adversely affect the then current rating or ratings of the class or classes of
securities of the related series that have been rated.
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EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
POOLING AND SERVICING AGREEMENT; SERVICING AGREEMENT. Events of default
under each Agreement will be specified in the prospectus supplement and may
include:
- any failure by the servicer to make an Advance which continues unremedied
for one business day;
- any failure by the servicer to make or cause to be made any other
required payment pursuant to the Agreement which continues unremedied for
one business day after written notice of such failure to the servicer in
the manner specified in the Agreement;
- any failure by the servicer duly to observe or perform in any material
respect any of its other covenants or agreements in the Agreement which
continues unremedied for sixty days after written notice of the failure
to the servicer in the manner specified in the Agreement; and
- certain events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings and certain actions by or on
behalf of the servicer indicating its insolvency, reorganization or
inability to pay its obligations.
Unless otherwise provided in the prospectus supplement, so long as an event
of default under an Agreement remains unremedied, the trustee may, and at the
direction of holders of securities evidencing not less than 25% of the aggregate
voting rights of such series and under such other circumstances as may be
specified in such Agreement, the trustee shall terminate all of the rights and
obligations of the servicer under the Agreement relating to such trust and in
and to the related trust assets, whereupon the trustee will succeed to all of
the responsibilities, duties and liabilities of the servicer under the
Agreement, including, if specified in the 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 to act as successor to the
servicer, it may appoint, or petition a court of competent jurisdiction for the
appointment of, a housing and home finance institution which is a Fannie Mae or
Freddie Mac approved servicer with a net worth of a least $15,000,000 to act as
successor to the servicer under the Agreement. Pending the appointment of a
successor servicer, the trustee is obligated to act in such capacity. The
trustee and any such successor may agree upon the servicing compensation to be
paid, which in no event may be greater than the compensation payable to the
servicer under the Agreement.
Unless otherwise provided in the prospectus supplement, no securityholder,
solely by virtue of the securityholder's status as a securityholder, will have
any right under any Agreement to institute any proceeding with respect to that
Agreement, unless the securityholder previously has given to the trustee written
notice of default and unless the holders of securities evidencing not less than
25% of the aggregate voting rights for the related series have made written
request upon the trustee to institute such proceeding in its own name as trustee
thereunder and have offered to the trustee reasonable indemnity, the trustee for
60 days has neglected or refused to institute any such proceeding, and all other
conditions precedent for the initiation of suit as described in the Agreement
have
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been met. However, the trustee is under no obligation to exercise any of the
trusts or powers vested in it by the Agreement for any series or to make any
investigation of matters arising thereunder or to institute, conduct or defend
any litigation thereunder or in relation thereto at the request, order or
direction of any securityholders, unless those securityholders have offered and
provided to the trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby.
INDENTURE. Except as otherwise specified in the prospectus supplement,
events of default or rapid amortization events under the indenture for each
series of notes or bonds include:
- a default in the payment of any principal of or interest on any note or
bond as specified in the prospectus supplement;
- failure to perform in any material respect any other covenant of the
depositor or the trust 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 prospectus supplement;
- certain events of bankruptcy, insolvency, receivership or liquidation of
the depositor or the trust; or
- any other event of default provided with respect to notes or bonds of
that series including, but not limited to, certain defaults on the part
of the trust, if any, of a credit enhancement instrument supporting such
notes or bonds.
If an event of default with respect to the notes or bonds 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 or bonds of
that series or the credit enhancer of that series, if any, may declare the
principal amount (or, if the notes or bonds have an interest rate of 0%, that
portion of the principal amount as may be specified in the terms of that series,
as provided in the prospectus supplement) of all the notes or bonds of that
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
aggregate voting rights of the bonds of the related series. Rapid amortization
events will trigger an accelerated rate of payment of principal on the notes or
bonds, as described in the related prospectus supplement.
If, following an event of default with respect to any series of notes or
bonds, the notes or bonds of that series have been declared to be due and
payable and the prospectus supplement and applicable Agreement so provide, the
trustee may, in its discretion, notwithstanding the acceleration of the notes or
bonds, elect to maintain possession of the collateral securing the notes or
bonds of that 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 or bonds of that series as they would have become due if there had not
been such a declaration. In addition, unless otherwise specified in the
prospectus supplement, the trustee may not sell or otherwise liquidate the
collateral securing the
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notes or bonds of a series following an event of default or a rapid amortization
event, unless:
- the holders of 100% of the aggregate voting rights of the bonds of such
series consent to the sale;
- 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 or bonds of the series at the date of the sale; or
- the trustee determines that the collateral would not be sufficient on an
ongoing basis to make all payments on the notes or bonds as those
payments would have become due if the notes or bonds had not been
declared due and payable, and the trustee obtains the consent of the
holders of 66 2/3% of the aggregate voting rights of the notes or bonds
of that series.
In the event that the trustee liquidates the collateral in connection with
an event of default or a rapid amortization event, the indenture provides that
the trustee will have a prior lien on the proceeds of that liquidation for
unpaid fees and expenses. As a result, upon the occurrence of an event of
default or rapid amortization event, the amount available for distribution to
the noteholders or bondholders could 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 or bondholders after the
occurrence of an event of default or rapid amortization event.
Except as otherwise specified in the prospectus supplement, in the event
the principal of the notes or bonds of a series is declared due and payable, as
described above, the holders of any of the notes or bonds 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 or a rapid amortization event shall occur
and be continuing with respect to a series of notes or bonds, 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 or bonds of
the series, unless those holders offer to the trustee security or indemnity
satisfactory to it against the costs, expenses and liabilities which might be
incurred by it in complying with their request or direction. Subject to these
provisions for indemnification and certain limitations contained in the
indenture, the holders of a majority of the then aggregate outstanding amount of
the notes or bonds of a 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 or bonds of the series, and the holders of a majority of the then
aggregate outstanding amount of the notes or bonds 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 or bonds of the series affected thereby.
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AMENDMENT
Except as otherwise specified in the prospectus supplement, each Agreement
may be amended by the depositor, the servicer, the trustee and, if applicable,
the credit enhancer, without the consent of any of the securityholders:
- to cure any ambiguity;
- to correct a defective provision or correct or supplement any provision
therein which may be inconsistent with any other provision therein;
- to make any other revisions with respect to matters or questions arising
under the Agreement which are not inconsistent with the provisions
thereof; or
- to comply with any requirements imposed by the Code or any regulation
thereunder; provided, however, that no such amendments (except those
pursuant to this clause) will 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 trustee receives a letter from each
rating agency requested to rate the class or classes of securities of such
series stating that the proposed amendment will not result in the downgrading or
withdrawal of the respective ratings then assigned to the related securities.
Each Agreement may also be amended by the depositor, the servicer, the trustee
and, if applicable, the credit enhancer with consent of holders of securities of
such series evidencing not less than 66 2/3% of the aggregate voting rights of
each class affected thereby for the purpose of adding any provisions to or
changing in any 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 such amendment may (a) 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 such
security, or (b) with respect to any series of securities, reduce the aforesaid
percentage of securities of any class the holders of which are required to
consent to any such amendment without the consent of the holders of all
securities of such class covered by such Agreement then outstanding. If a REMIC
election is made with respect to a trust, 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 proposed amendment will not cause
such trust to fail to qualify as a REMIC.
TERMINATION; OPTIONAL TERMINATION
POOLING AND SERVICING AGREEMENT; TRUST AGREEMENT. Unless otherwise
specified in the related Agreement, the obligations created by each pooling and
servicing agreement and trust agreement for each series of securities will
terminate upon the payment to the
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related securityholders of all amounts held in the collection account or by the
servicer and required to be paid to them pursuant to the Agreement following the
later of:
(a) the final payment of or other liquidation of the last of the trust
assets subject thereto or the disposition of all property acquired upon
foreclosure of any such trust assets remaining in the trust; and
(b) the purchase by the servicer or, if REMIC treatment has been elected
and if specified in the prospectus supplement, by the holder of the
residual interest or any other party specified to have such rights (see
"Federal Income Tax Consequences" below), from the related trust of all
of the remaining trust assets and all property acquired in respect of
the related trust assets.
Unless otherwise specified by the prospectus supplement, any purchase of
trust assets and property acquired in respect of trust assets evidenced by a
series of securities will be made at the option of the servicer, such other
person or, if applicable, the holder of the REMIC residual interest, at a price
specified in the prospectus supplement. The exercise of this right will effect
early retirement of the securities of that series, but the right of the
servicer, such other person or, if applicable, the holder of the REMIC residual
interest, to so purchase is subject to the principal balance of the related
trust assets being less than the percentage specified in the prospectus
supplement of the aggregate principal balance of the trust 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, any repurchase pursuant to clause (b)
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 or bonds, except with respect to certain continuing rights specified in
the indenture, upon the delivery to the trustee for cancellation of all the
notes or bonds of the related series or, with certain limitations, upon deposit
with the trustee of funds sufficient for the payment in full of all of the notes
or bonds of that series.
In addition to this type of discharge with certain limitations, the
indenture will provide that, if so specified with respect to the notes or bonds
of any series, the related trust will be discharged from any and all obligations
in respect of the notes or bonds of the related series (except for certain
obligations relating to temporary notes or bonds and exchange of notes or bonds,
to register the transfer of or exchange notes or bonds of such series, to
replace stolen, lost or mutilated notes or bonds of such 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 or bonds of the series on the last scheduled payment date
for the notes or bonds and any installment of interest on the notes or bonds in
accordance with the terms of the indenture and the notes or bonds of that
series. In the event of any defeasance and discharge of notes or bonds of the
series, holders of notes or bonds of the series would be able to look only to
that money
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and/or those direct obligations for payment of principal and interest, if any,
on their notes or bonds until maturity.
THE TRUSTEE
The trustee under each Agreement will be named in the prospectus
supplement. The commercial bank, savings and loan association or trust company
serving as trustee may have banking and other relationships with the depositor,
the servicer and any of their respective affiliates.
CERTAIN LEGAL ASPECTS OF THE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the loans. Because these legal aspects are
governed primarily by applicable state law and because the applicable state laws
may differ substantially from state to state, the descriptions do not, except as
expressly provided below, reflect the laws of any particular state, nor do they
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
DEEDS OF TRUST AND MORTGAGES. 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 real property
encumbered by the mortgage, which lien is generally not prior to the lien for
real estate taxes and assessments. 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 mortgaged 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 such time as 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.
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COOPERATIVE LOANS. Some of the loans may be cooperative loans. A
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.
The cooperative owns the real property and the specific units and is responsible
for management of the property. An ownership interest in a cooperative and the
accompanying rights are 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.
FORECLOSURE/REPOSSESSION
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 default
by the borrower under the terms of the note or deed of trust. In certain states,
these foreclosures 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, to any
person who has recorded a request for a copy of any notice of default and notice
of sale, to any successor in interest to the borrower-trustor, to the
beneficiary of any junior deed of trust and to certain other persons. 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 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 lienholder
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
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 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 of record in the real 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 real 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
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property. In some states, mortgages may also be foreclosed by advertisement,
pursuant to a power of sale provided in the mortgage.
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 deficiency judgments are 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 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. Examples of judicial remedies that
have been fashioned include judicial requirements that the lender undertake
affirmative and expensive actions to determine the causes of the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have eliminated the right of a lender to realize upon its
security if the default under the security agreement is not monetary, such as
the borrower's failure to maintain the property adequately or the borrower's
execution of secondary financing affecting the property. Finally, 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
statue. 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.
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 to cure or redeem
becomes a part of the indebtedness secured by the junior mortgage or deed of
trust.
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
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failure by the tenant-stockholder to pay rent or other obligations or charges
owed by such tenant-stockholder, including mechanics' liens against the
cooperative apartment building incurred by such tenant-stockholder. The
proprietary lease or occupancy agreement generally permits the cooperative to
terminate such lease or agreement in the event an obligor fails to make payments
or defaults in the performance of covenants required thereunder. 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 such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from the sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code and the security agreement relating to those shares. Article 9 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 also 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
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responsible for the deficiency. Please refer to the discussion under the heading
"Anti-Deficiency Legislation; Bankruptcy Laws; Tax Liens" 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.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to
environmental risks. Such risks, among other things, could substantially impair
a borrower's ability to repay a loan, result in substantial diminution in the
value of the property pledged as collateral to secure the loan and/or give rise
to liability which could exceed the value of such property or the principal
balance of the related loan.
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 related property. In addition, under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the United States Environmental Protection Agency ("EPA") may impose
a lien on property where the 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
mortgaged property and related costs, even though the environmental damage or
threat was caused by a prior or current owner or operator or another third
party. CERCLA imposes liability for these 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, without participating
in the management of a facility or property, holds indicia of ownership
primarily to protect its security interest (the "secured creditor exclusion").
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 a
third party), or fails to market the property in a timely fashion.
If a lender is or becomes liable, it may be entitled to 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 and the diminution in value of contaminated property and
related liabilities or losses may be
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substantial. It is conceivable that the costs arising from the circumstances set
forth above would result in a loss to securityholders.
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 the holder does not exercise decisionmaking control over
the borrower's enterprise, participate in the management or control of
decisionmaking relating to the operation of a tank, as long as petroleum is not
added to, stored in or dispensed from the tank, or as long as holder does not
deviate from certain other requirements specified in the rule. In addition,
under the Asset Conservation, Lender Liability and Deposit Insurance Protection
Act of 1996, similar protections to those accorded to lenders under CERCLA are
also accorded to holders of security interests in underground tanks. It should
be noted, however, that liability for cleanup of contamination may be governed
by state law, which may not provide for any specific protection for secured
creditors.
Whether actions taken by a lender would constitute participation in the
management of a mortgaged 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, regardless of
whether lender actually exercised such influence.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996. The
legislation provides that in order to be deemed to have participated in the
management of a mortgaged 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
exclusion 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
secured property. As noted above, the secured creditor exclusion does not govern
liability for cleanup costs except under the federal laws discussed above. In
addition, certain other environmental conditions may be required to be addressed
under other federal, state or local laws or in order to improve the
marketability of a property. Therefore, under certain circumstances, including
but not limited to after foreclosure, a lender may incur costs under applicable
laws or in order to improve the marketability of a property in
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connection with environmental conditions associated with that property, such as
the presence or release of regulated materials in underground storage tanks,
asbestos-containing material, lead paint or radon gas. 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. It is conceivable that the costs arising from such circumstances
would result in a loss to securityholders.
Except as otherwise specified in the prospectus supplement, at the time the
loans were originated, no environmental assessments or very limited
environmental assessments of the properties were 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; BANKRUPTCY LAWS; TAX LIENS
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 real
property at the time of the foreclosure sale. As a result of these prohibitions,
it is anticipated that in most instances the 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 that security;
however, in some of these states, the lender,
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following judgment on such 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.
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 mortgaged property without the permission of the bankruptcy
court. The rehabilitation plan proposed by the debtor may provide, if the
mortgaged property is not the debtor's principal residence and the court
determines that the value of the mortgaged property is less than the principal
balance of the mortgage loan, for the reduction of the secured indebtedness to
the value of the mortgaged 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 such mortgage
loan, change the rate of interest and alter the mortgage loan repayment
schedule. The effect of any 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 payments.
The federal tax laws provide priority to certain tax liens over the lien of
a mortgage or secured party.
DUE-ON-SALE CLAUSES
Each conventional loan generally 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 restrictions on the right of lenders to enforce these 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 are generally enforceable except in those states whose legislatures
exercised their authority to regulate the enforceability of the clauses with
respect to mortgage loans that
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were (a) 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 (b)
originated by lenders other than national banks, federal savings institutions
and federal credit unions. Freddie Mac 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 window 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
Garn-St. Germain 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 such 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 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. The absence of such a restraint on prepayment,
particularly with respect to fixed rate loans having higher loan rates, may
increase the likelihood of refinancing or other early retirement of the related
loans or contracts. Late charges and prepayment fees 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. Title V authorized the states to
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reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision which expressly rejects application of the federal law.
Fifteen states adopted such a law prior to the April 1, 1983 deadline. In
addition, even where Title V was not so rejected, any state is authorized by the
law to adopt a provision limiting discount points or other charges on 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.
SERVICEMEMBERS CIVIL RELIEF ACT
Generally, under the terms of the Servicemembers Civil Relief Act formerly
known as the Soldiers' and Sailors' Relief Act of 1940, (the "Relief Act"), a
borrower who enters military service after the origination of his or her loan
(including a borrower who is a member of the National Guard or is in reserve
status at the time of the origination of the loan and is later called to active
duty) may not be charged interest above an annual rate of 6% during the period
of his or her active duty status, unless a court orders otherwise upon
application of the lender. It is possible that this interest rate limitation
could have an effect, for an indeterminate period of time, on the ability of the
servicer to collect full amounts of interest on certain of the loans. Unless
otherwise provided in the prospectus supplement, any shortfall in interest
collections resulting from the application of the Relief Act could result in
losses to securityholders. The Relief Act also imposes limitations which would
impair the ability of the servicer to foreclose on an affected loan during the
borrower's period of active duty status. Moreover, the Relief Act permits 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 affected by the Relief Act goes into default, there may be delays and losses
occasioned by the inability to realize upon the property in a timely fashion.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
To the extent that the loans comprising the trust 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 (and therefore the
securityholders), as mortgagee under any such 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 condemnation
proceedings, and to apply
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those proceeds and awards to any indebtedness secured by the mortgage, in
whatever order the mortgagee may determine. 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 a
senior mortgage 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 mortgage. 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 reimbursing 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 be included in the trust. The
priority of the lien securing any advance made under a future advance 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.
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CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with the originating, servicing
and enforcing 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 and
related statutes and regulations. In particular, Regulation Z requires certain
disclosures to borrowers regarding the terms of the loans; the Equal Credit
Opportunity Act and Regulation B promulgated thereunder prohibit discrimination
in the extension of credit 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; and 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 such laws may limit the ability of the servicer 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.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the anticipated material federal income
tax consequences of the purchase, ownership and disposition of the securities,
as based on the advice of Chapman and Cutler LLP, special tax counsel to the
Issuer. This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), regulations (including the REMIC regulations promulgated by the
Treasury Department (the "REMIC Regulations")), rulings and decisions in effect
as of the date of this prospectus, all of which are subject to change. This
summary does not address federal income tax consequences applicable to all
categories of investors, some of which (such as banks and insurance companies)
may be subject to special rules. In addition, the summary is limited to
investors who will hold the securities as "capital assets" (generally, property
held for investment) as defined in section 1221 of the Code. Investors should
consult their own tax advisors in determining the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of the
securities. As applied to any particular class or series of securities, the
summary is subject to further discussion or change as provided in the related
prospectus supplement.
OVERVIEW
The federal income tax consequences applicable with respect to a specific
series of securities will vary depending on whether an election is made to treat
the trust estate relating to such series of securities as a real estate mortgage
investment conduit ("REMIC") under Code. The prospectus supplement for each
series of securities will specify whether a REMIC election will be made with
respect to such series. Securities of any series that is not the subject of a
REMIC election ("non-REMIC securities")
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are intended to be classified as indebtedness of the Issuer for federal income
tax purposes.
NON-REMIC SECURITIES
General. If a REMIC election is not made, Chapman and Cutler LLP will
deliver its opinion that, although no regulations, published rulings or judicial
decisions exist that specifically discuss the characterization for federal
income tax purposes of securities with terms substantially the same as the
non-REMIC securities, in its opinion such securities will be treated for federal
income tax purposes as indebtedness of the Issuer and not as an ownership
interest in the collateral or an equity interest in the Issuer.
Status as Real Property Loans. Because, in such counsel's opinion, the
non-REMIC securities will be treated as indebtedness of the Issuer for federal
income tax purposes, (i) such securities held by a thrift institution taxed as a
domestic building and loan association will not constitute "loans . . . secured
by an interest in real property" within the meaning of Code section
7701(a)(19)(C)(v), (ii) interest on non-REMIC securities held by a real estate
investment trust will not be treated as "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Code section 856(c)(3)(B), and non-REMIC securities will not constitute "real
estate assets" or "government securities" within the meaning of Code section
856(c)(4)(A), and (iii) non-REMIC securities held by a regulated investment
company will not constitute "government securities" within the meaning of Code
section 851(b)(4)(A)(i).
Interest on Non-REMIC Securities. Except as described below with respect
to original issue discount, market discount or premium, interest paid or accrued
on non-REMIC securities generally will be treated as ordinary income to the
holder, and will be includible in income in accordance with such holder's
regular method of accounting.
Original Issue Discount. All accrual securities will be, and some or all
of the other securities may be, issued with "original issue discount" within the
meaning of Code section 1273(a). Holders of any class of securities having
original issue discount must generally include original issue discount in
ordinary gross income for federal income tax purposes as it accrues, in
accordance with the constant yield method, in advance of receipt of the cash
attributable to such income. When required by the Code and/or applicable
regulations, the Issuer will indicate on the face of each security issued by it
information concerning the application of the original issue discount rules to
such security and certain other information that may be required. The Issuer
will report annually to the Internal Revenue Service (the "IRS") and to holders
of record of such securities information with respect to the original issue
discount accruing on such securities during the reporting period.
Rules governing original issue discount are set forth in Code sections 1271
through 1273, 1275 and 1281 through 1283 and in regulations issued thereunder
(the "OID Regulations"). The Code or the OID Regulations either do not address,
or are subject to varying interpretations with respect to, several issues
relevant to obligations, such as the securities, that are subject to prepayment.
Therefore, there is some uncertainty as to the
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manner in which the original issue discount rules of the Code will be applied to
the securities.
Original Issue Discount Defined. In general, each security will be
treated as a single installment obligation for purposes of determining the
original issue discount includible in a securityholder's income. The amount of
original issue discount on such a security is the excess of the stated
redemption price at maturity of the security over its issue price. The issue
price of a security is the initial offering price to the public at which a
substantial amount of the securities of that class are first sold to the public
(excluding bond houses, brokers, underwriters or wholesalers), generally as set
forth on the cover page of the prospectus supplement for a series of securities.
If less than a substantial amount of a particular class of securities is sold
for cash on or prior to the date of the their initial issuance, the issue price
for such class will likely be treated as equal to its fair market value on the
closing date. The portion of the initial offering price which consists of
payment for interest accrued on the securities prior to the closing date
generally may, at the option of the initial securityholders, be subtracted from
the issue price of the securities and treated as an offset to interest received
on the first payment date.
The stated redemption price at maturity of a security is equal to the total
of all payments to be made on the security other than "qualified stated interest
payments." "Qualified stated interest payments" are payments on the securities
which are paid at least annually and are based on either a fixed rate or 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, (i) such interest is unconditionally payable at least annually, (ii)
the issue price of the security does not exceed the total noncontingent
principal payments and (iii) 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 such security. Generally, the stated redemption price at maturity of a
security (other than an accrual security or a payment lag security, as defined
below) is its stated principal amount; the stated redemption price at maturity
of an accrual security is the sum of all payments (regardless of how
denominated) scheduled to be received on such security under the Tax Prepayment
Assumption (as defined below). Any payment denominated as interest that does not
constitute a qualified stated interest payment is generally referred to as a
"contingent interest payment." The related prospectus supplement will discuss
whether the payments on a security denominated as interest are qualified stated
interest payments and the treatment for federal income tax purposes of any
contingent interest payments.
De Minimis Original Issue Discount. Notwithstanding the general
definition of original issue discount above, any original issue discount with
respect to a security will be considered to be zero if such discount is less
than 0.25% of the stated redemption price at maturity of the security multiplied
by its weighted average life (a "de minimis" amount). The weighted average life
of a security for this purpose is the sum of the following amounts (computed for
each payment included in the stated redemption price at maturity of the
security): (i) the number of complete years (rounded down for partial years)
from the closing date until the date on which each such payment is scheduled to
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be made under the Tax Prepayment Assumption, multiplied by(ii) a fraction, the
numerator of which is the amount of the payment, and the denominator of which is
the security's stated redemption price at maturity. Securityholders generally
must report de minimis original issue discount pro rata as principal payments
are received, and such income will be capital gain if the security is held as a
capital asset. However, accrual method holders may elect to accrue all interest
on a security, including de minimis original issue discount and market discount
and as adjusted by any premium, under a constant yield method.
Accrual of Original Issue Discount. The Code requires that the amount and
rate of accrual of original issue discount be calculated based on a reasonable
assumed prepayment rate for the mortgage loans, the mortgage loans underlying
any mortgaged-backed securities and/or other mortgage collateral securing the
securities (the "Tax Prepayment Assumption") and prescribes a method for
adjusting the amount and rate of accrual of such discount if actual prepayment
rates exceed the Tax Prepayment Assumption. However, if such mortgage loans
prepay at a rate slower than the Tax Prepayment Assumption, no deduction for
original issue discount previously accrued, based on the Tax Prepayment
Assumption, is allowed. The Tax Prepayment Assumption is required to be
determined in the manner prescribed by regulations that have not yet been
issued. It is anticipated that the regulations will require that the Tax
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of such securities. The related prospectus supplement
for each series of securities will specify the Tax Prepayment Assumption
determined by the Issuer for the purposes of determining the amount and rate of
accrual of original issue discount. No representation is made that the mortgage
collateral will prepay at the Tax Prepayment Assumption or at any other rate.
Generally, a securityholder must include in gross income the sum of the
"daily portions," as determined below, of the original issue discount that
accrues on a security for each day the securityholder holds that security,
including the purchase date but excluding the disposition date. In the case of
an original holder of a security, a calculation will be made of the portion of
the original issue discount that accrues during each successive period (or
shorter period from date of original issue) (an "accrual period") that ends on
the day in the calendar year corresponding to each of the payment dates on the
securities (or the date prior to each such date). This will be done, in the case
of each full accrual period, by:
(1) adding (A) the present value at the end of the accrual period of
all remaining payments to be received on the securities, computed taking
into account (i) the yield to maturity of the security at the issue date,
(ii) events (including actual prepayments) that have occurred prior to the
end of the accrual period, and (iii) the Tax Prepayment Assumption, and (B)
any payments received during such accrual period, other than payments of
qualified stated interest, and
(2) subtracting from that total the "adjusted issue price" of the
securities at the beginning of such accrual period.
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The adjusted issue price of a security at the beginning of the initial accrual
period is its issue price; the adjusted issue price of a security at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of
original issue discount allocable to such accrual period and reduced by the
amount of any payment other than a payment of qualified stated interest made at
the end of or during such accrual period. The original issue discount accrued
during such accrual period will then be divided by the number of days in the
period to determine the daily portion of original issue discount for each day in
the period. With respect to an initial accrual period shorter than a full
accrual period, the daily portions of original issue discount must be determined
according to any reasonable method, provided that such method is consistent with
the method used to determine yield on the securities.
With respect to any security that is a variable rate debt instrument, the
sum of the daily portions of original issue discount that is includible in the
holder's gross income is determined under the same principles described above,
with the following modifications: the yield to maturity on the securities should
be calculated as if the interest index remained at its value as of the issue
date of such securities. Because the proper method of adjusting accruals of
original issue discount on a variable rate debt instrument as a result of
prepayments is uncertain, holders of such instruments should consult their own
tax advisors regarding the appropriate treatment of such securities for federal
income tax purposes.
Subsequent Purchasers of Securities with Original Issue Discount. A
subsequent purchaser of an accrual security or any other security issued with
original issue discount who purchases the security at a cost less than the
remaining stated redemption price at maturity, will also be required to include
in gross income for all days during his or her taxable year on which such
security is held, the sum of the daily portions of original issue discount on
the security. In computing the daily portions of original issue discount with
respect to a security for such a subsequent purchaser, however, the daily
portion for any day shall be reduced by the amount that would be the daily
portion for such day (computed in accordance with the rules set forth above)
multiplied by a fraction, the numerator of which is the amount, if any, by which
the price paid by such holder for the security exceeds its adjusted issue price
(the "acquisition premium"), and the denominator of which is the amount by which
the remaining stated redemption price at maturity exceeds the adjusted issue
price.
Premium. A holder who purchases a security at a cost greater than its
stated redemption price at maturity generally will be considered to have
purchased the security at a premium, which it may elect to amortize as an offset
to interest income on such 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 securities of a series will be calculated
using the prepayment assumption used in pricing such class. If a holder makes an
election to amortize premium on a security, such election will apply to
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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 acquired
thereafter by such holder, and will be irrevocable without the consent of the
Internal Revenue Service. Purchasers who pay a premium for the securities should
consult their tax advisers regarding the election to amortize premium and the
method to be employed.
Market Discount. The securities are subject to the market discount
provisions of Code sections 1276 through 1278. These rules provide that if a
subsequent holder of a security purchases it at a market discount, some or all
of any principal payment or of any gain recognized upon the disposition of the
security will be taxable as ordinary interest income. Market discount on a
security means the excess, if any, of (1) the sum of its issue price and the
aggregate amount of original issue discount includible in the gross income of
all holders of the security prior to the acquisition by the subsequent holder
(presumably adjusted to reflect prior principal payments), over (2) the price
paid by the holder for the security. Market discount on a security will be
considered to be zero if such discount is less than .25% of the stated
redemption price at maturity of such security multiplied by its weighted average
life, which presumably would be calculated in a manner similar to weighted
average life (described above), taking into account distributions (including
prepayments) prior to the date of acquisition of such security by the subsequent
purchaser. If market discount on a security is treated as zero under this rule,
the actual amount of such discount must be allocated to the remaining principal
distributions on such security and when each such distribution is made, gain
equal to the discount allocated to such distribution will be recognized.
Any principal payment (whether a scheduled payment or a prepayment) or any
gain on the disposition of a market discount security is to be treated as
ordinary income to the extent that it does not exceed the accrued market
discount at the time of such payment or disposition. The amount of accrued
market discount for purposes of determining the tax treatment of subsequent
principal payments or dispositions of the securities is to be reduced by the
amount so treated as ordinary income.
The Tax Reform Act of 1986 grants authority to the U.S. Treasury to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the U.S. Treasury, certain rules
described in the legislative history accompanying the Tax Reform Act of 1986
will apply. Under those rules, the holder of a market discount security may
elect to accrue market discount either on the basis of a constant interest rate
or using one of the following methods. For securities issued with original issue
discount, the amount of market discount that accrues during a period is equal to
the product of (i) the total remaining market discount, multiplied by (ii) a
fraction, the numerator of which is the original issue discount accruing during
the period and the denominator of which is the total remaining original issue
discount at the beginning of the period. For securities issued without original
issue discount, the amount of market discount that accrues during a period is
equal to the product of (i) the total remaining market discount, multiplied by
(ii) a fraction, the
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numerator of which is the amount of stated interest paid during the accrual
period and the denominator of which is the total amount of stated interest
remaining to be paid at the beginning of the period. For purposes of calculating
market discount under any of the above methods in the case of instruments (such
as the securities) that provide for payments that may be accelerated by reason
of prepayments of other obligations securing such instruments, the same
prepayment assumption applicable to calculating the accrual of original issue
discount shall apply. Regulations are to provide similar rules for computing the
accrual of amortizable security premium on instruments payable in more than one
principal installment. As an alternative to the inclusion of market discount in
income on the foregoing basis, the holder may elect to include such market
discount in income currently as it accrues on all market discount instruments
acquired by such holder in that taxable year or thereafter. In addition, accrual
method holders may elect to accrue all interest on a security, including de
minimis original issue discount and market discount and as adjusted by any
premium, under a constant yield method.
A subsequent holder of a security who acquired the security at a market
discount also may be required to defer, until the maturity date of the security
or the earlier disposition of the security in a taxable transaction, the
deduction of a portion of the amount of interest that the holder paid or accrued
during the taxable year on indebtedness incurred or maintained to purchase or
carry the security in excess of the aggregate amount of interest (including
original issue discount) includible in his or her gross income for the taxable
year with respect to such security. The amount of such net interest expense
deferred in a taxable year may not exceed the amount of market discount accrued
on the security for the days during the taxable year on which the subsequent
holder held the security, and the amount of such deferred deduction to be taken
into account in the taxable year in which the security is disposed of in a
transaction in which gain or loss is not recognized in whole or in part is
limited to the amount of gain recognized on the disposition. This deferral rule
does not apply to a holder that elects to include market discount in income
currently as it accrues on all market discount instruments acquired by such
holder in that taxable year or thereafter.
Because the regulations described above with respect to market discounts
and premiums have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a security purchased at a
discount or premium in the secondary market.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a 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 securities acquired on
or after April 4, 1994. If such an election were to be made with respect to a
security with market discount, the holder of the 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 such holder of
the securities acquires during the year of the election or thereafter.
Similarly, a holder of a security that makes this election for a security that
is acquired at a premium will be deemed to have made an election to amortize
security premium with respect to all debt instruments having amortizable
security premium that such holder
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owns or acquires. The election to accrue interest, discount and premium on a
constant yield method with respect to a security is irrevocable.
Sale or Redemption. If a security is sold, exchanged, redeemed or
retired, the seller will recognize gain or loss equal to the difference between
the amount realized on the sale and the seller's adjusted basis in the security.
Such adjusted basis generally will equal the cost of the security to the seller,
increased by any original issue discount and market discount included in the
seller's gross income with respect to the security and reduced by payments,
other than payments of qualified stated interest, previously received by the
seller and by any amortized premium. If a securityholder is a bank, thrift or
similar institution described in section 582(c) of the Code, gain or loss
realized on the sale or exchange of a security will be taxable as ordinary
income or loss. Any such gain or loss recognized by any other seller generally
will be capital gain or loss provided that the security is held by the seller as
a "capital asset" (generally, property held for investment) within the meaning
of Code section 1221. Such gain or loss will be long-term gain or loss if the
security is held as a capital asset for more than one year. Long-term capital
gains of non-corporate taxpayers are subject to reduced maximum rates while
short-term capital gains are taxable at ordinary rates. The use of capital
losses is subject to limitations.
REMIC SECURITIES
General. If a REMIC election is made with respect to a series of
securities, Chapman and Cutler LLP will deliver an opinion generally to the
effect that, under existing law, assuming timely filing of a REMIC election and
ongoing compliance with all provisions of the related Agreements, all or a
portion of the trust estate securing such series of securities will qualify as a
REMIC for federal income tax purposes.
The securities in such series will be designated either as one or more
"regular interests" in a REMIC, which generally are treated as debt for federal
income tax purposes, or as "residual interests" in a REMIC, which generally are
not treated as debt for such purposes but rather as representing rights and
responsibilities with respect to the taxable income or loss of the related
REMIC. The prospectus supplement for such series will indicate which classes of
securities are being designated as regular interests ("regular interest
securities") and which class is being designated as the residual interest
("residual interest securities").
Tiered REMIC Structures. For certain series of securities, multiple
separate elections may be made to treat designated portions of the related trust
estate as REMICs (referred to as the "Upper Tier REMIC" and the "Lower Tier
REMIC(s)" respectively) for federal income tax purposes. Upon the issuance of
any such series of securities, Chapman and Cutler LLP will deliver its opinion
generally to the effect that, under existing law, assuming timely filing of
applicable REMIC elections and ongoing compliance with all provisions of the
related Agreements, the Upper Tier REMIC and each Lower Tier REMIC will each
qualify as a REMIC for federal income tax purposes. In certain cases, a single
residual interest security may represent the residual interest in both the Upper
Tier REMIC and each Lower Tier REMIC. In such case, the discussion
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of residual interest securities set forth below should be interpreted as
applying to each residual interest separately.
Status as Real Property Loans. Except to the extent otherwise provided in
the related prospectus supplement: (i) REMIC securities held by a "domestic
building and loan association" will constitute assets described in Code section
7701(a)(19)(C)(xi); (ii) REMIC securities held by a "real estate investment
trust" ("REIT") will constitute "real estate assets" within the meaning of Code
section 856(c)(4)(A) and interest on such securities will be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Code section 856(c)(3)(B); and (iii) regular interest securities held
by a "financial assets securitization investment trust" ("FASIT") will qualify
for treatment as "permitted assets" within the meaning of Code section
860L(c)(1)(G) and as "qualified mortgages" within the meaning of Code section
860G(a)(3) of if held by another REMIC. REMIC securities held by REITs or
regulated investment companies will not constitute "government securities"
within the meaning of Code section 856(c)(5)(A) or 851(b)(4)(A)(ii),
respectively. REMIC securities held by certain financial institutions will
constitute "evidences of indebtedness" within the meaning of Code section
582(c)(1).
In the case of items (i), (ii) and (iii) above, if less than 95% of the
REMIC's assets are assets qualifying under any of the foregoing Code sections,
the REMIC securities will be qualifying assets only to the extent that the
REMIC's assets are qualifying assets. If a series of securities employs a
multi-tier REMIC structure, both the Upper Tier REMIC and the Lower Tier REMIC
will be treated as a single REMIC for purposes of determining the extent to
which the related REMIC securities and the income thereon will be treated as
such assets and income.
TAXATION OF REGULAR INTEREST SECURITIES.
General. Except as otherwise stated in this discussion, regular interest
securities will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Holders of regular interest securities that otherwise report income under a cash
method of accounting will be required to report income with respect to regular
interest securities under an accrual method.
Original Issue Discount. Certain classes of regular interest securities
may be issued with original issue discount within the meaning of section 1273(a)
of the Code. The rules governing original issue discount with respect to a
regular interest security are described above under "Non-REMIC
Securities -- Original Issue Discount." Holders of regular interest securities
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the regular interest
securities. In view of the complexities and current uncertainties as to the
manner of inclusion in income of original issue discount on regular interest
securities, each investor should consult his own tax advisor to determine the
appropriate amount and method of inclusion in income of original issue discount
on such regular interest securities for federal income tax purposes.
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Although unclear at present, the depositor intends to treat interest on a
regular interest security that is a weighted average of the net interest rates
on mortgage loans as qualified stated interest. In such case, the weighted
average rate used to compute the initial pass-through rate on the regular
interest securities will be deemed to be the index in effect through the life of
the regular interest securities. It is possible, however, that the IRS may treat
some or all of the interest on regular interest securities with a weighted
average rate as taxable under the rules relating to obligations providing for
contingent payments. Such treatment may effect the timing of income accruals on
such regular interest securities.
Market Discount. A subsequent purchaser of a regular interest security
may also be subject to the market discount provisions of Code sections 1276
through 1278. These rules are described above under "Non-REMIC
Securities -- Market Discount."
Premium. The rules governing "premium" apply equally to regular interest
securities (see above "Non-REMIC Securities -- Premium").
Effects of Defaults and Delinquencies. Certain series of securities may
contain one or more classes of subordinated securities, and in the event there
are defaults or delinquencies on the mortgage assets, amounts that would
otherwise be distributed on the subordinated securities may instead be
distributed on the senior securities. Subordinated securityholders nevertheless
will be required to report income with respect to such securities under an
accrual method without giving effect to delays and reductions in distributions
on such subordinated securities attributable to defaults and delinquencies on
the mortgage assets, except to the extent that it can be established that such
amounts are uncollectible. As a result, the amount of income reported by a
subordinated securityholder in any period could significantly exceed the amount
of cash distributed to such 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 subordinated security
is reduced as a result of defaults and delinquencies on the mortgage assets.
Treatment of Realized Losses. Although not entirely clear, it appears
that holders of securities that are corporations should in general be allowed to
deduct as an ordinary loss any loss sustained during the taxable year on account
of any such securities becoming wholly or partially worthless, and that, in
general, holders of securities that are not corporations should be allowed to
deduct as a short-term capital loss any loss sustained during the taxable year
on account of any such securities becoming wholly worthless. Although the matter
is not entirely clear, non-corporate holders of securities may be allowed a bad
debt deduction at such time that the principal balance of any such security is
reduced to reflect realized losses resulting from any liquidated mortgage
assets. The Internal Revenue Service, however, could take the position that non-
corporate holders will be allowed a bad debt deduction to reflect realized
losses only after all mortgage assets remaining in the related trust fund have
been liquidated or the securities of the related series have been otherwise
retired. Potential investors and holders of the securities are urged to consult
their own tax advisors regarding the appropriate timing, amount and character of
any loss sustained with respect to such
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securities, including any loss resulting from the failure to recover previously
accrued interest or discount income. Special loss rules are applicable to banks
and thrift institutions, including rules regarding reserves for bad debts. Such
taxpayers are advised to consult their tax advisors regarding the treatment of
losses on securities.
Sale or Exchange. If a regular interest security is sold, exchanged,
redeemed or retired, the holder will recognize gain or loss equal to the
difference between the amount realized on such disposition and the adjusted
basis in the regular interest security. Similarly, a holder who receives a
payment denominated as principal with respect to a regular interest security
will recognize gain equal to the excess of the amount of such payment over his
adjusted basis in the regular interest security. A holder that receives a final
payment that is less than the holder's adjusted basis in a regular interest
security will generally recognize a loss. The adjusted basis of a regular
interest security generally will equal the cost of the regular interest security
to the holder, increased by any original issue discount or market discount
previously included in the holder's gross income with respect to the regular
interest security, and reduced by payments (other than payments of qualified
stated interest) previously received by the holder on the regular interest
security and by any amortized premium.
Except as note above with respect to market discount and except as noted
below, any such gain or loss on a regular interest security generally will be
capital gain or loss. Such gain or loss will be long-term gain or loss if the
regular interest security is held as a capital asset for more than one year.
Long-term capital gains of non-corporate taxpayers are subject to reduced
maximum rates while short-term capital gains are taxable at ordinary rates. The
use of capital losses is subject to limitations.
If the holder of a regular interest security is a bank, a mutual savings
bank, a thrift, or a similar institution described in section 582 of the Code,
any gain or loss on the sale or exchange of the regular interest security will
be treated as ordinary income or loss.
In the case of other types of holders, gain from the disposition of a
regular interest security that otherwise would be capital gain will be treated
as ordinary income to the extent that the amount actually includible in income
with respect to the regular interest security by the holder during his holding
period is less than the amount that would have been includible in income if the
yield on that regular interest security during the holding period had been 110%
of a specified U.S. Treasury borrowing rate as of the date that the holder
acquired the regular interest security. Although the relevant legislative
history indicates that the portion of the gain from disposition of a regular
interest security that will be recharacterized as ordinary income is limited to
the amount of original issue discount (if any) on the regular interest security
that was not previously includible in income, the applicable Code provision
contains no such limitation.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES.
The REMIC will not be subject to Federal income tax except with respect to
income from prohibited transactions and certain other transactions. See
"-- Prohibited Transactions and Contributions Tax" below. Instead, the original
holder of a security representing a residual interest (a "residual interest
security") will report on its federal
94
income tax return, as ordinary income, the "daily portion" of the taxable income
or net loss of the REMIC for each day during the taxable year on which such
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 such quarter, and by allocating that
amount among the holders (on such day) of the residual interest securities in
proportion to their respective holdings on such day.
The taxable income of the REMIC will be determined under an accrual method
and will be taxable to the holders of residual interest securities without
regard to the timing or amounts of cash distributions by the REMIC. Ordinary
income derived from residual interest securities will be "portfolio income" for
purposes of the taxation of taxpayers subject to the limitations on the
deductibility of "passive losses." As residual interests, the residual interest
securities will be subject to tax rules, described below, that differ from those
that would apply if the residual interest securities were treated for federal
income tax purposes as direct ownership interests in the mortgage assets or as
debt instruments issued by the REMIC.
The holder of a residual interest security may be required to include
taxable income from the residual interest security in excess of the cash
distributed. 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.
In any event, because the holder of a residual interest security 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 security or stripped instrument
having similar cash flow characteristics and pretax yield. Therefore, the
after-tax yield on the residual interest security may be less than that of such
a security or instrument.
A subsequent residual interest securityholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such residual interest securityholder owns
such residual interest security. Those daily amounts generally would equal the
amounts that would have been reported for the same days by an original residual
interest securityholder, as described above. The legislative history to the Code
provisions governing this matter indicates that certain adjustments may be
appropriate to reduce (or increase) the income of a subsequent holder of a
residual interest security that purchased such residual interest security at a
95
price greater than (or less than) the adjusted basis such residual interest
security would have in the hands of an original residual interest
securityholder. See "-- Sale or Exchange" below. It is not clear, however,
whether such adjustments will in fact be permitted or required and, if so, how
they would be made. The REMIC Regulations do not provide for any such
adjustments.
Limitation on Losses. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. 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 such loss
arises. A holder's basis in a residual interest security will initially equal
such 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
such holders should consult their 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 such 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 such
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 such holder's adjusted
basis in the residual interest security at the time of such sale or exchange. In
general, any such gain or loss will be capital gain or loss provided the
residual interest security is held as a capital asset. However, residual
interest securities will be "evidences of indebtedness" within the meaning of
Code Section 582(c)(1), so that gain or loss recognized from sale of a residual
interest security by a bank or thrift institution to which such section applies
would be ordinary income or loss. Any loss upon disposition of a residual
interest security may be disallowed if the selling holder acquires any residual
interest in a REMIC or similar mortgage pool within six months before or after
such disposition. In that event, any loss will increase such regular interest
securityholder's adjusted basis in the newly acquired interest.
Excess Inclusions. The excess inclusion portion of a REMIC's income is
generally equal to the excess, if any, of (a) REMIC taxable income for the
quarterly period allocable to a residual interest security, over (b) the daily
accruals for such quarterly period. For this purpose, daily accruals are
determined by allocating to each day in the calendar quarter its ratable portion
of the "adjusted issue price" of the residual interest security at the beginning
of such quarterly period and 120% of the long term applicable federal rate in
effect on the date the residual interest security is issued. The adjusted
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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. 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
outstanding marketable obligations of the United States government having
remaining maturities in excess of nine years.
The portion of the REMIC taxable income of a holder of a residual interest
security consisting of "excess inclusion" income will be subject to federal
income tax in all events and may not be offset by unrelated deductions or
losses, including net operating losses, on such 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, such holder's excess inclusion income will be treated as unrelated
business taxable income of such holder. If a residual interest security is owned
by a foreign 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. The Small Business
Job Protection Act of 1996 has eliminated the special rule permitting section
593 institutions ("thrift institutions") to use net operating losses and other
allowable deductions to offset their excess inclusion income from REMIC residual
securities that have "significant value" within the meaning of the REMIC
Regulations, effective for taxable years beginning after December 31, 1995,
except with respect to residual securities continuously held by a thrift
institution since November 1, 1995.
In the case of any residual interest securities held by a real estate
investment trust, the Code provides that under regulations to be issued the
aggregate excess inclusions with respect to such residual interest securities,
reduced (but not below zero) by the real estate investment trust taxable income
(within the meaning of Code Section 857(b)(2), excluding any net capital gain),
will be allocated among the shareholders of such trust in proportion to the
dividends received by such shareholders from such trust, and any amount so
allocated will be treated as an excess inclusion with respect to a residual
interest security as if held directly by such shareholder. Regulated investment
companies, common trust funds and certain cooperatives are subject to similar
rules. No such regulations have been issued to date and it is unclear how this
provision would be applied in practice.
In addition, the Small Business Job Protection Act of 1996 provides 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 such 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.
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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 residual interest
security 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 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income. Accordingly, the applicable Pooling and Servicing
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 will be imposed on the transferor of such 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. The pass-through entity otherwise liable
for the tax, for any period during which the disqualified organization is the
record holder of an interest in such entity, will be relieved of liability for
the tax if such record holder furnishes to such entity an affidavit that such
record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
Except as may be provided in Treasury regulations not yet issued, any person
holding an interest in a pass-through entity as a nominee for another will, with
respect to such interest, be treated as a pass-through entity. Under the
Taxpayer Relief Act of 1997, large partnerships (generally with 250 or more
partners) will be taxable on excess inclusion income as if all partners were
disqualified organizations.
Under the REMIC Regulations, if a residual interest security is a
"noneconomic residual interest," as described below, such 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 (i) 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 rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. A
significant purpose to impede the assessment or collection of tax exists if the
transferor, at the time of the transfer, either knew or should have known that
the transferee would be unwilling or unable to pay taxes
98
due on its share of the taxable income of the REMIC. Under final regulations
issued by the Treasury Department on July 19, 2002, a transferor is presumed not
to have such knowledge if (i) the transferor conducted a reasonable
investigation of the financial condition of the transferee, (ii) the transferee
acknowledges to the transferor that the residual interest security may generate
tax liabilities in excess of the cash flow and the transferee represents that it
intends to pay such taxes associated with the residual interest security as they
become due, (iii) the transferee represents that it will not cause income from
the residual interest security to be attributable to a foreign permanent
establishment or fixed base of the transferee or another U.S. taxpayer and (iv)
the transfer satisfies either an "asset test" or "formula test." The "asset
test" requires that the transfer be to certain domestic taxable corporations
with large amounts of gross and net assets where an agreement is made that all
future transfers will be to taxable domestic corporations in transactions that
qualify for the aforementioned "safe harbor." The asset test is not satisfied if
the facts and circumstances known to the transferor reasonably indicate that the
taxes associated with the residual interest security will not be paid.
Meanwhile, the "formula test" requires that the present value of the anticipated
tax liabilities associated with holding the residual interest does not exceed
the sum of (i) the present value of any consideration given to the transferee to
acquire the interest, (ii) the present value of the expected future
distributions on the interest, and (iii) the present value of any anticipated
tax savings associated with holding the interest as the REMIC generates losses.
If a transfer of a "noneconomic residual security" is disregarded, the
transferor would continue to be treated as the owner of the residual interest
security and would continue to be subject to tax on its allocable portion of the
net income of the REMIC.
Inducement Fees. The REMIC Regulations (i) require transferees of
noneconomic residual interests that receive payments made to induce the
acquisition of such interests ("inducement fees") to recognize such fees as
income over the expected remaining life of the acquired REMIC in a manner that
reasonably reflects the after-tax costs and benefits of holding the residual
interests, and (ii) specify that inducement fees constitute income from sources
within the United States. These regulations will apply to any inducement fee
received in connection with the acquisition of a residual interest security.
Foreign Investors. The REMIC Regulations provide that the transfer of a
residual interest security that has a "tax avoidance potential" to a "foreign
person" will be disregarded for federal income tax purposes. This rule appears
to apply to a transferee who is not a U.S. Person unless such transferee's
income in respect of the residual interest security is effectively connected
with the conduct of a United Sates trade or business. A residual interest
security is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor reasonably expect that the REMIC will distribute to the
transferee amounts that will equal at least 30 percent of each excess inclusion,
and that such amounts will be distributed at or after the time the excess
inclusion accrues and not later than the end of the calendar year following the
year of accrual. If the non-U.S. Person transfers the residual interest security
to a U.S. Person, the transfer will be disregarded, and the foreign transferor
will continue to be treated as the owner, if the transfer has the effect of
allowing the transferor to avoid tax on accrued excess
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inclusions. The Agreements will provide that no residual interest security may
be transferred to a non-U.S. Person. 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 not
a Non-U.S. Person.
The Agreements provide that any attempted transfer or pledge in violation
of the transfer restrictions shall be absolutely null and void and shall vest no
rights in any purported transferee. Investors in residual interest securities
are advised to consult their own tax advisors with respect to transfers of the
residual interest securities and, in addition, pass-through entities are advised
to consult their own tax advisors with respect to any tax which may be imposed
on a pass-through entity.
Mark to Market Rules. Prospective purchasers of a residual interest
security should be aware that such a 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.
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.
Qualification as a REMIC. The trust estate or one or more designated
pools of the assets of the trust estate may elect to be treated under the Code
as a REMIC in which the regular interest securities and residual interest
securities will constitute the "regular interests" and "residual interests,"
respectively, if a REMIC election is in effect and certain tests concerning (i)
the composition of the REMIC's assets and (ii) the nature of the holders'
interests in the REMIC are met on a continuing basis. A loss of REMIC status
could have a number of consequences for holders. If, as the result of REMIC
disqualification, the trust estate were treated as an association taxable as a
corporation, distributions on the security could be recharacterized in part as
dividends from a non-includible corporation and in part as returns of capital.
Alternatively, distributions on a regular interest security could continue to be
treated as comprised of interest and principal notwithstanding REMIC
disqualification, in which case a cash-basis holder might not be required to
continue to recognize interest and market discount with respect to the security
on a accrual basis. Under the first alternative, a loss of REMIC status would,
and under the second alternative, a loss of REMIC status could cause the
securities and the associated distributions not to be qualified assets and
income for the various purposes of domestic building and loan associations,
FASITs and REITs described under "REMIC Securities -- Status as Real Property
Loans" above, although
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such a loss would not affect the status of the securities as "government
securities" for REITs. The securities should continue to qualify as "government
securities" for regulated investment companies, regardless of whether REMIC
status is lost.
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 (i) 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 (ii) 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
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 such
expenses, when aggregated with such holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such 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 original issue discount 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
original issue discount income on such loans will be equivalent to the method
under which securityholders accrue original issue discount (i.e., under the
constant yield method taking into account the Prepayment Assumption). The REMIC
will deduct original issue discount on the regular interest securities in the
same manner that the holders of the regular interest securities include such
discount in income, but without regard to the de minimis rules. See "Taxation of
Regular Interest Securities" above. However, a REMIC that acquires loans at a
market discount must include such 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 such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
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,
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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: (i) subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC; (ii) subject to limited exceptions,
the sale or other disposition of a cash flow investment; (iii) the receipt of
any income from assets not permitted to be held by the REMIC pursuant to the
Code; or (iv) 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 any such
taxes imposed on the REMIC. To the extent not paid by such holders or otherwise,
however, such taxes will be paid out of the trust fund and will be allocated pro
rata to all outstanding classes of securities of such REMIC.
WITHHOLDING WITH RESPECT TO CERTAIN FOREIGN INVESTORS
Interest paid to or accrued by a beneficial owner of a security who is a
not a 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, provided the interest is not effectively connected with the
conduct of a trade or business within the United States by the foreign person
and the foreign person (i) is not actually or constructively a 10 percent
shareholder of the depositor or its affiliates or a controlled foreign
corporation with respect to which the depositor or its affiliates is a related
person (all within the meaning of the Code) and (ii) provides the Indenture
Trustee or other person who is otherwise required to withhold U.S. tax with
respect to the securities (the "withholding agent") with an appropriate
statement on Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for
United States Tax Withholding). If a security 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-8BEN provided by the foreign person that owns the security. If the information
shown on Form W-8BEN changes, a new Form W-8BEN must be filed. If interest on
the securities is not portfolio interest, then it will be subject to United
States federal income and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable tax treaty.
Under recently issued Treasury regulations, a payment to a foreign
partnership is treated, with some exceptions, as a payment directly to the
partners, so that the partners are required to provide any required
certifications. Foreign persons that intend to hold a security through a
partnership or other pass-through entity should consult their own tax advisors
regarding the application of those Treasury regulations to an investment in a
security.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a security by a foreign person will be exempt from United
States federal
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income and withholding tax, provided that (i) such gain is not effectively
connected with the conduct of a trade or business in the United States by the
foreign person and (ii) in the case of a foreign person who is an individual,
the foreign person is not present in the United States for 183 days or more in
the taxable year.
For purposes of this discussion, the term "U.S. Person" means (i) a citizen
or resident of the United States; (ii) a corporation (or entity treated as a
corporation for tax purposes) created or organized in the United States or under
the laws of the United States or of any state including the District of
Columbia; (iii) a partnership (or entity treated as a partnership for tax
purposes) organized in the United States or under the laws of the United States
or of any state including the District of Columbia (unless provided otherwise by
future Treasury regulations); (iv) an estate whose income is includible in gross
income for United States income tax purposes regardless of its source; or (v) a
trust, if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more U.S. Persons
have authority to control all substantial decisions of the trust.
Notwithstanding the last clause of the preceding sentence, to the extent
provided in Treasury regulations, certain trusts that were in existence on
August 20, 1996, that were treated as U.S. Persons prior to such date and that
elect to continue to be treated as U.S. Persons also will be U.S. Persons.
BACKUP WITHHOLDING
Under federal income tax law, a securityholder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner may
be subject to "backup withholding" under certain circumstances. Backup
withholding may apply to such person who is a United States person if such
person, among other things, (i) fails to furnish his social security number or
other taxpayer identification number, (ii) furnishes an incorrect taxpayer
identification number, (iii) fails to report properly interest and dividends, or
(iv) under certain circumstances, fails to provide a certified statement, signed
under penalties of perjury, that the taxpayer identification number provided is
correct and that such person is not subject to backup withholding. Backup
withholding may apply, under certain circumstances, to a securityholder who is a
Non-U.S. Person if the securityholder fails to provide securities broker with a
Foreign Person Certification. Backup withholding applies to "reportable
payments," which include interest payments and principal payments to the extent
of accrued original issue discount, as well as distributions of proceeds from
the sale of regular interest securities or residual interest securities. The
backup withholding rate is generally the fourth lowest rate of income tax as in
effect from time to time. Backup withholding, however, does not apply to
payments on a security made to certain exempt recipients, such as tax-exempt
organizations, and to certain Non-U.S. Persons. Securityholders should consult
their tax advisors for additional information concerning the potential
application of backup withholding to payments received by them with respect to a
security.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS ARE URGED TO CONSULT THEIR OWN
TAX ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
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STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described above,
potential investors should consider the state income tax consequences of the
acquisition, ownership, and disposition of the securities. State 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.
Therefore, potential investors should consult their own tax advisors with
respect to the various state tax consequences of an investment in the
securities.
ERISA CONSIDERATIONS
The following describes certain considerations under ERISA and Section 4975
of the Code, which apply only to securities of a series that are not divided
into subclasses. If securities are divided into subclasses, the prospectus
supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to such 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 certain Keogh plans, and on
collective investment funds and separate accounts in which such 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 such
Plans. 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 such Plans. ERISA also imposes
certain duties on persons who are fiduciaries of Plans. Under ERISA, any person
who exercises any discretionary authority or control respecting the management
or disposition of the assets of a Plan is considered to be a fiduciary of such
Plan (subject to certain exceptions not here relevant). Certain employee benefit
plans, such as governmental plans (as defined in Section 3(32) of ERISA) and, if
no election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA), are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in securities without regard
to the ERISA considerations described above and below, subject to the provisions
of applicable state law. Any such plan which is qualified and exempt from
taxation under Sections 401(a) and 501(a) of the Code, however, is subject to
the prohibited transaction rules set forth in Section 503 of the Code.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA prohibits a broad range of transactions
involving Plan assets and persons ("Parties in Interest") having certain
specified relationships to a Plan and imposes additional prohibitions where
Parties in Interest are fiduciaries with respect to such Plan. Certain Parties
in Interest that participate in a prohibited transaction may be subject to
excise taxes imposed pursuant to Section 4975 of the Code, or a penalty imposed
pursuant to Section 502(i) of ERISA, unless a statutory, regulatory or
administrative exemption is available.
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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. Under this regulation, the underlying assets and properties of
corporations, partnerships, trusts and certain other entities in which a Plan
acquires an "equity" interest could be deemed for purposes of ERISA and Section
4975 of the Code to be assets of the investing Plan in certain circumstances
unless certain exceptions apply.
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 which has no "substantial equity
features." If the securities of a series consist of notes or bonds that are not
treated as equity interests in the issuing trust for purposes of the Plan Asset
Regulation, a Plan's investment in such notes or bonds would not cause the trust
assets to be deemed Plan assets. However, the depositor, the servicer, the
trustee and the underwriter may be the depositor of or investment advisor with
respect to one or more Plans. Because such parties may receive certain benefits
in connection with the sale of the notes or bonds, the purchase of notes or
bonds using Plan assets over which any such parties (or any affiliates thereof)
has investment authority might be deemed to be a violation of the prohibited
transaction rules of ERISA and the Code for which no exemption may be available.
Accordingly, notes or bonds may not be purchased using the assets of any Plan if
the depositor, the servicer, the trustee, the underwriter or any of their
affiliates (a) has investment or administrative discretion with respect to such
Plan assets; (b) has authority or responsibility to give, or regularly gives,
investment advice with respect to such Plan assets for a fee and pursuant to an
agreement of understanding that such advice (i) will serve as a primary basis
for investment decisions with respect to such Plan assets and (ii) will be based
on the particular investment needs for such Plan; or (c) is an employer
maintaining or contributing to such Plan.
In addition, the issuing trust or an affiliate might be considered or might
become a Party in Interest with respect to a Plan. Also, any holder of
certificates issued by the trust, because of its activities or the activities of
its respective affiliates, may be deemed to be a Party in Interest with respect
to certain Plans, including but not limited to Plans depositored by such holder.
In either case, the acquisition or holding of notes by or on behalf of such a
Plan could be considered to give rise to a prohibited transaction within the
meaning of ERISA and the Code, unless it is subject to one or more exemptions
such as:
- Prohibited Transaction Class Exemption ("PTCE") 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified
professional asset manager";
- PTCE 90-1, which exempts certain transactions involving insurance company
pooled separate accounts;
- PTCE 91-38, which exempts certain transactions involving bank collective
investment funds;
105
- PTCE 95-60, which exempts certain transactions involving insurance
company general accounts; or
- PTCE 96-23, which exempts certain transactions effected on behalf of a
Plan by certain "in-house asset managers."
The prospectus supplement for a series of securities may require that Plans
investment in notes or bonds represent that the relevant conditions for
exemptive relief under at least one of the foregoing exemptions have been
satisfied.
The Plan Asset Regulation provides that, generally, the assets of an entity
in which a Plan invests will not be deemed for purposes of ERISA to be assets of
such Plan if the equity interest acquired by the investing Plan is a
publicly-offered security, or if equity participation by benefit plan investors
is not significant. In general, 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 (the
"Exchange Act"). Equity participation in an entity by benefit plan investors is
not significant if, after the most recent acquisition of an equity interest in
the entity, less than 25% of the value of each class of equity interest in the
entity is held by "benefit plan investors," which include benefit plans
described in ERISA or under Section 4975 of the Code, whether or not they are
subject to ERISA, as well as entities whose underlying assets include assets of
a Plan by reason of a Plan's investment in the entity.
If no exception under the Plan Asset Regulation applies and if a Plan (or a
person investing Plan assets, such as an insurance company general account)
acquires an equity interest in a trust established for a series of securities,
then the trust assets would be considered to be assets of the Plan. Because the
loans held by the trust may be deemed Plan assets of each Plan that purchases
equity securities, an investment in the securities by a Plan might be a
prohibited transaction under Sections 406 and 407 of ERISA and subject to an
excise tax under Section 4975 of the Code and may cause transactions undertaken
in the course of operating the trust to constitute prohibited transactions,
unless a statutory or administrative exemption applies.
The DOL has issued PTCE 83-1, which exempts 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 such certificates. If
the general conditions (discussed below) of PTEC 83-1 are satisfied, investments
by a Plan in certificates that provide for pass-through payments of principal
and interest and represent beneficial undivided fractional interests in a fixed
investment pool consisting solely of interest-bearing obligations secured by
first or second mortgages or deeds of trust on single-family residential
property, property acquired in foreclosure and undistributed cash ("single
family securities") will be exempt from the prohibitions of Sections 406(a) and
407 of ERISA (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 depositor,
106
the Plan does not purchase more than 25% of all single family securities, and at
least 50% of all single family securities are purchased by persons independent
of the pool depositor or pool trustee. PTCE 83-1 does not provide an exemption
for transactions involving subordinate securities.
The discussion in this and the next succeeding paragraph applies only to
single family securities. PTCE 83-1 sets forth three general conditions which
must be satisfied for any transaction to be eligible for exemption:
- the maintenance of a system of insurance or other protection for the
pooled mortgage loans and property securing such loans, and for
indemnifying certificateholders 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;
- the existence of a pool trustee who is not an affiliate of the pool
depositor; and
- a limitation on the amount of the payment retained by the pool depositor,
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 depositor to the pool.
The depositor believes that the first general condition referred to above
will be satisfied with respect to the certificates issued without a
subordination feature, or the senior certificates only in a series issued with a
subordination feature, provided that the subordination and reserve account,
subordination by shifting of interests, the 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 certificates 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 certificates satisfies the first general
condition referred to above, there can be no assurance that these features will
be so viewed by the DOL. 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 PTCE 83-1 have been satisfied, or as to the availability of any
other prohibited transaction exemptions. Each Plan fiduciary should also
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
107
The DOL has issued to various underwriters individual prohibited
transaction exemptions which generally exempt from the application of certain
prohibited transaction provisions of ERISA and the Code transactions with
respect to the initial purchase, the holding and the subsequent resale by Plans
of securities issued by the investment pools whose assets consist of:
- certain types of secured receivables, secured loans and other secured
obligations, including home equity loans, obligations secured by shares
issued by a cooperative housing association, and obligations that bear
interest or are purchased at a discount and which are secured by
single-family residential real property and/or multi-family residential
real property (including obligations secured by leasehold interests on
residential real property);
- property securing a permitted obligation;
- undistributed cash, cash credited to a "pre-funding account" or a
"capitalized interest account", and certain temporary investments made
therewith; and
- certain types of credit support arrangements, including yield supplement
agreements and interest-rate swaps that meet certain requirements set
forth in exemptions.
The securities covered by the underwriter exemptions include certificates
representing a beneficial ownership interest in the assets of a trust (including
a grantor trust, owner trust or REMIC) and which entitle the holder to payments
of principal, interest and/or other payments made with respect to the assets of
such trust.
Among the conditions that must be satisfied for the underwriter exemptions
to apply are the following:
- the plan must acquire the securities on terms, including the security
price, that are at least as favorable to the plan as they would be in an
arm's-length transaction with an unrelated party;
- the securities must not be subordinated to any other class of securities
issued by the same issuer, unless the securities are issued in a
"designated transaction";
- at the time of acquisition, the securities acquired by the plan must have
received a rating in one of the three (or, in the case of designated
transactions, four) highest generic rating categories from Standard and
Poor's Rating Services, Moody's Investors Service, Inc. or Fitch Ratings,
each referred to herein as a "rating agency";
- the trustee must not be an affiliate of any other member of the
"restricted group";
- the sum of all payments made to and retained by the underwriter must not
total more than reasonable compensation for underwriting the securities,
the sum of all payments made to and retained by the issuer's depositor
for assigning the obligations to the issuer must not total more than the
fair market value of the obligations, and the sum of all payments made to
and retained by any servicer
108
must not total more than reasonable compensation and expense
reimbursement for its services;
- the plan must be an "accredited investor" as defined in Rule 501(a)(1) of
Regulation D of the commission under the Securities Act of 1933; and
- in the event that all of the obligations used to fund the issuer have not
been transferred to the issuer on the closing date, additional
obligations having an aggregate value equal to no more than 25% of the
total principal amount of the securities being offered may be transferred
to the issuer under a pre-funding feature within ninety days or three
months following the closing date.
The issuer must also meet the following requirements:
- the assets of the issuer must consist solely of assets of the type that
have been included in other investment pools;
- securities evidencing interests in other investment pools must have been
rated in one of the three (or in the case of designated transactions,
four) highest rating categories by a rating agency for at least one year
prior to the plan's acquisition of securities; and
- investors other than plans must have purchased securities evidencing
interests in the other investment pools for at least one year prior to
the plan's acquisition of securities.
For purposes of the underwriter exemptions, the term "designated
transaction" includes any securitization transaction in which the assets of the
issuer consist solely of home equity loans, obligations secured by shares issued
by a cooperative housing association and/or obligations that bear interest or
are purchased at a discount and which are secured by single-family residential
real property and/or multi-family residential real property (including
obligations secured by leasehold interests on residential real property). Such
home equity loans and residential mortgage loans may be less than fully secured,
provided that:
- the securities acquired by a plan in the designated transaction are not
subordinated to any other class of securities issued by the same issuer;
- at the time of acquisition, the securities acquired by the plan must have
received a rating in one of the two highest generic rating categories
from a rating agency; and
- the obligations must be secured by collateral whose fair market value on
the closing date of the designated transaction is at least equal to 80%
of the sum of (i) the outstanding principal balance due under the
obligation and (ii) the outstanding principal balance of any other
obligations of higher priority (whether or not held by the issuer) which
are secured by the same collateral.
The underwriter exemptions also provide relief from various
self-dealing/conflict of interest prohibited transactions that may occur when a
plan fiduciary causes a plan to acquire securities of an issuer and the
fiduciary, or its affiliate, is an obligor with respect
109
to obligations or receivables contained in the issuer; provided that, among
other requirements:
- in the case of an acquisition in connection with the initial issuance of
the securities, at least fifty percent of each class of securities in
which plans have invested is acquired by persons independent of the
restricted group and at least fifty percent of the aggregate interest in
the issuer is acquired by persons independent of the restricted group;
- the fiduciary, or its affiliate, is an obligor with respect to five
percent or less of the fair market value of the obligations or
receivables contained in the issuer;
- the plan's investment in each class of securities does not exceed
twenty-five percent of all of the securities of that class outstanding at
the time of acquisition; and
- immediately after the plan acquires the securities, no more than
twenty-five percent of the plan's assets for which the person is a
fiduciary are invested in certificates representing an interest in one or
more trusts containing assets sold or serviced by the same entity.
The underwriter exemptions do not apply to plans depositored by a member of
the restricted group, which includes the depositor, the servicer (and any
subservicer), the trustee, the underwriter, any obligor with respect to
obligations or receivables included in the issuer constituting more than five
percent of the aggregate unamortized principal balance of the issuer's assets,
any insurer, the counterparty to any interest-rate swap entered into by the
issuer and any affiliate of these parties.
Prohibited transaction exemption 2000-58 amended the underwriter exemptions
and extended the relief available thereunder to transactions involving the
initial purchase, the holding and the subsequent resale by plans of securities
denominated as debt that are issued by, and are obligations of, investment pools
whose assets are held in trust. The same conditions described above relating to
certificates must also be met with respect to notes. In addition, prior to the
issuance of the notes, the issuer must receive a legal opinion to the effect
that the noteholders will have a perfected security interest in the issuer's
assets. As with certificates, exemptive relief would not be available for plans
depositored by a member of the restricted group.
The prospectus supplement will provide further information that plans
should consider before purchasing the securities. Any plan fiduciary that
proposes to cause a plan to purchase securities is encouraged to consult with
its counsel concerning the impact of ERISA and the Code, the applicability of
PTE 83-1, the availability and applicability of any underwriter exemption or any
other exemptions from the prohibited transaction provisions of ERISA and the
Code and the potential consequences in their specific circumstances, before
making the investment. 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 composition of the plan's
investment portfolio.
110
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, business 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 such entities. Under SMMEA, if a state enacted
legislation prior to October 4, 1991 specifically limiting the legal investment
authority of any of these entities with respect to mortgage related securities,
securities will constitute legal investments for entities subject to such
legislation only to the extent provided therein. Approximately twenty-one states
adopted such legislation prior to the October 4, 1991 deadline. SMMEA provides,
however, that in no event will the enactment of this type of 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
such contractually commitment was made or such 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 NCUA 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" (12C.F.R. Part 703), which sets forth certain restrictions on
investments 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).
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)
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, high-risk mortgage
securities include
111
securities not entitled to distributions allocated to principal or interest and
subordinate 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 which may restrict or prohibit investment in
securities which are not "interest bearing" or "income paying."
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. Investors should consult their own legal advisors in determining whether
and to what extent the securities constitute legal investments for them.
METHOD OF DISTRIBUTION
The securities are being offered hereby in series from time to time (each
series evidencing or relating to a separate trust) through any of the following
methods:
- by negotiated firm commitment underwriting and public reoffering by
underwriters;
- by agency placements through one or more placement agents primarily with
institutional investors and dealers; and
- 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;
- either the price at which such 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;
- 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 related series if any of
those securities are purchased.
112
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.
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 of 1933, as amended,
or to contribution with respect to payments which such underwriters or agents
may be required to make in respect thereof.
Redwood Trust, Inc. or other affiliates of the depositor may purchase
securities and pledge them to secure indebtedness or, together with its
pledgees, donees, transferees or other successors in interest, sell the
securities, from time to time, either directly or indirectly through one or more
underwriters, underwriting syndicates or designated agents.
If a series is offered other than through underwriters, the prospectus
supplement relating to that series will contain information regarding the nature
of the offering and any agreements to be entered into between the depositor and
purchasers of securities of that series.
LEGAL MATTERS
The validity of the securities will be passed upon for the depositor by
Tobin & Tobin, a professional corporation, San Francisco, California. Certain
federal income tax consequences with respect to the securities will be passed
upon for the depositor by Chapman and Cutler LLP, San Francisco, California.
FINANCIAL INFORMATION
A new trust will be formed with respect to each series of securities and no
trust 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 will be included in this
prospectus or in the prospectus supplement.
AVAILABLE INFORMATION
The depositor has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the securities. This
prospectus, which forms a part of the registration statement, and the supplement
relating to each series of securities contain information set forth in the
registration statement pursuant to the rules and regulations of the SEC. For
further information, reference is made to such registration statement and the
exhibits thereto, which may be inspected and copied at the facilities maintained
by the SEC at its Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at its regional offices located as follows:
<Table>
Chicago Regional Office, New York Regional Office
500 West Madison Street, Suite 1400 233 Broadway
Chicago, Illinois 60661 New York, New York 10279
</Table>
113
Please call the SEC at 1-800-732-0330 for further information on the public
reference rooms. The SEC maintains a website at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants including the depositor, that file electronically with the SEC.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference some of the information filed
with it, which means that important information can be disclosed by referring to
those documents. Any statement contained in a document incorporated or deemed to
be incorporated by reference in this prospectus shall be deemed to be modified
or superseded for all purposes of this prospectus to the extent that a statement
contained in this prospectus (or in the accompanying supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference modifies or replaces such statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to constitute
a part of this prospectus. Neither the depositor nor the servicer for any series
intends to file with the SEC periodic reports with respect to the related trust
following completion of the reporting period required by Rule 15d-1 or
Regulation 15D under the Exchange Act.
All documents filed by or on behalf of the trust referred to in the
accompanying prospectus supplement with the SEC pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act on or after the date of that prospectus
supplement and prior to the termination of any offering of the securities issued
by the trust shall be deemed to be incorporated by reference in this prospectus
and to be a part of this prospectus from the date of the filing of those
documents.
The trust will provide without charge to each person to whom this
prospectus is delivered, on the written or oral request of such person, 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 such exhibits are
specifically incorporated by reference into the information that this prospectus
incorporates). Requests for these documents should be directed to the corporate
trust office of the trustee specified in the accompanying prospectus supplement.
RATING
It is a condition to the issuance of the securities of each series offered
hereby and by the supplement that they shall be rated in one of the four highest
rating categories by the nationally recognized statistical rating agency or
agencies specified in the prospectus supplement.
Ratings on asset-backed securities address the likelihood of receipt by
securityholders of all distributions on the trust assets. These ratings address
the structural, legal and issuer-related aspects associated with such
securities, the nature of the trust assets and the credit quality of the credit
enhancer or guarantor, if any. Ratings on asset-backed securities do not
represent any assessment of the likelihood of principal
114
prepayments by mortgagors or of the degree by which actual prepayments might
differ from those originally anticipated. As a result, securityholders might
suffer a lower than anticipated yield, and, in addition, holders of stripped
securities in extreme cases might fail to recoup their underlying investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Further, security ratings do not address the effect of prepayments
on the yield anticipated by the investor. Each security rating should be
evaluated independently of any other security rating.
115
INDEX OF DEFINED TERMS
<Table>
<Caption>
accrual securities.......................................... 35
accrued period.............................................. 87
acquisition premium......................................... 88
adjusted issue price........................................ 87, 96
Agreement................................................... 14
backup withholding.......................................... 103
balloon payment............................................. 15
beneficial owners........................................... 42
buydown..................................................... 21
capital asset............................................... 84
CERCLA...................................................... 77
class security balance...................................... 34
Code........................................................ 33, 84
collateral value............................................ 18
collection account.......................................... 58
components.................................................. 39
contingent interest payment................................. 86
cut-off date................................................ 13
daily portions.............................................. 87
disqualified organization................................... 98
DOL......................................................... 105
DTC......................................................... 11
due on sale................................................. 16
EPA......................................................... 77
ERISA....................................................... 33
evidences of indebtedness................................... 92, 96
Exchange Act................................................ 106
FASIT....................................................... 92
FHA loans................................................... 19
Garn-St. Germain Act........................................ 80
government securities....................................... 85, 92
indemnified party........................................... 67
IRS......................................................... 85
lockout periods............................................. 16
Lower Tier REMIC............................................ 91
mortgage related securities................................. 7, 111
NCUA........................................................ 111
noneconomic residual interest............................... 98
non-REMIC Securities........................................ 84
OID Regulations............................................. 85
</Table>
116
<Table>
<Caption>
Parties in Interest......................................... 104
passive losses.............................................. 95
permitted assets............................................ 92
permitted investments....................................... 50
Plans....................................................... 104
Policy Statement............................................ 111
portfolio income............................................ 95
PTCE........................................................ 105
qualified mortgages......................................... 92
RCRA........................................................ 78
refinance loan.............................................. 18
regular interest securities................................. 91
REIT........................................................ 92
Relief Act.................................................. 82
REMIC....................................................... 84
REMIC Regulations........................................... 84
residual interest securities................................ 94
secured creditor exclusion.................................. 77
single family securities.................................... 106
SMMEA....................................................... 111
strip....................................................... 41
structuring range........................................... 40
Tax Prepayment Assumption................................... 87
thrift institutions......................................... 97
Title V..................................................... 81
Upper Tier REMIC............................................ 91
US person................................................... 102
VA loans.................................................... 19
withholding agent........................................... 102
</Table>
117
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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 ANY OTHER INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURITIES OFFERED HEREBY BY
ANYONE IN ANY JURISDICTION IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION
IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH
OFFER OR SOLICITATION. WE REPRESENT THE ACCURACY OF THE INFORMATION IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS ONLY AS OF THE DATES ON
THEIR RESPECTIVE COVERS.
$710,040,100
(APPROXIMATE)
SEQUOIA MORTGAGE TRUST 2004-11
Mortgage Pass-Through Certificates
Sequoia Residential Funding, Inc.
Depositor
PROSPECTUS SUPPLEMENT
------------------
MERRILL LYNCH & CO. BANC OF AMERICA
SECURITIES LLC
(Co-Lead Manager) (Co-Lead Manager)
Co-Managers:
RBS GREENWICH CAPITAL
MORGAN STANLEY
November 18, 2004
Dealers will be required to deliver a prospectus supplement and prospectus
when acting as underwriters of the certificates offered hereby and with respect
to their unsold allotments or subscriptions. In addition, all dealers selling
the certificates, whether or not participating in this offering, may be required
to deliver a prospectus supplement and prospectus until ninety days after the
date of this prospectus supplement.
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