Filed Pursuant to Rule 424(b)(5)
Registration File No.: 333-54184
PROSPECTUS SUPPLEMENT
(To Prospectus dated March 13, 2001)
$150,000,000
(APPROXIMATE)
AAMES MORTGAGE TRUST 2001-1
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 2001-1
AAMES CAPITAL CORPORATION
AS SPONSOR
COUNTRYWIDE HOME LOANS, INC.
AS SERVICER
OFFERED PRINCIPAL PASS-THROUGH PRICE TO UNDERWRITING PROCEEDS TO THE
CERTIFICATES BALANCE RATE PUBLIC(1) DISCOUNT SPONSOR(1)(2)
- -------------- ------------------ ---------------------- ----------------- -------------- ------------------
Class A-1 $100,000,000 6.379%(3)(4) 100.00000% 0.22500% 99.77500%
Class A-2 $ 26,000,000 6.388%(3)(4) 100.00000% 0.22500% 99.77500%
Class A-IO Notional 6.000% (5) (5) (5)
Class M-1 $ 9,750,000 7.193%(3)(4) 100.00000% 0.55000% 99.45000%
Class M-2 $ 8,250,000 7.588%(3)(4) 100.00000% 0.70000% 99.30000%
Class B $ 6,000,000 7.588%(3)(4) 97.28125% 0.91875% 96.36250%
------------ ---------- --------- -------------
Total $150,000,000 $149,836,875 $450,000 $149,386,875
- ----------
(1) Plus accrued interest, if any, from March 1, 2001.
(2) Before deducting expenses, estimated to be approximately $700,000.
(3) Subject to a maximum rate as described in this prospectus supplement.
(4) Subject to a step-up if the optional termination is not exercised.
(5) The Class A-IO certificates will be purchased by Greenwich Capital
Markets, Inc. from the sponsor and may be offered by Greenwich Capital
Markets, Inc. from time to time for sale to the public in negotiated
transactions or otherwise at varying prices to be determined at the time
of the sale. Proceeds to the sponsor from the sale of the Class A-IO
certificates will be approximately $2,058,501, plus accrued interest,
before deducting expenses.
(sidebar)
- --------------------------------------------------------------------------------
YOU SHOULD CAREFULLY REVIEW THE INFORMATION UNDER THE CAPTION "RISK FACTORS"
BEGINNING ON PAGE S-10 IN THIS PROSPECTUS SUPPLEMENT.
THE CERTIFICATES ARE NON-RECOURSE OBLIGATIONS OF THE TRUST ONLY AND DO NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF AAMES CAPITAL CORPORATION, THE TRUSTEE
OR ANY OF THEIR AFFILIATES.
THIS PROSPECTUS SUPPLEMENT MUST BE ACCOMPANIED BY THE PROSPECTUS IF IT IS BEING
USED TO OFFER AND SELL THE CERTIFICATES.
- --------------------------------------------------------------------------------
(end sidebar)
THE CERTIFICATES
o represent the entire beneficial interest in a trust, whose assets include a
pool of fixed rate and adjustable rate mortgage loans secured by first and
junior liens on one-to four-family residential properties,
o currently have no trading market and
o are obligations of the trust only and are not obligations of the sponsor,
the servicer or their affiliates.
CREDIT ENHANCEMENT
o overcollateralization,
o excess interest and
o subordination.
THE TRUST
o will make REMIC elections for federal income tax purposes.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE CERTIFICATES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The offered certificates will be delivered in book-entry form only, on or about
March 29, 2001.
------------------
GREENWICH CAPITAL MARKETS, INC.
COUNTRYWIDE SECURITIES CORPORATION
LEHMAN BROTHERS
MORGAN STANLEY DEAN WITTER
March 13, 2001
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT
AND THE ACCOMPANYING PROSPECTUS.
We provide information to you about the certificates in two separate
documents that provide progressively more detail:
o the accompanying prospectus, which provides general information, some of
which may not apply to your certificates; and
o this prospectus supplement, which describes the specific terms of your
certificates.
YOU SHOULD RELY PRIMARILY ON THE DESCRIPTION OF YOUR CERTIFICATES IN THIS
PROSPECTUS SUPPLEMENT.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Mortgage Pass-Through Certificates, Series 2001-1 and with
respect to their unsold allotments or subscriptions. In addition, all dealers
selling Mortgage Pass-Through Certificates, Series 2001-1, will be required to
deliver a prospectus supplement and prospectus for ninety days following the
date of this prospectus supplement.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT PROSPECTUS
CAPTION PAGE CAPTION PAGE
- ------- ---- ------- ----
Summary ............................................ S-3 Incorporation of Certain Documents by
Risk Factors ....................................... S-10 Reference ................................ 2
Description of the Certificates .................... S-19 Use of Proceeds ............................. 3
Credit Enhancement ................................. S-35 Aames Capital Acceptance Corp ............... 3
The Mortgage Loans ................................. S-37 Aames Capital Corporation ................... 3
Prepayment and Yield Considerations ................ S-42 The Originators ............................. 6
Origination and Servicing of the Mortgage Description of the Securities ............... 12
Loans ........................................... S-54 Reports to Securityholders .................. 20
Primary Mortgage Insurer ........................... S-61 Credit Enhancement .......................... 22
Certain Federal Income Tax Consequences ............ S-62 The Pooling and Servicing Agreement ......... 24
ERISA Considerations ............................... S-63 The Indenture ............................... 35
Use of Proceeds .................................... S-64 Certain Legal Aspects of the Mortgage Loans
Legal Investment Considerations .................... S-64 and Related Matters ...................... 38
Underwriting ....................................... S-64 Federal Income Tax Considerations ........... 48
Legal Matters ...................................... S-66 State Tax Considerations .................... 75
Rating of the Offered Certificates ................. S-66 ERISA Considerations ........................ 75
Annex A: Description of the Mortgage Pool .......... A-1 Legal Investment ............................ 84
Annex B: Global Clearance, Settlement And Plan of Distribution ........................ 84
Tax Documentation Procedures .................... B-1 Legal Matters ............................... 85
S-2
SUMMARY
This section outlines the significant terms of the offered certificates. As
this is a summary, we do not attempt to discuss or describe in any detail the
terms outlined here. We recommend that you review carefully the more detailed
information in this prospectus supplement and in the attached prospectus.
THE ISSUER.................. Aames Mortgage Trust 2001-1.
THE SPONSOR................. Aames Capital Corporation, a California
corporation. The principal office of the sponsor
is located at 350 South Grand Avenue, 40th Floor,
Los Angeles, California 90071.
THE SERVICER................ Countrywide Home Loans, Inc., a New York
corporation. The servicer may appoint a
sub-servicer to service mortgage loans on its
behalf. During the servicer transfer period
expected to be completed by May 1, 2001, the
sponsor will act as interim subservicer.
THE TRUSTEE................. Bankers Trust Company of California, N.A.
CUT-OFF DATE................ The close of business on March 1, 2001, except
that the cut-off date for any mortgage loan
originated after March 1, 2001 will be the date
of origination of that mortgage loan.
STATISTIC CALCULATION DATE... February 15, 2001.
CLOSING DATE................ On or about March 29, 2001.
DISTRIBUTION DATES.......... The 25th day of each month or, if such day is
not a business day, the next business day,
beginning in April 2001.
RECORD DATES................ The last business day of the month before the
month in which the applicable distribution date
occurs.
FINAL SCHEDULED DISTRIBUTION
DATE....................... The final scheduled distribution date for each
class of offered certificates is as follows:
FINAL SCHEDULED
CLASS DISTRIBUTION DATE
----- -----------------
Class A-1 June 2031
Class A-2 June 2031
Class A-IO March 2004
Class M-1 June 2031
Class M-2 June 2031
Class B June 2031
S-3
The actual last distribution date for each class
of offered certificates is expected to be
significantly earlier than its final scheduled
distribution date.
DESIGNATIONS................ Each class of certificates will have different
characteristics. Certain of those characteristics
are reflected in the following general
designations. These designations are used in this
prospectus supplement and the attached prospectus
to provide you with a better understanding of the
certificates.
Book-Entry Certificates... All classes of offered certificates.
Offered Certificates...... The senior certificates and the subordinate
certificates.
Senior Certificates....... Class A-1, Class A-2 and Class A-IO
certificates.
Class A Certificates...... Class A-1 and Class A-2 certificates.
Subordinate Certificates... Class M-1, Class M-2 and Class B certificates.
Notional Amount
Certificates.............. Class A-IO certificates.
Mortgage Loan Group....... Group I or Group II, as applicable.
Group I................... Those mortgage loans having agency conforming
balances, bearing interest at fixed rates and at
rates that are fixed for some specified period
before beginning to adjust, and included in Group
I.
Group II.................. Those mortgage loans having both agency
conforming and non-conforming balances, bearing
interest at fixed rates and at rates that are
fixed for some specified period before beginning
to adjust, and included in Group II.
Retained Certificates..... Class C, Class P and Class R certificates.
S-4
REGISTRATION OF OFFERED CERTIFICATES
We will issue the offered certificates in book-entry form. You will hold
your interests either through a depository in the United States or upon request
through one of two depositories in Europe. You will not be entitled to receive a
definitive certificate representing your interests except under limited
circumstances that are described in this prospectus supplement. While the
certificates are in book-entry form, they will be registered in the name of the
applicable depository, or in the name of the depository's nominee. Transfers
within any depository system will be made in accordance with the usual rules and
operating procedures of that system.
We refer you to "Description of the Certificates -- Book-Entry Registration
of Offered Certificates" in this prospectus supplement, "Annex B: Global
Clearance, Settlement and Tax Documentation Procedures" to this prospectus
supplement and "Description of the Securities -- Book-Entry Securities" in the
prospectus.
RATINGS
The offered certificates will not be issued unless they receive the
respective ratings set forth below from Standard & Poor's, a division of The
McGraw-Hill Companies, Inc. and Moody's Investors Service, Inc.
STANDARD
CLASS & POOR'S MOODY'S
----- -------- -------
A-1 AAA Aaa
A-2 AAA Aaa
A-IO AAA Aaa
M-1 AA Aa2
M-2 A A2
B BBB Baa2
DISTRIBUTIONS ON THE OFFERED CERTIFICATES
INTEREST
The pass-through rate for each class of offered certificates is set forth
on the cover page of, and further described in, this prospectus supplement. The
pass-through rate for each class of offered certificates, other than the Class
A-IO certificates, is limited by a maximum rate cap that will be determined
based on the weighted average of the interest rates on the mortgage loans, minus
interest payable to the Class A-IO certificates and specified fees and expenses.
Holders of the offered certificates limited by the maximum rate cap will be
entitled to certain interest amounts in excess of the maximum rate cap, but such
amounts will be paid on a subordinated basis.
We refer you to "Description of the Certificates -- Pass-Through Rates" in
this prospectus supplement for a more detailed description of the pass-through
rates on the offered certificates.
Generally, on each distribution date, each class of offered certificates
will be entitled to interest in an amount equal to:
o the applicable pass-through rate, multiplied by
o the applicable certificate principal balance or notional balance on the
day before that distribution date, multiplied by
o 1/12, minus
o such class' share of civil relief act interest shortfalls and
prepayment interest shortfalls, plus
o any unpaid interest amounts from prior distribution dates, plus
o interest on such unpaid interest amounts at the applicable pass-through
rate.
The interest accrual period for the offered certificates is the calendar
month preceding the month in which a
S-5
distribution date occurs. Interest accrues on the basis of a 360-day year
consisting of twelve 30-day months.
Interest on the Class A-IO certificates is only payable on the first 36
distribution dates.
PRINCIPAL
The initial certificate principal balances of the offered certificates are
set forth on the cover page of this prospectus supplement. The notional amount
of the Class A-IO certificates on any distribution date will equal the lesser
of:
o the amount for that distribution date set forth under "Description of
the Certificates" in this prospectus supplement; or
o the aggregate principal balances of the mortgage loans at the close of
business on the first date of the month prior to the month of the
applicable distribution date.
The Class A-IO certificates do not have a certificate principal balance and
will not be entitled to distributions of principal.
On each distribution date, to the extent funds are available, holders of
the certificates, other than the Class A-IO certificates, will be entitled to
distributions of principal in the order of priority described in this prospectus
supplement.
We refer you to "Description of the Certificates -- Distributions" in this
prospectus supplement.
MONTHLY ADVANCES AND COMPENSATING INTEREST
Each month the servicer will determine the amount of any unpaid interest
due on the mortgage loans. If the servicer believes that unpaid interest can be
recovered from the related mortgage loan, then the servicer will either:
o advance the unpaid interest to the trust out of its own funds; or
o advance the unpaid interest to the trust out of collections on the
mortgage loans that are not required to be distributed on the related
distribution date.
The servicer is required to reimburse the trust for amounts advanced from
trust collections on the next succeeding deposit date.
The servicer is entitled to be reimbursed from the related mortgage loan in
respect of which the advance was made and, to the extent that the servicer
reasonably believes thereafter that such advances will not be recoverable from
subsequent collections on the related mortgage loan, from the related mortgage
loan group.
The servicer will provide to the trust the amount of any shortfall in the
anticipated collection of interest on a mortgage loan that is caused by a full
or partial prepayment of a mortgage loan generally up to the amount of the
servicer's monthly servicing fee.
We refer you to "Origination and Servicing of the Mortgage Loans -- Monthly
Advances; -- Servicing Advances; -- Compensating Interest; and Interest
Shortfalls" in this prospectus supplement.
SERVICING ADVANCES
Unless the servicer determines that any proposed advance is not recoverable
from the related mortgage loan, the servicer will be required to pay all
reasonable and customary
S-6
"out-of-pocket" costs and expenses incurred in the performance of its servicing
obligations, including, but not limited to:
o expenditures in connection with a foreclosed mortgage loan prior to the
liquidation of the loan;
o the cost of any enforcement of judicial proceedings, including
foreclosures; and
o the cost of the management and liquidation of property acquired in
satisfaction of the related mortgage loan.
The servicer is entitled to be reimbursed for servicing advances from the
related mortgage loan in respect of which the servicing advance was made and, to
the extent that the servicer believes thereafter that such advances will not be
recoverable from the related mortgage loan, from the related mortgage loan
group.
We refer you to "Origination and Servicing of the Mortgage Loans -- Monthly
Advances; Servicing Advances; Compensating Interest and Interest Shortfalls" in
this prospectus supplement.
CREDIT ENHANCEMENT
Credit enhancement refers to a mechanism that is intended to protect the
holders of the offered certificates against losses due to defaults by the
borrowers under the mortgage loans.
The offered certificates have the benefit of two types of credit
enhancement:
o the use of excess interest to cover losses and to create
overcollateralization; and
o subordination of distributions on the class or classes of certificates
with lower relative payment priorities.
The Class B certificates, which have the lowest relative payment priority,
have the benefit of only the first form of credit enhancement.
ALLOCATION OF LOSSES
If, on any distribution date, there is insufficient excess interest or
overcollateralization to absorb realized losses on the mortgage loans, then
realized losses on the mortgage loans will be allocated to the subordinate
certificates first, to the Class B certificates, second, to the Class M-2
certificates and third, to the Class M-1 certificates. The pooling agreement
does not permit the allocation of realized losses on the mortgage loans to the
senior certificates, or the Class P certificates; however investors in the
senior certificates should realize that under certain loss scenarios there will
not be enough principal and interest on the mortgage loans to pay the Class A
certificates all the interest and principal amounts to which such certificates
would then be entitled or enough interest on the mortgage loans to pay the Class
A-IO certificates all the interest amounts to which such certificates would then
be entitled if collections on the mortgage loans were sufficient to pay the
maximum amount on such certificates.
Once realized losses are allocated to the certificates, such realized losses
will not be reinstated thereafter. However, the amount of any realized losses
allocated to the subordinate certificates may be paid to the holders of these
certificates according to the priorities set forth under "Description of the
Certificates -- Distributions" in this prospectus supplement.
S-7
We refer you to "Description of the Certificates -- Treatment of Realized
Losses" in this prospectus supplement.
THE MORTGAGE LOANS
Set forth below is selected information about the mortgage loans that
existed as of the statistic calculation date of February 15, 2001, which we
refer to as the statistic calculation loans. On the closing date, additional
mortgage loans will be delivered to the trust.
Group I
number of mortgage loans: 1,284
aggregate principal
balance: $91,782,626.33
secured by first lien on mortgaged
property: 97.20%
range of loan sizes
(approximate): $9,986 to $348,903
mortgaged property locations: 44 states
average principal balance: $71,481.80
interest rates range: 7.4600% to 16.8750%
weighted average interest rate,
based on principal balance
(approximate): 10.9158%
weighted average remaining term to
stated maturity, based on principal
balance (months) (approximate): 333
range of remaining term to
maturity (months): 60 to 360
weighted average original term to maturity (months) (approximate): 333
latest maturity date: March 2031
range of original term to
maturity (months): 60 to 360
combined loan-to-value ratio
range (approximate): 9.90% to 100.00%
weighted average combined loan-to value
ratio (approximate): 75.01%
mortgage loans with prepayment
charges (by aggregate
principal balance): 73.97%
hybrid loans: 9.88%
Group II
number of mortgage loans: 301
aggregate principal balance: $24,101,385.00
secured by first lien on mortgaged
property (approximate): 97.15%
range of loan sizes: $9,956 to $500,000
mortgaged property locations: 35 states
average principal balance: $80,071.05
interest rates range: 7.9900% to 15.8500%
weighted average interest rate
(approximate): 10.6376%
weighted average remaining term to
stated maturity, based on principal
balance (months) (approximate): 334
range of remaining term to stated
maturity (months): 108 to 360
weighted average original term to
maturity (months): 334
latest maturity date: March 2031
range of original term to
maturity (months): 108 to 360
combined loan-to-value ratio
range (approximate): 15.15% to 100.00%
weighted average combined loan-to
value ratio (approximate): 74.74%
mortgage loans with prepayment
charges (by aggregate principal
balance): 72.46%
hybrid loans: 10.33%
We refer you to "The Mortgage Loans" in this prospectus supplement and
S-8
"Annex A: Description of the Mortgage Pool" to this prospectus supplement.
OPTIONAL TERMINATION OF THE TRUST
On any distribution date when the principal balance of the mortgage loans
is less than 5% of the sum of the principal balances of the mortgage loans
delivered on the closing date, the servicer may purchase all of the remaining
mortgage loans from the trust and thereby terminate the trust. Upon receipt of
the purchase price of the mortgage loans from the servicer, the trustee will
make a final payment to the certificateholders.
We refer you to "Description of the Certificates" in this prospectus
supplement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The trust will make multiple elections to treat certain assets of the trust
as separate REMICs for federal income tax purposes, creating a tiered REMIC
structure. The offered certificates, the Class P certificates and Class C
certificates will each represent regular interests in a REMIC and generally will
be treated as newly originated debt instruments for federal income tax purposes.
In addition, each of the offered certificates, other than the Class A-IO
certificates, will represent an undivided beneficial ownership interest in an
interest rate cap agreement. The Class R certificates will represent the
residual interest in each REMIC.
We refer you to "Certain Federal Income Tax Consequences" in this
prospectus supplement and in the prospectus.
ERISA CONSIDERATIONS
Subject to the satisfaction of certain conditions described in this
prospectus supplement, the offered certificates may be acquired and held by a
pension or other employee benefit plan.
We refer you to "ERISA Considerations" in this prospectus supplement and in
the prospectus.
LEGAL INVESTMENT CONSIDERATIONS
The offered certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984.
We refer you to "Legal Investment" in this prospectus supplement and in the
prospectus.
S-9
RISK FACTORS
An investment in the offered certificates involves significant risks.
Before you decide to invest in the offered certificates, you should consider the
following risk factors.
YOU MAY HAVE DIFFICULTY SELLING YOUR CERTIFICATES
The offered certificates will not be listed on any securities exchange. As
a result, if you wish to sell your certificates, you will have to find a
purchaser that is willing to purchase your certificates. The underwriters intend
to make a secondary market for the offered certificates. The underwriters may do
so by offering to buy the offered certificates from investors that wish to sell.
However, the underwriters will not be obligated to make offers to buy the
offered certificates and may stop making offers at any time. In addition, the
prices offered, if any, may not reflect prices that other potential purchasers,
were they to be given the opportunity, would be willing to pay. There have been
times in the past where there have been very few buyers of similar
mortgage-backed securities, and there may be such times in the future. As a
result, you may not be able to sell your certificates if or when you wish to do
so or you may not be able to obtain the price you wish to receive.
THE UNIQUE FEATURES OF THE MORTGAGE LOANS CREATE SPECIAL RISKS
There are a number of unique features of the mortgage loans that create
risks, including the following:
o Risks Associated with Underwriting Standards. The sponsor has
underwritten and originated or re-underwritten all of the mortgage
loans in accordance with the sponsor's guidelines. The sponsor's
guidelines rely on the creditworthiness of the mortgagor and the value
and adequacy of the related mortgaged property as collateral. As a
lender that specializes in loans made to credit impaired borrowers, the
sponsor ordinarily makes mortgage loans to borrowers with credit
histories or other factors that would disqualify them from
consideration for a loan from traditional financial institutions. A
derogatory credit history or a lack of credit history will not
necessarily prevent the sponsor from making or acquiring a mortgage
loan. The values of the mortgaged properties may decline from those on
the dates the related mortgage loans were originated thereby increasing
the loan-to-value ratios of the mortgage loans. Even assuming that the
mortgaged properties provide adequate security for the mortgage loans,
substantial delays could be encountered in connection with the
foreclosure and liquidation of defaulted mortgage loans. The actual
rates of delinquencies, foreclosures and losses on mortgage loans could
be higher than those historically experienced in the mortgage lending
industry in general, particularly in periods during which the values of
the related mortgaged properties decline. We refer you to "The
Originators -- Underwriting Guidelines" in the prospectus.
o Newly Originated Mortgage Loans May Default. Defaults on mortgage loans
tend to occur at higher rates during the early years of the mortgage
loans. A substantial majority of the mortgage loans will have been
originated within 12 months prior to their sale to the trust. As a
result, the trust may experience higher rates of default than if the
mortgage loans had been outstanding for a longer period of time.
S-10
o Defaults on Junior Lien Mortgage Loans May Result in More Severe
Losses. Based on statistic calculation date principal balances,
approximately 2.80% and 2.85% of the statistic calculation loans in
Group I and Group II, respectively, are secured by junior liens on the
related property. If a borrower on a mortgage loan secured by a junior
lien defaults, the trust's rights to proceeds on liquidation of the
related property are subordinate to the rights of the holder of the
first lien on the related property. There may not be enough proceeds to
pay both the first lien and the junior lien, and the trust would suffer
a loss.
o Geographic Concentration Increases Risks. Based on the statistic
calculation date principal balances, approximately 17.64%, 13.42%,
11.09%, 6.86%, 6.13% and 5.55% of the statistic calculation loans in
Group I are secured by mortgaged properties located in California,
Texas, Florida, New York, Michigan and Ohio respectively, and
approximately 27.23%, 15.37%, 9.70% and 6.34% of the statistic
calculation loans in Group II are secured by mortgaged properties
located in California, Texas, Florida and Ohio respectively. In
general, declines in the California, Texas, Florida, New York, Michigan
and Ohio residential real estate markets may adversely affect the
values of the mortgaged properties securing mortgage loans in those
states such that the principal balances of the mortgage loans will
equal or exceed the value of the mortgaged properties. In addition,
adverse economic conditions in those states may affect borrowers'
timely payment of scheduled payments of principal and interest on
mortgage loans in those states. Accordingly, the actual rates of
delinquencies, foreclosures and losses on the mortgage loans could be
higher than those currently experienced in the mortgage lending
industry in general.
o Risks Associated with Damaged Mortgage Properties. Generally, the
standard form of hazard insurance policy required to be maintained
under the terms of each mortgage loan does not cover physical damage
resulting from floods and other water-related causes or from earth
movement (including earthquakes, landslides and mudflows). California
historically has been vulnerable to certain natural disaster risks,
such as earthquakes and erosion-caused mudslides. Florida historically
has been vulnerable to certain other natural disasters, such as
tropical storms and hurricanes. To the extent a mortgaged property has
been materially damaged since the cut-off date due to flooding or other
water-related causes or due to an earthquake or other earth movement
and that damage results in losses on the related mortgage loan, and if
such damage is caused by a natural disaster in one of the states with a
concentration of loans, you could suffer a loss if such loss exceeds
the overcollateralization of the mortgage loans. Under the pooling and
servicing agreement, the sponsor will represent that, as of the cut-off
date, each mortgaged property is free of substantial damage and is in
good repair. In the event that any uncured breach of that
representation materially and adversely affects the interest of
certificateholders in the related mortgage loan, the sponsor will be
required to repurchase the mortgage loan or deliver a substitute
mortgage loan for it. To the extent the sponsor repurchases any
mortgage loan, the repurchase will accelerate the timing of principal
distributions with respect to the related mortgage loan group and may
thereby affect the yields and weighted average lives of the related
class or classes of certificates.
S-11
o Risks Associated with Hybrid Loans. Credit-impaired borrowers with
loans that have an initial fixed rate term followed by an adjustable
rate term may encounter financial difficulties as a result of increases
in the interest rate over the life of the loan. Substantially all of
the hybrid loans include a teaser rate, i.e., an initial interest rate
significantly below the fully indexed interest rate at origination. As
a result, borrowers will face interest rate increases on their
adjustable rate even in a stable interest rate environment. Hybrid
loans with an initial adjustment date two or three years after funding
are underwritten at the teaser rate. Higher risks of delinquency may
result when borrowers who may qualify for hybrid loans with a teaser
rate at the time of funding may not be able to afford the monthly
payments when the payment amount increases.
THE RETURN ON YOUR INVESTMENT WILL CHANGE OVER TIME
Your pre-tax return on your investment will change from time to time for a
number of reasons, including the following:
o The Rate of Return of Principal is Uncertain. The amount of
distributions of principal of the offered certificates and the time
when you receive those distributions depends on the amount and the
times at which borrowers make principal payments on the mortgage loans.
Those principal payments may be regularly scheduled payments or
unscheduled payments resulting from prepayments or defaults of the
mortgage loans. The rate of prepayment may be affected by the credit
standings of the borrowers. If a borrower's credit standing improves,
that borrower may be able to refinance his existing loan on more
favorable terms, which would result in a principal prepayment.
o The Rate of Prepayment of the Mortgage Loans is Uncertain. All of the
statistic calculation loans may be prepaid in full or in part at any
time, in some cases upon the payment to the sponsor of a prepayment
charge. The rate of prepayments of the mortgage loans cannot be
predicted and may be affected by a wide variety of economic, social,
competitive and other factors. Prepayments, liquidations, repurchases
and purchases of the mortgage loans will result in distributions to
offered certificateholders of principal amounts that would otherwise be
distributed over the remaining terms of the mortgage loans thereby
potentially affecting the yield to maturity of an offered certificate
from the anticipated yield.
o Overcollateralization Provisions Will Affect Your Yield. The
overcollateralization provisions are intended to result in an
accelerated rate of principal distributions to holders of the offered
certificates then entitled to principal distributions at any time that
the overcollateralization provided by the mortgage pool falls below the
required level. An earlier return of principal to the holders of the
offered certificates as a result of the overcollateralization
provisions will influence the yield on the offered certificates in a
manner similar to the manner in which principal prepayments on the
mortgage loans will influence the yield on the offered certificates. In
addition, if the Class A certificates are entitled to distributions of
principal at any time that overcollateralization is required to be
restored to the required level, then the amounts available for such
purpose will be allocated between the Class A-1
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certificates and the Class A-2 certificates on a pro rata basis based
on the amount of principal actually received on the Group I mortgage
loans and Group II mortgage loans, respectively, for the related
distribution date. This, as well as the relative sizes of these two
groups of mortgage loans, may magnify the prepayment effect on either
class of Class A certificates caused by the relative rates of
prepayments and defaults experienced by the two groups of mortgage
loans.
Substantially all of the hybrid loans have fixed interest rates for
some specified period before beginning to adjust. Those mortgage loans
may have higher prepayments as they approach their first adjustment
dates because the borrowers may want to avoid periodic changes to their
monthly payments or the increase in rate after the initial fixed rate
period by refinancing their mortgage. We refer you to "-- Hybrid Loans"
below.
o The Yield on the Subordinate Certificates Will Be Particularly
Sensitive to Prepayments. The multiple class structure of the offered
certificates causes the yield of certain classes of the offered
certificates to be particularly sensitive to changes in the rates of
prepayments of mortgage loans. Because distributions of principal will
be made to the classes of offered certificates according to the
priorities described in this prospectus supplement, the yield to
maturity on such classes of offered certificates will be sensitive to
the rates of prepayment on the mortgage loans experienced both before
and after the commencement of principal distributions on such classes.
In particular, the subordinate certificates do not receive (unless the
certificate principal balances of the Class A certificates have been
reduced to zero) any portion of the amount of principal payable to the
offered certificates prior to the distribution date in April 2004.
Thereafter, subject to the loss and delinquency performance of the
mortgage pool, the subordinate certificates may continue (unless the
certificate principal balances of the Class A certificates have been
reduced to zero) to receive no portion of the amount of principal then
payable to the offered certificates. The weighted average lives of the
subordinate certificates will therefore be longer than would otherwise
be the case. The effect on the market value of the subordinate
certificates of changes in market interest rates or market yields for
similar securities may be greater than for the Class A certificates.
We refer you "Prepayment and Yield Considerations" in this prospectus
supplement.
o Owners of Class A-IO certificates may not recover their initial
investments. An investment in the Class A-IO certificates is risky
because the return of the investment depends solely on the payments of
interest by borrowers under the mortgage loans. If the borrowers prepay
their mortgage loans, no further interest payments will be made. If
borrowers prepay their mortgage loans very fast, investors in the Class
A-IO certificates may not recover their initial investments. In
addition, the Class A-IO certificates are not entitled to any
distributions after the 36th distribution date.
o You Bear Reinvestment Risk. Mortgage-backed securities like the offered
certificates usually produce more returns of principal to investors
when market
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interest rates fall below the interest rates on the mortgage loans and
produce less returns of principal when market interest rates are above
the interest rates on the mortgage loans. If borrowers refinance their
mortgage loans as a result of lower market interest rates, you will
receive an unscheduled payment of principal. As a result, you are
likely to receive more money to reinvest at a time when other
investments generally are producing a lower yield than that on the
offered certificates, and are likely to receive less money to reinvest
when other investments generally are producing a higher yield than that
on the offered certificates. You will bear the risk that the timing and
amount of distributions on your offered certificates will prevent you
from attaining your desired yield.
o The Optional Termination May Affect the Yield. Your investment in the
offered certificates may be ended before you desire if the optional
termination is exercised. In addition, holders of the offered
certificates, other than the Class A-IO certificates, will not be
entitled to any net rate cap carryover amounts accrued but unpaid at
the time the optional termination is exercised. We refer you
"Description of the Certificates -- Termination; Retirement of the
Certificates" in this prospectus supplement.
o Pass-Through Rates May be Limited. The rate at which interest accrues
on the offered certificates, other than the Class A-IO certificates, is
subject to a rate cap. The rate cap is based on the weighted average of
the interest rates on the mortgage loans, net of interest payable to
the Class A-IO certificates and certain fees and expenses. If mortgage
loans with relatively higher loan rates prepay, the maximum rate on
these classes of offered certificates will be lower than otherwise
would be the case.
If the pass-through rate on your certificates is limited by the rate
cap, the market value and liquidity of your certificates may decline.
We refer you to "Prepayment and Yield Considerations -- Pass-Through
Rates" in this prospectus supplement.
o Hybrid Loans. Based on principal balances as of the statistic
calculation date, approximately 9.88% and 10.33% of the statistic
calculation loans in Group I and Group II, respectively, had at
origination a three year fixed rate term followed by a 27 year
adjustable rate term. As with all mortgage loans, the rate of
prepayments on hybrid loans (as we call these loans in this prospectus
supplement) that are in their respective initial fixed rate periods is
sensitive to prevailing interest rates. The prepayment behavior of the
hybrid loans may differ from that of the other mortgage loans. As a
hybrid loan approaches its initial adjustment date, the borrower may
become more likely to refinance the loan to avoid an increase in the
coupon rate, even if fixed rate loans are only available at rates that
are slightly lower or higher than the coupon rate before adjustment.
The existence of the applicable periodic rate cap, lifetime cap and
lifetime floor also may affect the likelihood of prepayments resulting
from refinancings. You will bear the risk of any faster or slower
prepayments on the mortgage loans. We refer you to "Prepayment and
Yield Considerations" in this prospectus supplement.
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THE TRUST ASSETS ARE THE ONLY SOURCE OF PAYMENTS ON THE OFFERED CERTIFICATES
All distributions on the offered certificates will be made from payments by
borrowers under the mortgage loans or, in the case of certain mortgage loans,
the related primary mortgage insurance policy. The trust has no other assets to
make distributions on the offered certificates. The mortgage loans are not
insured, other than by the related primary mortgage insurance policy in the case
of the primary mortgage insurance loans, or guaranteed by any person. Only the
trust is obligated to make distributions on the offered certificates. The
offered certificates are not insured by any governmental agency. If substantial
losses occur as a result of defaults and delinquencies on the mortgage loans,
you may suffer losses.
INTEREST GENERATED BY THE MORTGAGE LOANS MAY BE INSUFFICIENT TO MAINTAIN
OVERCOLLATERALIZATION
The weighted average of the interest rates on the mortgage loans is
expected to be higher than the pass-through rates on the offered certificates.
The mortgage loans are expected to generate more interest than is needed to pay
interest owed on the offered certificates and to pay certain fees and expenses
of the trust. Any remaining interest generated by the mortgage loans will then
be used to absorb losses that occur on the mortgage loans. After these financial
obligations of the trust are covered, the available excess interest generated by
the mortgage loans will be used to maintain overcollateralization at the
required level provided in the pooling and servicing agreement. We cannot assure
you, however, that enough excess interest will be generated to absorb losses or
to maintain the required level of overcollateralization.
TRANSFER OF PRIMARY SERVICING MAY RESULT IN HIGHER DELINQUENCIES AND DEFAULTS
WHICH MAY ADVERSELY AFFECT THE YIELD ON YOUR CERTIFICATES
Countrywide Home Loans, Inc. will be the servicer under the pooling and
servicing agreement. However, the sponsor has serviced the mortgage loans since
origination or acquisition by the originator or the sponsor and will continue to
service the mortgage loans on an interim basis pending the transfer of primary
servicing obligations to May 1, 2001. Although we expect the transfer to be
completed by May 1, 2001, we cannot assure you that it will be completed by that
date. All transfers of servicing involve the risk of disruption in collections
due to data input errors, misapplied or misdirected payments, system
incompatibilities and other reasons. As a result, the rate of delinquencies and
defaults are likely to increase at least for a period of time and may result in
losses on your certificates. In addition, a higher delinquency rate may delay
payments of principal to you. A higher default rate may result in accelerated
prepayments on the offered certificates. You will bear any reinvestment risk
associated with any accelerated prepayments. We cannot assure you as to the
extent or duration of any disruptions associated with the transfer of servicing
or as to the resulting effect on your certificates.
THE SUBORDINATE CERTIFICATES WILL ABSORB CASH SHORTFALLS BEFORE THE SENIOR
CERTIFICATES
The subordinate certificates will not receive any distributions of interest
until the senior certificates receive their interest distributions and will not
receive any distributions of principal until the Class A certificates receive
their principal
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distributions. If the available funds are insufficient to make all of the
required distributions on the offered certificates, one or more classes of
certificates will not receive all of their distributions. In addition, losses
due to defaults by borrowers, to the extent not covered by the amount of
overcollateralization and excess interest at that time, will be allocated to
the subordinate certificates in the reverse order of payment priority. Any
allocation of a loss to a class of subordinate certificates will reduce the
amount of interest and, to the extent not reimbursed from future excess
interest, principal they will receive. Distributions to the subordinate
certificates are made in the following order: to the Class M-1 certificates,
then to the Class M-2 certificates and then to the Class B certificates, and
losses are allocated to the subordinate certificates in the reverse order,
commencing with the Class B certificates. The Class M-1 certificates receive
distributions before, and are allocated losses after, the other classes of
subordinate certificates. Conversely, the Class B certificates receive
distributions after, and are allocated losses before, the other classes of
subordinate certificates. As a result, the Class B certificates will be
affected to a larger degree by any losses on the mortgage loans.
ADDITIONAL RISKS ASSOCIATED WITH THE SUBORDINATE CERTIFICATES
The weighted average lives of, and the yields to maturity on, the Class M-1
certificates, the Class M-2 certificates and the Class B certificates will be
progressively more sensitive, in that order, to the rate and timing of mortgagor
defaults and the severity of ensuing losses on the mortgage loans. If the actual
rate and severity of losses on the mortgage loans is higher than those assumed
by an investor in such certificates, the actual yield to maturity of such
certificates may be lower than the yield anticipated by such holder based on
such assumption. The timing of losses on the mortgage loans will also affect an
investor's actual yield to maturity, even if the rate of defaults and severity
of losses over the life of the mortgage loans are consistent with an investor's
expectations. In general, the earlier a loss occurs, the greater the effect on
an investor's yield to maturity. Realized losses on the mortgage loans, to the
extent they exceed the amount of overcollateralization following distributions
of principal on the related distribution date, will reduce the certificate
principal balance of the Class B certificates, the Class M-2 certificates and
the Class M-1 certificates, in that order. As a result of such reductions, less
interest will accrue on such class of subordinate certificates than would
otherwise be the case. Once a realized loss is allocated to a subordinate
certificate, no interest will be distributable with respect to such written down
amount. However, the amount of any realized losses allocated to the subordinate
certificates may be reimbursed to the holders of the subordinate certificates
according to the priorities set forth under "Description of the
Certificates--Distributions" in this prospectus supplement.
Unless the certificate principal balances of the Class A certificates have
been reduced to zero, the subordinate certificates will not be entitled to any
principal distributions until at least April 2004 or during any period in which
delinquencies on the mortgage loans exceed certain levels. As a result, the
weighted average lives of the subordinate certificates will be longer than would
otherwise be the case if distributions of principal were allocated among all of
the certificates at the same time. As a result of the longer weighted average
lives of the subordinate certificates, the holders of such certificates have a
greater risk of suffering a loss on their investments. Further, because
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such certificates might not receive any principal if certain delinquency levels
occur, it is possible for such certificates to receive no principal
distributions even if no losses have occurred on the mortgage pool.
In addition, the multiple class structure of the subordinate certificates
causes the yield of such classes to be particularly sensitive to changes in the
rates of prepayment of the mortgage loans. Because distributions of principal
will be made to the holders of such certificates according to the priorities
described in this prospectus supplement, the yield to maturity on such classes
of certificates will be sensitive to the rates of prepayment on the mortgage
loans experienced both before and after the commencement of principal
distributions on such classes. The yield to maturity on such classes of
certificates will also be extremely sensitive to losses due to defaults on the
mortgage loans and the timing thereof, to the extent such losses are not covered
by overcollateralization, excess interest, the retained certificates or a class
of subordinate certificates with a lower payment priority. Furthermore, as
described in this prospectus supplement, the timing of receipt of principal and
interest by the subordinate certificates may be adversely affected by losses
even if such classes of certificates do not ultimately bear such loss.
RISKS ASSOCIATED WITH ORIGINATION FEES
Fees earned on the origination of loans, placement of related insurance and
other services provided by the sponsor and affiliated originators are often paid
by the borrower out of related loan proceeds. From time to time, in the ordinary
course of their businesses, originators of mortgage loans have been named in
legal actions brought by mortgagors challenging the amount or method of imposing
or disclosing such fees. If such an action against any originator with respect
to any mortgage loan were successful, a court might require that the principal
balances of the related mortgage loans be reduced by the amount of contested
fees or charges. Any such reductions could result in substantial realized losses
during one or more collection periods. You could suffer a loss if such realized
losses exceed the overcollateralization of the mortgage loans.
HIGH LOAN-TO-VALUE RATIOS INCREASE RISK OF LOSS
Mortgage loans with higher loan-to-value ratios may present a greater risk
of loss than mortgage loans with lower loan-to-value ratios. Approximately
20.16% of the statistic calculation loans (by aggregate principal balance as of
the statistic calculation date) had loan-to-value ratios in excess of 80%, but
not more than 100%, at origination. Additionally, the sponsor's determination of
the value of a mortgaged property used in the calculation of the loan-to-values
ratios of the mortgage loans may differ from the appraised value of such
mortgaged properties or the actual value of such mortgaged properties. The
primary mortgage insurance policies will provide only limited protection against
some of the risks associated with high loan-to-value ratios, and such policies
will provide limited protection only with respect to those mortgage loans which
are covered by such a policy.
WITHDRAWAL OR DOWNGRADING OF INITIAL RATINGS WILL AFFECT THE PRICES FOR
CERTIFICATES
A security rating is not a recommendation to buy, sell or hold securities.
Similar ratings on different types of securities do not necessarily mean the
same thing. You are
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encouraged to analyze the significance of each rating independently from any
other rating. Any rating agency may change its rating of the offered
certificates after those offered certificates are issued if that rating agency
believes that circumstances have changed. Any subsequent change in rating will
likely affect the price that a subsequent purchaser will be willing to pay for
your certificates.
THE OFFERED CERTIFICATES ARE NOT SUITABLE INVESTMENTS FOR ALL INVESTORS
The offered certificates, and in particular the subordinate certificates,
are not a suitable investment if you require a regular or predictable schedule
of payments or payment on any specific date. The offered securities, and in
particular the subordinate certificates, are complex investments that should be
considered only by investors who, either alone or with their financial, tax and
legal advisors, have the expertise to analyze the prepayment, reinvestment,
default and market risk, the tax consequences of an investment, and the
interaction of these factors.
S-18
DESCRIPTION OF THE CERTIFICATES
GENERAL
The certificates will represent certain undivided beneficial ownership
interests in the trust created pursuant to a pooling and servicing agreement,
subject to the limits and priority of distributions described therein. The
offered certificates will be issued in minimum denominations of $25,000 and
integral dollar multiples of $1,000 in excess thereof. The assets of the trust
will consist of:
(a) the mortgage loans;
(b) the assets that from time to time are required by the pooling and
servicing agreement to be deposited in the collection account and the
certificate account and any investment proceeds of these accounts;
(c) all rights of the mortgagee under any insurance policy covering a
mortgage loan or the related mortgaged property;
(d) property and any proceeds thereof acquired by foreclosure of the
mortgage loans, deed in lieu of foreclosure or a comparable conversion; and
(e) rights under the applicable primary mortgage guaranty policy in
connection with the mortgage loans covered by primary mortgage insurance.
The principal balance of a class of certificates, other the Class A-IO
certificates, on any distribution date is equal to the applicable certificate
principal balance on the closing date reduced by the
o aggregate of amounts actually distributed as principal to the holders
of the class of certificates prior to the applicable date and
o in the case of a subordinate certificate, any reductions in the class
principal balance of the subordinate certificate due to realized loss
as described in this prospectus supplement.
The Class A-IO certificates do not have a class principal balance but will
have a notional amount which for any distribution date prior to the 37th
distribution date will equal the lesser of
(a) the pool balance as of the end of the second preceding collection
period and
(b) the applicable amount set forth below:
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DISTRIBUTION DATES NOTIONAL AMOUNT
-------------------- -----------------
1-3 .............. $17,466,667
4-6 .............. 16,920,833
7-9 .............. 16,375,000
10-12 ............ 15,829,167
13-15 ............ 15,283,333
16-18 ............ 14,191,667
19-21 ............ 13,100,000
22-24 ............ 12,008,333
25-27 ............ 9,825,000
28-30 ............ 8,733,333
31-33 ............ 7,641,667
34-36 ............ 7,095,833
On and after the 37th distribution date, the notional amount of the Class A-IO
certificates will be zero.
SEPARATE REMIC STRUCTURE
For federal income tax purposes, the trust, other than the net rate cap
fund created by the agreement, will include multiple segregated asset pools,
each of which will be treated as a separate REMIC, creating a tiered REMIC
structure. The offered certificates, excluding any rights to receive net rate
cap carryover, the Class C certificates and the Class P certificates will be
designated as regular interests in a REMIC.
DISTRIBUTION DATES
Distributions on the certificates will be made by the trustee on the 25th
day of each month or, if that day is not a business day, on the first business
day thereafter, commencing in April 2001, each called a distribution date, to
the persons in whose names the certificates are registered, each called a
certificateholder, as of the related record date. The record date for any
distribution date, is the last business day of the calendar month preceding the
month of the applicable distribution date. Distributions will be made (1) in
immediately available funds to holders of certificates the aggregate principal
balance or notional amount of which is at least $5,000,000, by wire transfer or
otherwise, to the account of the certificateholder at a domestic bank or other
entity having appropriate facilities for distribution, if the certificateholder
has so notified the trustee, or (2) by check mailed to the address of the person
entitled to the distribution as it appears on the certificate register
maintained by the trustee as certificate registrar. Notwithstanding the
foregoing, the final distribution on any certificate will be made in like manner
but only upon presentment and surrender of the certificate at the office or
agency appointed for that purpose.
DISTRIBUTIONS
Fees and Costs
On each distribution date, the trustee will withdraw from the certificate
account that portion of available funds for such distribution date for each
mortgage loan group in such amounts so as to pay, concurrently, to the trustee,
the trustee fee and to the
S-20
servicer, the monthly servicing fee and the primary mortgage insurer premium, if
any (to the extent not otherwise reimbursed from the collection account), in
each case for such mortgage loan group and distribution date.
Interest Distributions on the Offered Certificates
On each distribution date, after subtracting amounts payable toward the
trustee fee, the monthly servicing fee and the primary mortgage insurance
premium, if any, the trustee shall withdraw from the certificate account that
portion of available funds for such distribution date consisting of the Interest
Remittance Amount for such distribution date, and make the following
disbursements and transfers in the order of priority described below, in each
case to the extent of the Interest Remittance Amount remaining for such
distribution date:
1. To each class of senior certificates, the related Class Interest
Distribution for the applicable distribution date, allocated as follows:
A. The portion of the related Class Interest Distribution
attributable to the Group I mortgage loans will be distributed:
first, concurrently, to the Class A-IO certificates, the Group I
Class A-IO Class Interest Distribution and to the Class A-1
certificates, the Class Interest Distribution for the Class A-1
certificates, allocated pro rata based on entitlement pursuant to
this clause first; and
second, concurrently, to the Class A-IO certificates, the Group
II Class A-IO Class Interest Distribution and to the Class A-2
certificates, the Class Interest Distribution for the Class A-2
certificates, in each case to the extent not paid pursuant to
clause B below, allocated pro rata based on entitlement pursuant
to this clause second;
B. The portion of the related Class Interest Distribution
attributable to the Group II mortgage loans will be distributed:
first, concurrently, to the Class A-IO certificates, the Group II
Class A-IO Class Interest Distribution and to the Class A-2
certificates, the Class Interest Distribution for the Class A-2
certificates, allocated pro rata based on entitlement pursuant to
this clause first; and
second, concurrently, to the Class A-IO certificates, the Group I
Class A-IO Class Interest Distribution and to the Class A-1
certificates, the Class Interest Distribution for the Class A-1
certificates, in each case to the extent not paid pursuant to
clause A above, allocated pro rata based on entitlement pursuant
to this clause second;
2. Sequentially, to the Class M-1, Class M-2 and Class B certificates,
in that order, the related Class Monthly Interest Amount for the
applicable distribution date.
Principal Distributions on the Offered Certificates
On each distribution date, the holders of the offered certificates, other
than the Class A-IO certificates, shall be entitled to receive distributions in
respect of principal to the extent of the Principal Distribution Amount in the
following amounts and order of priority:
S-21
1. To the Class A certificates, the Senior Principal Distribution
Amount for the applicable distribution date, excluding any Subordination
Increase Amount included in that amount, distributed as follows:
A. To the Class A-1 certificates, payable solely from the Basic
Principal Amount from the Group I mortgage loans, an amount equal to
the product of (a) the Senior Principal Distribution Amount, excluding
any Subordination Increase Amount included in that amount, and (b) the
Class A Principal Allocation Percentage applicable to the Class A-1
certificates, until the certificate principal balance thereof is
reduced to zero;
B. To the Class A-2 certificates, payable solely from the Basic
Principal Amount from the Group II mortgage loans, an amount equal to
the product of (a) the Senior Principal Distribution Amount, excluding
any Subordination Increase Amount included in that amount, and (b) the
Class A Principal Allocation Percentage applicable to the Class A-2
certificates, until the certificate principal balance thereof is
reduced to zero;
2. To the Class M-1 certificates, the Class M-1 Principal Distribution
Amount for the applicable distribution date, excluding any Subordination
Increase Amount included in that amount, until its certificate principal
balance is reduced to zero.
3. To the Class M-2 certificates, the Class M-2 Principal Distribution
Amount for the applicable distribution date, excluding any Subordination
Increase Amount included in that amount, until its certificate principal
balance is reduced to zero.
4. To the Class B certificates, the Class B Principal Distribution
Amount for the applicable distribution date, excluding any Subordination
Increase Amount included in that amount, until its certificate principal
balance is reduced to zero.
If the certificate principal balance of either class of Class A
certificates is reduced to zero, then the remaining amount of principal
distributions distributable to the holders of the Class A certificates on such
distribution date, and the amount of principal distributions distributable to
the holders of the Class A certificates on all subsequent distribution dates,
will be distributed to the holders of the class of Class A certificates
remaining outstanding, until the certificate principal balance of such class of
Class A certificates remaining outstanding has been reduced to zero.
Excess Interest Distributions on the Offered Certificates
On each distribution date, any Excess Interest shall be paid in the
following order of priority, in each case to the extent of the Excess Interest
remaining undistributed:
1. To the offered certificates, other than the Class A-IO certificates,
the Subordination Increase Amount for the applicable distribution date,
allocated in the order set forth in " -- Principal Distributions on the
Offered Certificates", above.
2. To the Class M-1 certificates, any related (a) Class Interest
Carryover Shortfall and then (b) Class Principal Carryover Shortfall.
3. To the Class M-2 certificates, any related (a) Class Interest
Carryover Shortfall and then (b) Class Principal Carryover Shortfall.
S-22
4. To the Class B certificates, any related (a) Class Interest
Carryover Shortfall and then (b) Class Principal Carryover Shortfall.
5. To the Class C certificates for deposit in the net rate cap fund.
6. Sequentially, (a) concurrently to the Class A-1 and Class A-2
certificates, pro rata, and (b) sequentially to the Class M-1 certificates,
the Class M-2 certificates and the Class B certificates, in that order, the
related Net Rate Cap Carryover, from the net rate cap fund.
7. To fund a distribution to the Class C certificateholders in an
amount required by the pooling and servicing agreement.
8. To the Class R certificates, the remainder.
On each distribution date, the holders of the Class P certificates will be
entitled to all prepayment charges received with respect to the mortgage loans
during the related collection period, and such amounts will not be available for
distribution on the other classes of certificates.
GLOSSARY OF TERMS
The following terms have the meanings given below to help describe the
cashflows on the offered certificates:
"Aggregate Principal Amount" means, as to any distribution date, the sum of
the Basic Principal Amount for each mortgage loan group.
"Available Funds" as to any mortgage loan group and any distribution date,
is the sum, without duplication of the following amounts with respect to the
mortgage loans and the immediately preceding collection period, of:
(i) scheduled and unscheduled payments of principal and interest on the
mortgage loans received by the servicer, including amounts deposited in
respect of interest on any mortgage loan that does not have a monthly
payment due in the collection period relating to the distribution date (net
of amounts representing the monthly servicing fee with respect to each
mortgage loan and reimbursement for monthly advances and servicing
advances);
(ii) net liquidation proceeds and trust insurance proceeds with respect
to the mortgage loans (net of amounts applied to the restoration or repair
of a mortgaged property);
(iii) amounts payable in connection with each such mortgage loan that
was repurchased from the trust, and all amounts payable in respect of any
mortgage loan in the related mortgage loan group in connection with a
substitution of a qualified replacement mortgage loan therefor; and
(iv) payments from the Servicer in connection with (a) monthly
advances, (b) compensating interest, and (c) payments in connection with
the termination of the trust with respect to the mortgage loans as provided
in the pooling and servicing agreement.
Available Funds shall not include any prepayment charges.
S-23
"Available Funds Cap" means the per annum rate equal to (1) the weighted
average loan rate of the mortgage loans net of certain expenses, minus (2) the
product of (x) the pass-through rate on the Class A-IO certificates and (y) a
fraction, the numerator of which is the notional amount of the Class A-IO
certificates and the denominator of which is the Pool Balance, expressed as a
per annum rate.
"Basic Principal Amount" as to any mortgage loan group and any distribution
date, is an amount equal to the sum of the following amounts (without
duplication) with respect to the mortgage loans in such mortgage loan group and
the immediately preceding collection period:
(i) each payment of principal on a mortgage loan received by the
servicer during such collection period, including all full and partial
principal prepayments (net of reimbursements to the servicer for servicing
advances);
(ii) the net liquidation proceeds and trust insurance proceeds
allocable to principal received by the servicer with respect to any
mortgage loan during such collection period (net of amounts applied to the
restoration or repair of a mortgaged property); and
(iii) all amounts allocable to principal payable in connection with
each such mortgage loan that was repurchased from the trust during such
collection period, and all amounts allocable to principal payable in
respect of any mortgage loan in the related mortgage loan group in
connection with a substitution of a qualified replacement mortgage loan
therefor.
"Basic Principal Distribution Amount" as to any distribution date, is an
amount equal to the Aggregate Principal Amount minus the Excess
Overcollateralization Amount.
"Certificate Principal Balance" of any class of the offered certificates is
the original certificate principal balance of such class as reduced by all
amounts in respect of principal actually distributed to the related
certificateholders on all prior distribution dates, reduced by any Realized
Losses allocated to such class on prior distribution dates.
"Class A Principal Allocation Percentage" for any distribution date is the
percentage equivalent of a fraction, determined as follows: (i) in the case of
the Class A-1 certificates, the numerator of which is (x) the portion of the
Aggregate Principal Amount for such distribution date that is attributable to
principal received or advanced on the Group I mortgage loans, and the
denominator of which is (y) the Aggregate Principal Amount for such distribution
date, and (ii) in the case of the Class A-2 certificates, the numerator of which
is (x) the portion of the Aggregate Principal Amount for such distribution date
that is attributable to principal received or advanced on the Group II mortgage
loans, and the denominator of which is (y) the Aggregate Principal Amount for
such distribution date.
"Class Interest Distribution" means as to any class of certificates and
distribution date, is an amount equal to the sum of (a) the related Class
Monthly Interest Amount and (b) any Class Interest Carryover Shortfall for that
class of certificates for the applicable distribution date.
S-24
"Class B Principal Distribution Amount" means as to any distribution date
on or after the Stepdown Date and as long as a Delinquency Event is not in
effect, is the excess of:
(1) the sum of
(A) the aggregate certificate principal balance of the Class A
certificates, after taking into account distributions of the Senior
Principal Distribution Amount for the applicable distribution date,
(B) the certificate principal balance of the Class M-1 certificates,
after taking into account distribution of the Class M-1 Principal
Distribution Amount for the applicable Distribution Date,
(C) the certificate principal balance of the Class M-2 certificates,
after taking into account distribution of the Class M-2 Principal
Distribution Amount for the applicable distribution date, and
(D) the certificate principal balance of the Class B certificates
immediately prior to the applicable Distribution Date
over
(2) the lesser of
(A) 100% of the Pool Balance as of the last day of the related
collection period less the Subordination Required Overcollateralization
Amount for that Distribution Date, and
(B) the Pool Balance as of the last day of the related collection
period minus the OC Floor,
provided, however, that after the certificate principal balances of the Class
A, Class M-1 and Class M-2 certificates are reduced to zero, the Class B
Principal Distribution Amount for the applicable distribution date will equal
100% of the Principal Distribution Amount.
"Class Interest Carryover Shortfall" means as to any class of certificates
and any distribution date, an amount equal to the sum of (1) the excess of the
related Class Monthly Interest Amount for the preceding distribution date and
any outstanding Class Interest Carryover Shortfall with respect to that class
on the preceding distribution date, over the amount in respect of interest that
is actually distributed to the certificateholders of the class on the preceding
distribution date plus (2) one month's interest on the excess, to the extent
permitted by law, at the related pass-through rate.
"Class M-1 Principal Distribution Amount": As to any distribution date on
or after the Stepdown Date, (x) 100% of the Principal Distribution Amount if
the certificate principal balance of each class of Class A certificates has
been reduced to zero and a Delinquency Event exists, or (y) if a Delinquency
Event is not in effect, the excess of
(1) the sum of
(A) the aggregate certificate principal balance of the Class A
certificates, after taking into account distributions of the Senior
Principal Distribution Amount for the applicable distribution date, and
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(B) the certificate principal balance of the Class M-1 certificates
immediately prior to the applicable distribution date
over
(2) the lesser of
(A) 81% of the Pool Balance as of the last day of the related
collection period less the Subordination Required Overcollateralization
Amount for that Distribution Date, and
(B) the Pool Balance as of the last day of the related collection
period minus the OC Floor.
"Class M-2 Principal Distribution Amount" means as to any distribution
date on or after the Stepdown Date, (x) 100% of the Principal Distribution
Amount if the aggregate certificate principal balance of each of the Class A
and Class M-1 certificates has been reduced to zero and a Delinquency Event
exists, or (y) if a Delinquency Event is not in effect, the excess of
(1) the sum of
(A) the aggregate certificate principal balance of the Class A
certificates, after taking into account distributions of the Senior
Principal Distribution Amount for the applicable distribution date,
(B) the certificate principal balance of the Class M-1 certificates,
after taking into account distribution of the Class M-1 Principal
Distribution Amount for the applicable distribution date, and
(C) the certificate principal balance of the Class M-2 certificates
immediately prior to the applicable distribution date
over
(2) the lesser of
(A) 92% of the Pool Balance as of the last day of the related
collection period less the Subordination Required Overcollateralization
Amount for that Distribution Date, and
(B) the Pool Balance as of the last day of the related collection
period minus the OC Floor.
"Class Monthly Interest Amount" for any class of certificates on any
distribution date is the amount of interest due thereon in respect of any
Interest Period at the applicable pass-through rate on the related certificate
principal balance or notional amount, less such class' share of Interest
Shortfalls.
"Class Principal Carryover Shortfall" means as to any class of subordinate
certificates and any distribution date, the excess, if any, of (1) the sum of
(x) the amount of the reduction in the certificate principal balance of that
class of subordinate certificates on the applicable distribution date as
provided under " -- Treatment of realized losses" below and (y) the amount of
any reductions on prior distribution dates over (2) the amount distributed in
respect of the Class Principal Carryover Shortfall to such class of subordinate
certificates on prior distribution dates.
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"Collection Period" with respect to the first distribution date, is the
period beginning on and including March 2, 2001 and ending on and including
April 1, 2001 (except that with respect to payments due and unpaid on or before
March 1, 2001, only collections of principal are included), and with respect to
any distribution date thereafter for collections of both interest and principal,
the period beginning on and including the second day of the calendar month
immediately preceding such distribution date and ending on and including the
first day of the calendar month of such distribution date.
"Cumulative Loss Event" means the occurrence of rates of cumulative losses
during particular periods of time as specified in the pooling and servicing
agreement.
"Delinquency Amount" means as to any distribution date, the aggregate
principal balance of the mortgage loans that are (a) 60 or more days delinquent
or (b) 60 days or more delinquent and in bankruptcy or (c) foreclosure or REO
properties as of the last day of the related collection period.
"Delinquency Event" means a Delinquency Event shall have occurred and be
continuing, if at any time, (x) the three-month rolling average of the
percentage equivalent of a fraction, the numerator of which is the Delinquency
Amount and the denominator of which is the Pool Balance as of the last day of
the related collection period exceeds (y) 50% of the Senior Enhancement
Percentage.
"Excess Interest" with respect to any distribution date, means the sum of
(a) any Excess Overcollateralization Amount and (b) the excess of (x) the
Available Funds for such distribution date over (y) the sum for such
distribution date of (A) the Class Monthly Interest Amounts for the offered
certificates, (B) any Class Interest Carryover Shortfall for the Senior
Certificates, and (C) the Aggregate Principal Amount.
"Excess Overcollateralization Amount" means as to any distribution date,
the lesser of (1) the Aggregate Principal Amount for the applicable distribution
date and (2) the excess, if any, of (x) the Overcollateralization Amount,
assuming 100% of the Aggregate Principal Amount is distributed on the offered
certificates, over (y) the Required Overcollateralization Amount.
"Group I Class A-IO Class Interest Distribution" means as to any
distribution date, an amount equal to the Class Interest Distribution for the
Class A-IO certificates for such distribution date multiplied by a fraction, the
numerator of which is (x) the Certificate Principal Balance of the Class A-1
certificates immediately prior to such Distribution Date and the denominator of
which is (y) the aggregate Certificate Principal Balance of the Class A
certificates immediately prior to such distribution date.
"Group II Class A-IO Class Interest Distribution" means as to any
distribution date, an amount equal to the Class Interest Distribution for the
Class A-IO certificates for such distribution date multiplied by a fraction, the
numerator of which is (x) the Certificate Principal Balance of the Class A-2
certificates immediately prior to such Distribution Date and the denominator of
which is (y) the aggregate Certificate Principal Balance of the Class A
certificates immediately prior to such distribution date.
"Interest Period" means the calendar month preceding the month in which
such distribution date occurs.
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"Interest Remittance Amount" for any distribution date is that portion of
the Available Funds for such distribution date attributable to interest received
or advanced on the mortgage loans.
"Interest Shortfall" means as to any class of certificates and any
distribution date, the amount equal to the sum of Relief Act Shortfalls and
Prepayment Interest Shortfalls. On any distribution date, the amount of any
interest shortfalls will be applied to reduce the Class Monthly Interest Amount
of a class in the following order: first, to the Class C certificates in
reduction of the interest amounts payable to such class on the related
distribution date and, to the extent the amount of such interest shortfall
exceeds the interest due and payable to the Class C certificates on such
distibution date, thereafter to the offered certificates, pro rata, based on the
respective Class Monthly Interest Amount for each such class on such
distribution date.
"Liquidation Proceeds" means the aggregate of any proceeds received by the
servicer, including payments received under the primary mortgage insurance
policy, during the related collection period in connection with the liquidation
of any mortgaged property securing a mortgage loan, whether through trustee's
sale, foreclosure, condemnation, taking by eminent domain or otherwise
(including any insurance proceeds to the extent not duplicative of trust
insurance proceeds).
"Net Liquidation Proceeds" means the amount equal to liquidation proceeds
less expenses incurred by the servicer in connection with the liquidation of
such mortgage loan.
"Net Rate Cap Carryover" means, as to any distribution date and the
offered certificates, other than the Class A-IO certificates, the sum of
(a) the excess, if any, of the related Class Monthly Interest Amount,
calculated at the applicable pass-through rate, without regard to the
Available Funds Cap, over the Class Monthly Interest Amount for the
applicable distribution date,
(b) any Net Rate Cap Carryover remaining unpaid from prior distribution
dates and
(c) 30 days' interest on the amount in clause (b) calculated at the
applicable pass-through rate, without regard to the Available Funds Cap.
"OC Floor" means an amount equal to 0.50% of the aggregate certificate
principal balance of the offered certificates as of the closing date.
"Overcollateralization Amount" means, as of any distribution date, the
excess of (x) the Pool Balance as of the last day of the related collection
period over (y) the aggregate certificate principal balance of the offered
certificates (after taking into account all distributions of principal on the
offered certificates on such distribution date).
"Pool Balance" means, as to any distribution date, the aggregate of the
principal balances of the mortgage loans as of the end of the related collection
period.
"Prepayment Charge" means any charge paid by a mortgagor in connection with
certain partial prepayments and all prepayments in full.
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"Primary Mortgage Insurer Premium" means, for any distribution date and
any certificate group, the aggregate of the premiums payable by the servicer,
if any, during the immediately preceding collection period under the primary
mortgage insurance policy for any primary mortgage insurance mortgage loans in
the related mortgage loan group.
"Principal Distribution Amount" means, as to any distribution date, the
lesser of (a) the aggregate certificate principal balances immediately preceding
such distribution date and (b) sum of (1) the Aggregate Principal Amount minus
the Excess Overcollateralization Amount and (2) the Subordination Increase
Amount.
"Relief Act" means the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
"Relief Act Shortfalls" means, as to any distribution date and any mortgage
loan group, the amount of any reduction of interest collectable on any mortgage
loan in such mortgage loan group for the related Interest Period due to the
application of the Relief Act.
"Required Overcollateralization Amount" means, as to any distribution date
(a) prior to the Stepdown Date, the product of (x) 3.00% and (y) the Pool
Balance as of the cut-off date; and (b) on and after the Stepdown Date, the
greater of (1) the lesser of (x) the product of 3.00% and the Pool Balance as of
the cut-off date and (y) the product of 6.00% and the Pool Balance as of the end
of the related collection period and (2) the OC Floor; provided, however, that
on each distribution date during the continuance of a Delinquency Event or
Cumulative Loss Event, the Required Overcollateralization Amount will equal the
Required Overcollateralization Amount in effect as of the distribution date
immediately preceding the date on which the Delinquency Event or Cumulative Loss
Event, as applicable, first occurred.
"Senior Enhancement Percentage" means, as to any distribution date, the
percentage equivalent of a fraction, the numerator of which is the sum of (1)
the aggregate certificate principal balance of the subordinate certificates and
(2) the Overcollateralization Amount, in each case, after taking into account
the distribution of the Principal Distribution Amount on the applicable
distribution date, and the denominator of which is the Pool Balance as of the
last day of the related collection period.
"Senior Principal Distribution Amount" means, as to (a) any distribution
date prior to the Stepdown Date or during the continuation of a Delinquency
Event, the lesser of (1) 100% of the Principal Distribution Amount and (2) the
aggregate certificate principal balance of the Class A certificates, and (b) any
other distribution date, an amount equal to the lesser of (1) the Principal
Distribution Amount and (2) the excess, if any, of (x) the aggregate certificate
principal balance of the Class A certificates immediately prior to the
applicable distribution date over (y) the lesser of (A) 68.00% of the Pool
Balance as of the last day of the related collection period less the
Subordination Required Overcollateralization Amount for that Distribution Date
and (B) the Pool Balance as of the last day of the related collection period
minus the OC Floor.
"Stepdown Date" means the later to occur of (x) the earlier to occur of (A)
the distribution date in April 2004 and (B) the distribution date on which the
aggregate certificate principal balance of the Class A certificates is reduced
to zero, and (y) the
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first distribution date on which the Senior Enhancement Percentage, assuming
100% of the Principal Distribution Amount is distributed on the offered
certificates, is at least equal to 38%.
"Subordination Deficiency" means, as to any distribution date, the excess,
if any, of (x) the Required Overcollateralization Amount for the applicable
distribution date over (y) the Overcollateralization Amount for that
distribution date after giving effect to the distribution of the Basic Principal
Amount on that distribution date.
"Subordination Increase Amount" means, as to any distribution date, the
lesser of (x) the Subordination Deficiency and (y) the Excess Interest.
"Subordination Required Overcollateralization Amount" means (A) as to any
distribution date on which a Delinquency Event or a Cumulative Loss Event has
not occurred and is continuing, the Required Overcollateralization Amount
without giving effect to the OC Floor calculation and (B) as to any distribution
date on which a Delinquency Event or a Cumulative Loss Event has occurred and is
continuing, the Required Overcollateralization Amount.
"Trust Insurance Proceeds" means the aggregate of any proceeds from or in
respect of any policy of insurance (other than the primary mortgage insurance
policy covering a mortgage loan in a mortgage loan group) that are received
during a collection period and applied by the servicer to reduce the principal
balance of the related mortgage loan or losses with respect thereto (which
proceeds will not include any amounts applied to the restoration or repair of
the related mortgaged property or released to the related mortgagor in
accordance with applicable law, the servicer's customary servicing procedures or
the terms of the related mortgage loan).
PASS-THROUGH RATES
The pass-through rate for each class of offered certificates is set forth
on the cover page of this prospectus supplement. The pass-through rates of the
offered certificates, other than the Class A-IO certificates, are subject to the
Available Funds Cap and will increase by 50 basis points per annum after the
clean-up call date.
NET RATE CAP FUND
The pooling and servicing agreement provides for a reserve fund, called the
net rate cap fund, which is held by the trustee on behalf of the holders of the
offered certificates other than the Class A-IO certificates. To the extent
amounts on deposit are sufficient, holders of the applicable certificates will
be entitled to receive payments from the fund equal to any Net Rate Cap
Carryover. The amount required to be deposited in the fund on any distribution
date will equal any Net Rate Cap Carryover for such distribution date or, if no
Net Rate Cap Carryover is payable on such distribution date, an amount such that
when added to other amounts already on deposit in the fund, the aggregate amount
on deposit therein is equal to $10,000. Any investment earnings on amounts on
deposit in the fund will be paid to (and for the benefit of) the holders of the
Class C certificates and will not be available to pay any Net Rate Cap
Carryover. The net rate cap fund will not be included as an asset of any REMIC
created pursuant to the pooling and servicing agreement. The applicable
certificates will be entitled to receive any related Net Rate Cap Carryover on
the distribution date on which it arises
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or on a subsequent distribution date from and to the extent of amounts
otherwise distributable to the Class C certificateholders. Net Rate Cap
Carryover amounts will not be paid after the date on which the trust is
terminated by optional termination or otherwise. The ratings assigned to the
offered certificates do not address the likelihood of the payment of any Net
Rate Cap Carryover.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to certificateholders, the trustee will
make available on its web site, located at
http://www-apps.gis.deutsche-bank.com/invr, the following information:
(a) the amount of the distribution with respect to each class of
certificates, based on a certificate in the original principal amount of
$1,000;
(b) the amount of such distribution allocable to principal on the
related mortgage loans in each mortgage loan group, separately identifying
the aggregate amount of any prepayment or other recoveries of principal
included therein;
(c) the amount of such distribution allocable to interest on the
related mortgage loans in each mortgage loan group, based on a certificate
in the original principal amount of $1,000;
(d) the class monthly interest and the class interest carryover
shortfall for each class of certificates;
(e) the principal amount of each class of certificates, based on a
certificate in the original principal amount of $1,000 that will be
outstanding after giving effect to any payment of principal on such
distribution date;
(f) the aggregate of the principal balances of all mortgage loans and
the aggregate of the principal balances of the mortgage loans in each
mortgage loan group after giving effect to any payment of principal on such
distribution date and the related group factor;
(g) based upon information furnished by the sponsor, such information
as may be required by Section 6049(d)(7)(C) of the Internal Revenue Code
and the regulations promulgated thereunder to assist certificateholders in
computing their market discount;
(h) the total of all amounts paid by the sponsor or the servicer during
such collection period in connection with purchases or repurchases from the
trust of mortgage loans and substitutions for mortgage loans of qualified
replacement mortgages with respect to each mortgage loan group;
(i) the weighted average mortgage interest rate of the mortgage loans
in each mortgage loan group;
(j) whether a delinquency event or cumulative loss event under the
pooling and servicing agreement have occurred;
(k) the overcollateralization amount and required overcollateralization
amount;
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(l) the certificate principal balance of each class of certificates
then outstanding after giving effect to all payments of principal on such
distribution date;
(m) with respect to each mortgage loan group, the number of mortgage
loans in each mortgage loan group and the aggregate of their principal
balances as a percentage of the applicable group balance, that are
(i) 30 to 59 days delinquent,
(ii) 60 to 89 days delinquent,
(iii) 90 or more days delinquent,
(iv) the subject of bankruptcy proceedings, to the actual knowledge
of the servicer,
(v) in foreclosure, and
(vi) as to which the related mortgaged property is REO property;
(n) the amount of any Net Rate Cap Carryover paid and remaining unpaid
as of such distribution date; and
(o) the dollar amount of
(i) claims paid by the primary mortgage insurer under the primary
mortgage insurance policy as of the related distribution date and
(ii) claims denied by the primary mortgage insurer under the primary
mortgage insurance policy as of the related distribution date.
Assistance in using the Trustee's web site can be obtained by calling the
Trustee's investor relations desk at 1-800-735-7777. The obligation of the
Trustee to provide information to the Certificateholders is conditioned upon
such information being received from the Servicer.
As to any distribution date, the "group factor" will be the percentage
obtained (carried to eight decimal places, rounded down) by dividing the
aggregate principal balance of the related mortgage loan group on such
distribution date (after giving effect to any distribution of principal or
allocation of realized losses on the certificates on such distribution date) by
the related cut-off date group balance.
Within 90 days after the end of each calendar year, the trustee will mail
to each person who at any time during such calendar year was a holder of record
of a certificate the information set forth in clauses (a) through (q) above,
aggregated for such calendar year or, in the case of each person who was a
holder of record of a certificate for a portion of such calendar year, setting
forth such information for each month thereof.
VOTING RIGHTS
Each certificateholder of a class will have a voting interest equal to the
product of the voting interest to which such class is collectively entitled and
the certificateholder's percentage interest in such class. 1% of all voting
interests will be allocated to each of the Class A-IO, Class C, Class P and
Class R certificates. The remaining voting interests will be allocated to the
classes of offered certificates in proportion to their respective certificate
principal balances on any determination date.
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BOOK-ENTRY REGISTRATION OF OFFERED CERTIFICATES
The offered certificates initially will be issued as book-entry
certificates. The book-entry certificates will be issued in one or more
certificates which equal the aggregate principal balance of the offered
certificates and will initially be registered in the name of Cede & Co.,
referred to as Cede, the nominee of the Depository Trust Company, referred to as
DTC. Persons acquiring beneficial ownership interests in the offered
certificates will hold their certificates through DTC in the United States, or
upon request Clearstream, Luxembourg or the Euroclear System, referred to as
Euroclear, in Europe, if they are participants of these systems, or indirectly
through organizations which are participants in these 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 positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank, N.A., referred to as Citibank, will act as
depositary for Clearstream, Luxembourg and The Chase Manhattan Bank, referred to
as Chase, will act as depositary for Euroclear. Collectively, these entities are
referred to as the European depositaries.
Investors may hold beneficial interests in the book-entry certificates in
minimum denominations representing certificate principal balances or notional
amount of $25,000 and in integral multiples of $1,000 in excess of the notional
amount of $25,000. One certificate of each class of offered certificates may be
issued in a different principal amount to accommodate the remainder of the
initial principal amount of the certificates of the class. Unless and until
definitive certificates are issued, it is anticipated that the only
certificateholder of the offered certificates will be Cede & Co., as nominee of
DTC. Certificate owners will not be certificateholders as that term is used in
the pooling and servicing agreement. Certificate owners are only permitted to
exercise their rights indirectly through participants and DTC. For a description
of the features of the book-entry registration system, see "Description of the
Securities -- Form of Securities -- Book-Entry Registration" in the prospectus.
For information with respect to tax documentation procedures relating to the
certificates, see "Global Clearance, Settlement and Tax Documentation Procedures
- -- U.S. Federal Income Tax Documentation Requirements" in Annex I to this
prospectus supplement.
Neither the seller, the servicer nor the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to beneficial ownership interests.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The trust will terminate upon the later to occur of
(a) the payment to certificateholders of all amounts held in the
certificate account or by or on behalf of the servicer and required to be
paid to the certificateholders pursuant to the pooling and servicing
agreement,
(b) the final payment or other liquidation of the principal balance of
the last mortgage loan remaining in the trust or
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(c) the optional purchase of the mortgage loans by the servicer, as
described below.
Written notice of termination of the pooling and servicing agreement will be
given to each certificateholder, and the final distribution will be made only
upon surrender and cancellation of the certificates at an office or agency
appointed by the trustee which will be specified in the notice of termination.
Subject to provisions in the pooling and servicing agreement concerning
adopting a plan of complete liquidation, the servicer may, at its option,
terminate the agreement on any distribution date during which the aggregate
outstanding principal balance of the mortgage loans is less than 5% of the sum
of the principal balances of the mortgage loans as of the cut-off date, called
the clean-up call date, by purchasing all of the outstanding mortgage loans and
REO properties at a price equal to the sum of the principal balance of the
outstanding mortgage loans, plus the fair market value of any REO property
included in the trust, plus accrued and unpaid interest on the related mortgage
loans at the weighted average of the loan rates through the end of the related
collection period. Any resulting losses will be allocated to the subordinate
certificates in reverse order of payment priority.
The pooling and servicing agreement will provide that notice of any
termination, specifying the final distribution date upon which the
certificateholders may surrender their certificates to the trustee for payment
of the final distribution and cancellation, will be given promptly by the
trustee by letter to certificateholders specifying
(a) the distribution date for the final distribution,
(b) the amount of any such final distribution and
(c) that the final distribution will be made only upon presentation and
surrender of the certificates at the office or agency of the trustee
therein specified.
THE TRUSTEE
Bankers Trust Company of California, N.A. will be the trustee under the
pooling and servicing agreement. The pooling and servicing agreement will
provide that the trustee is entitled to the trustee fee and reimbursement of
expenses. The trustee may resign at any time, in which event the servicer will
be obligated to appoint a successor trustee. The servicer may also remove the
trustee if the trustee ceases to be eligible to continue as such under the
pooling and servicing agreement, if the trustee fails to fulfill its
obligations in any material respect under the pooling and servicing agreement
or if the trustee becomes insolvent. Upon becoming aware of such circumstances,
the servicer will be obligated to appoint a successor trustee. Any resignation
or removal of the trustee and appointment of a successor trustee will not
become effective until acceptance of the appointment by the successor trustee.
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CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the offered
certificateholders consists of the application of excess interest, the
overcollateralization features of the trust and, in certain instances, the
primary mortgage insurance policy.
TREATMENT OF REALIZED LOSSES
The aggregate principal amount includes the net liquidation proceeds in
respect of principal received upon liquidation of a liquidated mortgage loan. If
the portion of net liquidation proceeds allocable to principal are less than the
unpaid principal balance of the related liquidated mortgage loan, the pool
balance will decline more than the aggregate class principal balance of the
offered certificates. If the difference is not covered by the
overcollateralization amount or the application of excess interest, the class of
subordinate certificates then outstanding with the lowest relative payment
priority will bear the loss.
If, following the distributions on a distribution date, the aggregate class
principal balance of the offered certificates exceeds the pool balance, that is,
the certificates are undercollateralized, the class principal balance of the
class of subordinate certificates then outstanding with the lowest relative
payment priority will be reduced by the amount of the excess. Any reduction will
constitute a class principal carryover shortfall for the applicable class.
Although a class principal carryover shortfall will not accrue interest, this
amount may be paid on a future distribution date to the extent funds are
available for distributions as provided above under "-- Distribution
Priorities."
The pooling and servicing agreement does not permit the allocation of
realized losses to the Class A certificates, the Class A-IO certificates or the
Class P certificates. Investors in the Class A certificates should note that
although realized losses cannot be allocated to the Class A certificates, under
certain loss scenarios there will not be enough principal and interest on the
mortgage loans to pay the Class A certificates all interest and principal
amounts to which they are then entitled. Investors in the Class A-IO
certificates should note that although realized losses cannot be allocated to
the Class A-IO certificates, under certain loss scenarios there will not be
enough interest on the mortgage loans to pay the Class A-IO certificates all
interest amounts to which they are then entitled.
For all purposes of this prospectus supplement, the Class B certificates
will have the lowest payment priority of any class of subordinate certificates.
OVERCOLLATERALIZATION AND APPLICATION OF EXCESS INTEREST
The weighted average net mortgage interest rate for the mortgage loans is
generally expected to be higher than the weighted average of the pass-through
rates on the offered certificates. In addition, to the extent that there is
overcollateralization, these mortgage loans will be generating still further
excess interest relative to the pass-through rates on the offered certificates.
The overcollateralization mechanics of the trust result in a limited
acceleration of the payment of the offered certificates relative to the
amortization of the mortgage loans. The accelerated amortization will cause the
aggregate of the related principal balances of the certificates to amortize more
rapidly than the principal balances of the
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mortgage loans, increasing the amount of overcollateralization. Once the
required overcollateralization amount is reached, such accelerated amortization
feature will cease, unless necessary to maintain the required
overcollateralization amount. On any distribution date on which the required
overcollateralization amount is reached, the excess interest will not be passed
through as a distribution of principal to the holders of the offered
certificates on such distribution date, but will be distributed to the retained
certificateholders.
The pooling and servicing agreement provides that, based on the delinquency
and loss experience of the mortgage loans, the required overcollateralization
amount may increase or decrease over time. An increase would result in a
temporary period of accelerated amortization of the offered certificates to
increase the actual level of overcollateralization to the required
overcollateralization amount; a decrease would result in a temporary period of
decelerated amortization to reduce the actual level of overcollateralization to
the required overcollateralization amount.
PRIMARY MORTGAGE INSURANCE POLICY
The following description of the primary mortgage insurance policy is only
a brief outline and does not purport to summarize or describe all of the
provisions, terms and conditions of the primary mortgage insurance policy. For a
more complete description of these provisions, terms and conditions, reference
is made to the primary mortgage insurance policy, a copy of which is available
upon request from the trustee.
As of the statistic calculation date, approximately 6.60% and 3.59%, as
measured by aggregate principal balance, of the statistic calculation loans in
Group I and Group II, respectively, which have original loan-to-value ratios in
excess of 90% are insured by Mortgage Guaranty Insurance Corporation, called the
primary mortgage insurer, pursuant to the primary mortgage insurance policy. The
amount of coverage provided by the primary mortgage insurance policy varies on a
loan-by-loan basis based upon the original loan-to-value ratio of the primary
mortgage insurance mortgage loan. The primary mortgage insurance policy provides
for the payment to the primary mortgage insurance insurer of certain initial and
renewal premiums with respect to each primary mortgage insurance mortgage loan,
at rates calculated under the primary mortgage insurance policy.
The primary mortgage insurance policy is required to remain in force with
respect to each primary mortgage insurance mortgage loan until:
(1) the principal balance of such primary mortgage insurance mortgage
loan is paid in full, or
(2) the principal balance of such primary mortgage insurance mortgage
loan has amortized down to a level that results in a loan-to-value ratio
for such mortgage loan agreed to with the primary mortgage insurance
insurer.
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THE MORTGAGE LOANS
The mortgage loans will include:
(a) the mortgage loans identified as of February 15, 2001 and described
in this prospectus supplement, called the statistic calculation loans, and
(b) additional fixed and hybrid loans to be delivered on the closing
date, referred to as the additional mortgage loans, and together with the
statistic calculation loans, called the mortgage loans.
The following brief description of the statistic calculation loans is based
on the terms of the statistic calculation loans, including their respective
principal balances as of the statistic calculation date, and each mortgage loan
group as of the statistic calculation date. Certain mortgage loans may be
removed, prior to the closing date, from the mortgage pool and each mortgage
loan group and other mortgage loans may be substituted therefor. As a result,
the statistical information presented in this prospectus supplement regarding
the statistic calculation loans and each mortgage loan group may vary in certain
limited respects but will not vary in any material respects from comparable
information based on the actual composition of the mortgage pool and each
mortgage loan group at the closing date.
None of the mortgage loans is or will be insured or guaranteed by the
sponsor, the servicer, the trustee, any originator or any of their respective
affiliates, or by any governmental agency or other person.
None of the mortgage loans is subject to the Home Ownership and Equity
Protection Act of 1994 or any comparable state law.
A schedule of the mortgage loans included in each mortgage loan group as of
the closing date will be attached to the pooling and servicing agreement
delivered to the trustee upon delivery of the certificates. A current report on
Form 8-K containing a description of the mortgage loans included in the final
mortgage pool in a form comparable to the description of the statistic
calculation loans contained in "Annex A: Description of the Mortgage Pool" will
be filed with the Securities and Exchange Commission within 15 days after the
closing date.
Each mortgage loan in the trust will be assigned to Group I or Group II.
All of the mortgage loans in Group I have conforming balances. Each mortgage
loan bears interest either at a fixed rate or at an initial fixed rate term at
origination followed by an adjustable rate term. The statistic calculation loans
are secured by first and second liens.
Certain mortgage loans will provide for the payment of a charge if the
principal thereof is paid prior to its stated maturity date. No mortgage loan
will impose a prepayment charge for a term in excess of five years. Such charge,
to the extent received, however, will not be available to the trust but will
instead be paid to the holders of the Class P certificates.
In connection with the assignment of the mortgage loans to the trust, the
sponsor will represent and warrant that, among other things, as of the cut-off
date, no mortgage loan had two or more monthly payments past due. However, you
should be aware that approximately 45.29% and 47.60%, by aggregate principal
balance, of the statistic
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calculation loans in Group I and Group II, respectively, had a first monthly
payment due before March 1, 2001, and it was not possible for any mortgage loan
other than such mortgage loans to have had two or more monthly payments past
due as of the statistic calculation date. Less than 0.01%, by aggregate
principal balance, of the statistic calculation loans in each of Group I and
Group II, respectively, were 30 days delinquent in payment as of the statistic
calculation date. No statistic calculation loan has a loan-to-value ratio at
origination of more than 100%.
Approximately 9.88% and 10.33%, by principal balance, of the statistic
calculation loans in Group I and Group II, respectively, change from having a
fixed rate of interest to having an adjustable rate of interest 36 months after
origination. These loans are referred to, collectively, as hybrid loans. The
weighted average change date for the hybrid loans in Group I and Group II, as of
the statistic calculation date, is approximately 35.46 months and 35.62 months,
respectively. The interest rate, also referred to as the loan rate, borne by
each hybrid loan during its adjustable rate term, which we refer to as an ARM,
is subject to adjustment on the date set forth in the related promissory note,
each called a mortgage note, and at regular intervals thereafter, each referred
to as a change date, to equal the sum of (a) the applicable loan index and (b)
the number of basis points set forth in that mortgage note, called the gross
margin, subject to rounding and to the effects of the applicable periodic cap,
the applicable lifetime cap and the applicable lifetime floor. The periodic cap
limits changes in the loan rate for each ARM on each change date. The lifetime
cap is the maximum loan rate that may be borne by an ARM at any point. The
lifetime floor is the minimum loan rate that may be borne by an ARM at any
point. The periodic cap for all of the ARMs, subsequent to the first change
date, is 1.00%. However, the periodic cap for the initial change date for the
hybrid loans in Group I and Group II generally is 3.00%.
For all of the statistic calculation mortgage loans that are ARMs, the loan
index is the London interbank offered rate for six-month United States dollar
deposits, and the change dates occur every six months after the initial change
date. The reference for each applicable loan index and the date prior to a
change date as of which the loan index is determined is set forth in the related
mortgage note.
CONVEYANCE OF ADDITIONAL MORTGAGE LOANS
On the closing date, the sponsor will deliver additional mortgage loans
which may have characteristics which differ from the statistic calculation loans
initially included in the applicable loan group. Accordingly, the statistical
characteristics of the mortgage loans in the trust will vary upon the
acquisition of additional mortgage loans, but will not vary in any material
repects from the characteristics of the statistic calculation loans.
The additional mortgage loans are subject to the following requirements in
addition to other requirements set forth in the agreement:
o the additional mortgage loan may not be 30 or more days contractually
delinquent as of the related cut-off date;
o the remaining term to stated maturity of the additional mortgage loan
will not exceed 30 years;
o the additional mortgage loan will be underwritten or re-underwritten in
accordance with the sponsor's underwriting criteria;
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o the additional mortgage loan will not have a loan rate less than 7.75%;
and
o following the delivery of such additional mortgage loans, the mortgage
loans in the related mortgage loan group (including the additional
mortgage loans) (a) will have a related weighted average loan rate not
materially different from the weighted average loan rate of the
statistic calculation loans in the related mortgage loan group, (b)
will each have a principal balance not in excess of $560,000 and (c)
will satisfy any additional requirements set forth in the pooling and
servicing agreement.
ASSIGNMENT OF MORTGAGE LOANS
On the closing date, the sponsor will transfer to the trust all of its
right, title and interest in and to each mortgage loan, the related mortgage
note, mortgages and other related documents, collectively referred to as the
related documents, including all payments received after the related cut-off
date other than payments of interest on the initial mortgage loans due on or
before March 1, 2001. The trustee, concurrently with the transfer, will deliver
the certificates to the sponsor. Each mortgage loan transferred to the trust
will be identified on a mortgage loan schedule delivered to the trustee pursuant
to the agreement. This schedule will include information as to the principal
balance of each mortgage loan as of the related cut-off date, as well as
information with respect to the loan rate.
The agreement will require that, within the time period specified in the
agreement, the sponsor will deliver to the trustee the mortgage loans endorsed
to the trustee and the related documents. In lieu of delivery of original
mortgages, if the original is not available, the sponsor may deliver true and
correct copies of the original mortgages.
Under the terms of the agreement, the sponsor will promptly and in no event
later than 30 days after the closing date, prepare and record assignments of the
mortgages related to each mortgage loan in favor of the trustee, unless opinions
of counsel satisfactory to the rating agencies are delivered to the trustee to
the effect that recordation of the assignments is not required in the relevant
jurisdictions to protect the interests of the trustee in the mortgage loans. If
the recording information with respect to any assignment of mortgage is
unavailable within 30 days of the closing date, the assignment will be prepared
and recorded within 30 days after receipt of this information, but in no event
later than eight months after the closing date.
Within 45 days of the closing date, the trustee will review the mortgage
loans and the related documents pursuant to the agreement and if any mortgage
loan or related document is found to be defective in any material respect and
the defect is not cured within 60 days following notification of the defect to
the sponsor by the trustee, the sponsor will be obligated to either (a)
substitute for the mortgage loan a qualified replacement mortgage loan; however,
this substitution is permitted only within two years of the closing date and may
not be made unless an opinion of counsel is provided to the effect that the
substitution will not disqualify any REMIC as a REMIC or result in a prohibited
transaction tax under the Code or (b) purchase the mortgage loan at a price,
called the purchase price, equal to the outstanding principal balance of the
mortgage loan as of the date of purchase, plus unpaid interest on the mortgage
loan from the date interest was last paid or with respect to which interest was
advanced and not reimbursed through the end of the calendar month in which the
purchase occurred,
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computed at the loan rate, net of the servicing fee if the sponsor is the
servicer, plus if the sponsor is not the servicer the amount of any
unreimbursed servicing advances made by the servicer. The purchase price will
be deposited in the collection account on or prior to the next succeeding
deposit date after the obligation arises. The obligation of the sponsor to
repurchase or substitute for a defective mortgage loan is the sole remedy
regarding any defects in the mortgage loans and related documents available to
the trustee or the certificateholders.
The sponsor will make representations and warranties as to the accuracy in
all material respects of information furnished to the trustee with respect to
each mortgage loan. In addition, the sponsor will represent and warrant, on the
closing date, among other things: (a) that each mortgage loan, at its
origination, complied in all material respects with applicable state and federal
laws; (b) that each mortgage is a valid lien of the applicable priority; (c)
that, as of the closing date, no mortgage loan had two or more monthly payments
past due; (d) that each mortgaged property consists of a one-to four-family
residential property or unit in a condominium or planned unit development; (e)
that the sponsor had good title to each mortgage loan prior to the sale and
assignment by the sponsor; and (f) that no proceeds from any mortgage loan were
used to finance single-premium credit, life and disability insurance policies.
Upon discovery of a breach of any representation and warranty which materially
and adversely affects the interests of the certificateholders in the related
mortgage loan and related documents, the sponsor will have a period of 60 days
after discovery or notice of the breach to effect a cure. If the breach cannot
be cured within the 60-day period, the sponsor will be obligated to (x)
substitute for the mortgage loan a qualified replacement mortgage loan or (y)
purchase the mortgage loan from the trust. The same procedure and limitations
that are set forth above for the substitution or purchase of defective mortgage
loans as a result of deficient documentation relating to the defective mortgage
loans will apply to the substitution or purchase of a mortgage loan as a result
of a breach of a representation or warranty in the agreement that materially and
adversely affects the interests of the certificateholders.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The servicer additionally has the option to purchase from the trust any
mortgage loan 90 days or more delinquent at the purchase price set forth above
for the purchase of defective mortgage loans, subject to certain limits set
forth in the pooling and servicing agreement.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND CERTIFICATE
ACCOUNT
The servicer will establish and maintain in the name of the trustee a
separate collection account for the benefit of the holders of the certificates
The collection account will be an eligible account meeting the criteria
specified in the pooling and servicing agreement. Upon receipt by the servicer
of amounts in respect of the mortgage loans, excluding amounts representing the
servicing fee, reimbursement for any primary mortgage insurance premium made by
it, reimbursement for certain monthly advances, servicer advances and any other
expenses incurred by it for which it is entitled to reimbursement under the
pooling and servicing agreement, the servicer will deposit these amounts in the
collection account. Amounts so deposited may be invested in permitted
investments, as described in the agreement, that meet the criteria of the
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rating agencies as being consistent with their then current ratings of the
offered certificates. Investment earnings from amounts on deposit in the
collection account will not be part of Available Funds.
The trustee will establish a certificate account. Three days prior to each
distribution date, which date is called the deposit date, the trustee is
required to deposit into the certificate account the Available Funds for each
mortgage loan group and the related collection period. The certificate account
will be an eligible account. Amounts on deposit in the certificate account may
be invested in permitted investments maturing on or before the business day
prior to the related distribution date. Investment earnings from amounts on
deposit in the distribution account will not be part of Available Funds.
S-41
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The weighted average life of and the yield to maturity on an offered
certificate will be directly related to the rate of prepayments of principal of
the mortgage loans. The actual rate of principal prepayments on the mortgage
loans may be influenced by a variety of economic, tax, geographic, demographic,
social, competitive, legal and other factors and has fluctuated considerably in
recent years. The mortgage loans may be prepaid by the borrowers at any time;
however, a majority of the mortgage loans are subject to a prepayment charge.
Because a portion of all amounts available for distribution on each class
of certificates after distributions in respect of class monthly interest are
applied as reductions of the related certificate principal balance, the
weighted average lives of the certificates will be influenced by the amount of
excess interest so applied. Because the overcollateralization feature is
expected to cause interest collections on the related mortgage loans to outpace
required interest distributions for each class of certificates, such excess
interest will be applied to reduce the principal balances of the offered
certificates. It is expected that, over time, this excess interest will
increase in proportion to the principal balances of the offered certificates in
the absence of offsetting realized losses.
PASS-THROUGH RATES
The pass-through rate for the offered certificates, other than the Class
A-IO certificates, is subject to the available funds cap. The available funds
cap on any distribution date is determined by reference to the weighted average
interest rate of the mortgage loans, net of interest payable to the Class A-IO
certificates and certain expenses, in effect at the beginning of the related
collection period. Approximately 90% of the statistic calculation loans have
interest rates that are fixed for the lives of such mortgage loans. If mortgage
loans bearing higher interest rates were to prepay at rates faster than mortgage
loans with lower interest rates, the available funds cap would be lower than
otherwise would be the case. Thus, the effective pass-through rate on the
offered certificates, other than the Class A-IO certificates, will be dependent
on the prepayment experience of the mortgage loans.
The yield to investors on the offered certificates, other than the Class
A-IO certificates, will be sensitive to, among other things, the level of the
loan index. 9.88% and 10.33%, measured by aggregate principal balance, of the
statistic calculation loans in Group I and Group II, respectively, are hybrid
loans which will bear interest at fixed rates for 36 months after origination of
such mortgage loans. Although each of the hybrid loans, after its initial fixed
rate period, bears interest at an adjustable rate, such rate is subject to a
periodic rate cap, a lifetime floor and a lifetime cap. If the index increases
substantially between change dates, the adjusted interest rate on the related
mortgage loan may not equal the index plus the related gross margin due to the
constraint of such caps. In such event, the related mortgage interest rate will
be less than would have been the case in the absence of such caps. If the index
of a hybrid loan during its adjustable rate period decreases, the related
mortgage loan for any collection period may bear interest at a rate lower than
the rate on one or more of the offered
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certificates. In such an event, the available funds cap would be lower than
otherwise would be the case. In addition, the mortgage interest rate applicable
to any change date will be based on the index related to the change date. Thus,
if the value of the index with respect to a mortgage loan rises, the lag in
time before the corresponding mortgage interest rate increases will, all other
things being equal, slow the upward adjustment of the available funds cap.
Furthermore, mortgage loans that have not reached their first change date are
more likely to be subject to the applicable periodic rate cap on their first
change date. Although the holders of the offered certificates, other than the
Class A-IO certificates, will be entitled to receive the related net rate cap
carryover, there is no assurance that sufficient funds will be available
therefor. The ratings on the offered certificates, other than the Class A-IO
certificates, do not address the likelihood of the payment of any Net Rate Cap
Carryover.
The subordinate certificates provide credit enhancement for the senior
certificates in both certificate groups and may absorb losses on the mortgage
loans in either loan group. The weighted average lives of, and the yields to
maturity on, the subordinate certificates, in reverse order of their relative
payment priorities, will be progressively more sensitive to the rate and timing
of mortgagor defaults and the severity of ensuing losses on the mortgage loans.
If the actual rate and severity of losses on the mortgage loans is higher than
those assumed by a holder of a subordinate certificate, the actual yield to
maturity on the holder's certificate may be lower than the yield expected by the
holder based on that assumption. Realized losses on the mortgage loans will
reduce the certificate principal balance of the class of subordinate
certificates then outstanding with lowest relative payment priority if and to
the extent that the aggregate of the certificate principal balances of all
classes of certificates, following all distributions on a distribution date,
exceeds the pool balance. As a result of these reductions, less interest will
accrue on the class of subordinate certificates than otherwise would be the
case.
The basic principal amount includes the net proceeds in respect of
principal received upon liquidation of a liquidated mortgage loan. If the net
proceeds are less than the unpaid principal balance of the liquidated mortgage
loan, the pool balance will decline more than the aggregate certificate
principal balance of the offered certificates, thus reducing the
overcollateralization amount. If this difference is not covered by the
overcollateralization amount or the application of excess interest, the class of
subordinate certificates then outstanding with the lowest relative payment
priority will bear the loss. In addition, the subordinate certificates will not
be entitled to any principal distributions prior to the stepdown date or during
the continuation of a delinquency event, unless all of the certificates with a
higher relative payment priority have been paid in full. Because of the
disproportionate distribution of principal of the senior certificates, depending
on the timing of realized losses, the subordinate certificates may bear a
disproportionate percentage of the realized losses on the mortgage loans.
For all purposes, the Class B certificates will have the lowest payment
priority of any class of subordinate certificates.
PAYMENT DELAY FEATURE OF FIXED RATE CERTIFICATES
The effective yield to the certificateholders will be lower than the yield
otherwise produced by the pass-through rate for such class and the purchase
price of such
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certificates because distributions will not be payable to the
certificateholders until the 25th day of the month following the month of
accrual, without any additional distribution of interest or earnings thereon in
respect of such delay.
PROJECTED PREPAYMENTS AND YIELDS FOR THE OFFERED CERTIFICATES
If an offered certificate is purchased at other than its parity price, its
yield to maturity will be affected by the rate of the payment of principal on
the mortgage loans in the related mortgage loan group. If the actual rate of
payments on the mortgage loans in the related mortgage loan group is slower than
the rate anticipated by an investor who purchases an offered certificate at a
discount, especially in the case of a subordinate certificate, the actual yield
to such investor will be lower than such investor's anticipated yield. If the
actual rate of payments on the mortgage loans in the related mortgage loan group
is faster than the rate anticipated by an investor who purchases an offered
certificate at a premium, the actual yield to such investor will be lower than
such investor's anticipated yield.
The rate of prepayments with respect to conventional fixed rate mortgage
loans has fluctuated significantly in recent years. As with fixed rate
obligations generally, the rate of prepayment on a pool of mortgage loans with
fixed rates is affected by prevailing market rates for mortgage loans of a
comparable term and risk level. When the market interest rate is below the
applicable loan rate, mortgagors may have an increased incentive to refinance
their mortgage loans. Depending on prevailing market rates, the future outlook
for market rates and economic conditions generally, some mortgagors may sell or
refinance mortgaged properties in order to realize their equity in the mortgaged
properties, to meet cash flow needs or to make other investments.
As is the case with conventional fixed rate mortgage loans, ARMs may be
subject to a greater rate of principal prepayments in a declining interest rate
environment. For example, if prevailing interest rates fall appreciably, ARMs
are likely to be subject to a higher prepayment rate than if prevailing interest
rates remain constant because the availability of fixed rate mortgage loans at
competitive interest rates may encourage mortgagors to refinance their ARMs to
"lock in" a lower fixed interest rate. In addition, the prepayment behavior of
the hybrid loans may differ from that of the other mortgage loans. As a hybrid
loan approaches its initial adjustment date, the borrower may become more likely
to refinance such loan to avoid an increase in the mortgage interest rate. The
existence of the applicable periodic rate cap, lifetime cap and lifetime floor
also may affect the likelihood of prepayments resulting from refinancings.
However, no assurance can be given as to the expected level of prepayments on
the mortgage loans.
Due to changes in interest rates, property appreciation, loan seasoning and
other factors, borrowers of the mortgage loans may be the subject of
solicitations to refinance their loans. Any refinancing of the mortgage loans,
whether such refinancing is effected by the servicer or a competitor, will
affect the rate of prepayment of the mortgage loans.
In addition to the foregoing factors affecting the weighted average lives
of the offered certificates, the use of excess interest to pay principal of the
offered certificates will result in acceleration of the offered certificates
then entitled to principal distributions, relative to the amortization of the
related mortgage loans, particularly in the early months of the transaction.
This acceleration feature creates
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overcollateralization which equals the excess of the pool balance over the
aggregate certificate principal balance of the certificates. Once the required
level of overcollateralization is reached, the acceleration feature will cease,
unless necessary to maintain the required level of overcollateralization.
FINAL DISTRIBUTION DATES
The final scheduled distribution date for each class of offered
certificates is set forth in the summary of this prospectus supplement. The
final scheduled distribution dates for the offered certificates, other than the
Class A-IO certificates, is the distribution date in the second month after the
last due date of the latest maturing mortgage loan in either mortgage loan
group. The final scheduled distribution date for the Class A-IO certificates is
the distribution date occurring in March 2004. It is expected that the weighted
average lives of the offered certificates are likely to be shorter, and the
actual final distribution date for each class of offered certificates could
occur significantly earlier than the final scheduled distribution date for such
class.
STRUCTURING ASSUMPTIONS
The following tables have been prepared on the basis of the following
assumptions,:
(i) the offered certificates are purchased on March 29, 2001;
(ii) with respect to the initial collection period, the mortgage loans
include 30 days of interest and no deposits in respect of interest were
contributed to the trust;
(iii) scheduled payments are timely received on the first day of each
month commencing in April 2001;
(iv) distributions on the offered certificates are received, in cash,
on the 25th day of each month, commencing in April 2001;
(v) no defaults or delinquencies in, or modifications, waivers or
amendments respecting, the payment by the mortgagors of principal and
interest on the mortgage loans occur;
(vi) prepayments represent payment in full of individual mortgage loans
and are received on the last day of each month, commencing in March 2001
and include 30 days' interest thereon;
(vii) the mortgage loans prepay according to the indicated prepayment
scenario as described below;
(viii) the six-month London Interbank Offered Rate remains constant at
4.89125%;
(ix) except as otherwise indicated on the following table, the servicer
does not exercise its right of optional termination;
(x) the required overcollateralization amount is set initially as
specified in the pooling and servicing agreement and thereafter decreases
in accordance with the provisions as specified therein;
(xi) all adjustable rate mortgage loans have semi-annual rate
adjustment frequencies;
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(xii) each mortgage loan group consists of mortgage loans having the
characteristics set forth in the following tables.
The foregoing assumptions are referred to collectively in this prospectus
supplement as the structuring assumptions.
S-46
ASSUMED MORTGAGE LOAN CHARACTERISTICS
GROUP I MORTGAGE LOANS
ORIGINAL REMAINING ORIGINAL
MORTGAGE TERM TO TERM TO AMORTIZATION
PRINCIPAL INTEREST MATURITY MATURITY TERM
POOL BALANCE RATE (MONTHS) (MONTHS) (MONTHS)
- ------ ------------------ ------------- ---------- ----------- --------------
1 $ 147,913.23 9.93000% 360 358 360
2 $ 11,585,789.16 10.59782% 360 359 360
3 $ 850,162.73 12.02090% 112 112 112
4 $ 12,029,538.16 11.10313% 180 180 180
5 $ 6,337,822.92 11.96244% 240 239 240
6 $ 87,851,996.02 10.84757% 360 360 360
MAXIMUM MINIMUM INITIAL PERIODIC
MORTGAGE MORTGAGE MONTHS TO PERIODIC RATE RATE
GROSS INTEREST INTEREST NEXT MORTGAGE ADJUSTMENT ADJUSTMENT
POOL MARGIN RATE RATE RATE CHANGE CAP CAP
- ------ ------------- -------------- ------------- --------------- --------------- -------------
1 5.88000% 15.93000% 9.93000% 34 3.00000% 1.00000%
2 6.54984% 16.59782% 10.59782% 35 3.00000% 1.00000%
3 N/A N/A N/A N/A N/A N/A
4 N/A N/A N/A N/A N/A N/A
5 N/A N/A N/A N/A N/A N/A
6 N/A N/A N/A N/A N/A N/A
GROUP II MORTGAGE LOANS
ORIGINAL REMAINING ORIGINAL
MORTGAGE TERM TO TERM TO AMORTIZATION
PRINCIPAL INTEREST MATURITY MATURITY TERM
POOL BALANCE RATE (MONTHS) (MONTHS) (MONTHS)
- ------ ------------------ -------------- ---------- ----------- --------------
1 $ 3,221,676.49 10.70798% 360 359 360
2 $ 271,924.95 10.92550% 115 114 115
3 $ 2,935,457.70 10.85154% 180 180 180
4 $ 1,698,464.86 11.67964% 240 239 240
5 $ 23,069,253.78 10.52043% 360 359 360
MAXIMUM MINIMUM INITIAL PERIODIC
MORTGAGE MORTGAGE MONTHS TO PERIODIC RATE RATE
GROSS INTEREST INTEREST NEXT MORTGAGE ADJUSTMENT ADJUSTMENT
POOL MARGIN RATE RATE RATE CHANGE CAP CAP
- ------ ------------- -------------- -------------- --------------- --------------- -------------
1 6.75323% 16.70798% 10.70798% 36 3.00000% 1.00000%
2 N/A N/A N/A N/A N/A N/A
3 N/A N/A N/A N/A N/A N/A
4 N/A N/A N/A N/A N/A N/A
5 N/A N/A N/A N/A N/A N/A
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DECREMENT TABLES
The weighted average lives of the offered certificates will be influenced
by the rate at which principal payments on the mortgage loans in the related
mortgage loan group are made, which may be in the form of scheduled amortization
or prepayments.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this prospectus supplement is
the prepayment assumption, which represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of the mortgage loans
for the life of such mortgage loans. In the case of the mortgage loans bearing a
fixed rate of interest, a 100% prepayment assumption assumes a 4.0% constant
prepayment rate, referred to as CPR, per annum of the outstanding principal
balance of such mortgage loans in the first month of the life of the mortgage
loans and an additional 1.4762% in each month thereafter until the twelfth
month; beginning in the twelfth month and in each month thereafter during the
life of such mortgage loans, a CPR of 20% per annum each month is assumed. In
the case of the hybrid loans, the prepayment assumption assumes a constant
prepayment rate of the applicable per annum CPR percentage of the outstanding
principal balance of the hybrid loans. Each of the prepayment assumptions in the
table below assumes the respective percentages of the prepayment scenario in the
case of the fixed rate mortgage loans or CPR in the case of the hybrid loans.
The prepayment assumption does not purport to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any of the mortgage loans. The sponsor is not aware of any statistics that
provide a reliable basis for predicting with any certainty the amount or the
timing of receipt of prepayments on the related mortgage loans.
The prepayment scenarios are defined as a percentage of the applicable
prepayment assumption:
SCENARIO SCENARIO SCENARIO SCENARIO SCENARIO SCENARIO SCENARIO
I II III IV V VI VII
---------- ---------- ---------- ---------- ---------- ---------- ---------
Fixed Rate Mortgage Loans;
% of Prepayment Assumption ......... 0% 50% 85% 115% 125% 150% 175%
Hybrid Mortgage Loans;
CPR % .............................. 0% 15% 22% 27% 30% 35% 40%
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PERCENT OF CLASS A-1 INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
PREPAYMENT SCENARIO
---------------------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
- ----------------- --------- --------- --------- --------- --------- --------- ---------
Initial Percent ............................... 100% 100% 100% 100% 100% 100% 100%
March 2002 .................................... 96 87 82 78 76 72 68
March 2003 .................................... 94 75 63 53 50 43 35
March 2004 .................................... 93 64 47 35 31 22 15
March 2005 .................................... 92 54 36 27 25 19 15
March 2006 .................................... 91 45 29 21 18 14 10
March 2007 .................................... 89 37 24 16 14 9 6
March 2008 .................................... 87 33 19 12 10 7 4
March 2009 .................................... 85 29 16 9 8 5 3
March 2010 .................................... 83 26 13 7 6 3 2
March 2011 .................................... 81 22 10 5 4 2 1
March 2012 .................................... 78 20 8 4 3 2 0
March 2013 .................................... 75 17 7 3 2 1 0
March 2014 .................................... 72 15 6 2 2 0 0
March 2015 .................................... 68 13 4 2 1 0 0
March 2016 .................................... 64 11 4 1 1 0 0
March 2017 .................................... 61 10 3 1 0 0 0
March 2018 .................................... 58 8 2 0 0 0 0
March 2019 .................................... 54 7 2 0 0 0 0
March 2020 .................................... 51 6 2 0 0 0 0
March 2021 .................................... 46 5 1 0 0 0 0
March 2022 .................................... 42 4 1 0 0 0 0
March 2023 .................................... 38 4 0 0 0 0 0
March 2024 .................................... 34 3 0 0 0 0 0
March 2025 .................................... 31 3 0 0 0 0 0
March 2026 .................................... 27 2 0 0 0 0 0
March 2027 .................................... 23 2 0 0 0 0 0
March 2028 .................................... 18 1 0 0 0 0 0
March 2029 .................................... 13 0 0 0 0 0 0
March 2030 .................................... 7 0 0 0 0 0 0
March 2031 .................................... 0 0 0 0 0 0 0
Weighted Average Life to Maturity (years) ..... 18.05 6.58 4.33 3.31 3.05 2.53 2.13
Weighted Average Life to Call* (years) ........ 18.04 6.44 4.17 3.19 2.94 2.44 2.04
- ----------
* Assuming early termination by repurchase by the Servicer of the related
mortgage loans on the first applicable date.
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PERCENT OF CLASS A-2 INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
PREPAYMENT SCENARIO
---------------------------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
- ----------------- --------- --------- --------- --------- --------- --------- ---------
Initial Percent ....................... 100% 100% 100% 100% 100% 100% 100%
March 2002 ............................ 95 86 80 76 74 70 65
March 2003 ............................ 94 74 61 52 48 40 33
March 2004 ............................ 93 63 46 33 29 20 13
March 2005 ............................ 92 53 34 26 23 17 13
March 2006 ............................ 90 44 27 19 17 12 8
March 2007 ............................ 89 36 22 14 12 7 4
March 2008 ............................ 87 31 18 10 8 5 2
March 2009 ............................ 85 28 14 7 6 3 1
March 2010 ............................ 82 24 11 5 4 1 0
March 2011 ............................ 80 21 9 4 2 1 0
March 2012 ............................ 77 18 7 2 1 0 0
March 2013 ............................ 74 16 5 1 1 0 0
March 2014 ............................ 71 13 4 1 0 0 0
March 2015 ............................ 67 11 3 0 0 0 0
March 2016 ............................ 63 9 2 0 0 0 0
March 2017 ............................ 60 8 1 0 0 0 0
March 2018 ............................ 57 7 1 0 0 0 0
March 2019 ............................ 53 6 0 0 0 0 0
March 2020 ............................ 49 5 0 0 0 0 0
March 2021 ............................ 45 4 0 0 0 0 0
March 2022 ............................ 41 3 0 0 0 0 0
March 2023 ............................ 36 2 0 0 0 0 0
March 2024 ............................ 33 2 0 0 0 0 0
March 2025 ............................ 29 1 0 0 0 0 0
March 2026 ............................ 25 1 0 0 0 0 0
March 2027 ............................ 21 0 0 0 0 0 0
March 2028 ............................ 16 0 0 0 0 0 0
March 2029 ............................ 11 0 0 0 0 0 0
March 2030 ............................ 5 0 0 0 0 0 0
March 2031 ............................ 0 0 0 0 0 0 0
Weighted Average Life to Maturity (years) 17.76 6.17 3.99 3.03 2.78 2.30 1.92
Weighted Average Life to Call* (years) 17.76 6.12 3.94 3.00 2.76 2.28 1.90
- ----------
* Assuming early termination by repurchase by the servicer of the related
mortgage loans on the first applicable date.
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PERCENT OF CLASS M-1 INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
PREPAYMENT SCENARIO
---------------------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
- ----------------- --------- --------- --------- --------- --------- --------- ---------
Initial Percent ............................... 100% 100% 100% 100% 100% 100% 100%
March 2002 .................................... 100 100 100 100 100 100 100
March 2003 .................................... 100 100 100 100 100 100 100
March 2004 .................................... 100 100 100 100 100 100 100
March 2005 .................................... 100 100 96 73 66 52 44
March 2006 .................................... 100 100 78 55 49 36 25
March 2007 .................................... 100 100 64 42 36 24 16
March 2008 .................................... 100 88 52 32 26 17 10
March 2009 .................................... 100 78 42 24 19 11 7
March 2010 .................................... 100 68 34 18 14 8 4
March 2011 .................................... 100 60 27 13 10 5 0
March 2012 .................................... 100 52 22 10 8 3 0
March 2013 .................................... 100 45 18 7 5 0 0
March 2014 .................................... 100 39 14 6 4 0 0
March 2015 .................................... 100 34 11 4 1 0 0
March 2016 .................................... 100 29 9 1 0 0 0
March 2017 .................................... 100 25 7 0 0 0 0
March 2018 .................................... 100 22 6 0 0 0 0
March 2019 .................................... 100 19 4 0 0 0 0
March 2020 .................................... 100 16 3 0 0 0 0
March 2021 .................................... 100 13 0 0 0 0 0
March 2022 .................................... 100 11 0 0 0 0 0
March 2023 .................................... 100 9 0 0 0 0 0
March 2024 .................................... 92 8 0 0 0 0 0
March 2025 .................................... 83 6 0 0 0 0 0
March 2026 .................................... 73 5 0 0 0 0 0
March 2027 .................................... 61 3 0 0 0 0 0
March 2028 .................................... 48 0 0 0 0 0 0
March 2029 .................................... 34 0 0 0 0 0 0
March 2030 .................................... 17 0 0 0 0 0 0
March 2031 .................................... 0 0 0 0 0 0 0
Weighted Average Life to Maturity (years) ..... 26.62 12.85 8.39 6.34 5.86 5.08 4.70
Weighted Average Life to Call* (years) ........ 26.60 12.55 8.10 6.12 5.65 4.91 4.55
- ----------
* Assuming early termination by repurchase by the servicer of the related
mortgage loans on the first applicable date.
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PERCENT OF CLASS M-2 INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
PREPAYMENT SCENARIO
---------------------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
- ----------------- --------- --------- --------- --------- --------- --------- ---------
Initial Percent ............................... 100% 100% 100% 100% 100% 100% 100%
March 2002 .................................... 100 100 100 100 100 100 100
March 2003 .................................... 100 100 100 100 100 100 100
March 2004 .................................... 100 100 100 100 100 100 100
March 2005 .................................... 100 100 96 73 66 52 40
March 2006 .................................... 100 100 78 55 49 36 25
March 2007 .................................... 100 100 64 42 36 24 16
March 2008 .................................... 100 88 52 32 26 17 10
March 2009 .................................... 100 78 42 24 19 11 6
March 2010 .................................... 100 68 34 18 14 8 0
March 2011 .................................... 100 60 27 13 10 3 0
March 2012 .................................... 100 52 22 10 8 0 0
March 2013 .................................... 100 45 18 7 3 0 0
March 2014 .................................... 100 39 14 3 0 0 0
March 2015 .................................... 100 34 11 0 0 0 0
March 2016 .................................... 100 29 9 0 0 0 0
March 2017 .................................... 100 25 7 0 0 0 0
March 2018 .................................... 100 22 4 0 0 0 0
March 2019 .................................... 100 19 1 0 0 0 0
March 2020 .................................... 100 16 0 0 0 0 0
March 2021 .................................... 100 13 0 0 0 0 0
March 2022 .................................... 100 11 0 0 0 0 0
March 2023 .................................... 100 9 0 0 0 0 0
March 2024 .................................... 92 8 0 0 0 0 0
March 2025 .................................... 83 5 0 0 0 0 0
March 2026 .................................... 73 2 0 0 0 0 0
March 2027 .................................... 61 0 0 0 0 0 0
March 2028 .................................... 48 0 0 0 0 0 0
March 2029 .................................... 34 0 0 0 0 0 0
March 2030 .................................... 17 0 0 0 0 0 0
March 2031 .................................... 0 0 0 0 0 0 0
Weighted Average Life to Maturity (years) ..... 26.62 12.77 8.31 6.28 5.79 4.95 4.45
Weighted Average Life to Call* (years) ........ 26.60 12.55 8.10 6.12 5.64 4.83 4.34
- ----------
* Assuming early termination by repurchase by the servicer of the related
mortgage loans on the first applicable date.
S-52
PERCENT OF CLASS B INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
PREPAYMENT SCENARIO
---------------------------------------------------------------------
DISTRIBUTION DATE I II III IV V VI VII
- ----------------- --------- --------- --------- --------- --------- --------- ---------
Initial Percent ................................... 100% 100% 100% 100% 100% 100% 100%
March 2002 ........................................ 100 100 100 100 100 100 100
March 2003 ........................................ 100 100 100 100 100 100 100
March 2004 ........................................ 100 100 100 100 100 100 100
March 2005 ........................................ 100 100 96 73 66 52 40
March 2006 ........................................ 100 100 78 55 49 36 25
March 2007 ........................................ 100 100 64 42 36 24 16
March 2008 ........................................ 100 88 52 32 26 17 5
March 2009 ........................................ 100 78 42 24 19 8 0
March 2010 ........................................ 100 68 34 18 12 1 0
March 2011 ........................................ 100 60 27 11 6 0 0
March 2012 ........................................ 100 52 22 5 1 0 0
March 2013 ........................................ 100 45 18 1 0 0 0
March 2014 ........................................ 100 39 12 0 0 0 0
March 2015 ........................................ 100 34 7 0 0 0 0
March 2016 ........................................ 100 29 3 0 0 0 0
March 2017 ........................................ 100 25 0 0 0 0 0
March 2018 ........................................ 100 22 0 0 0 0 0
March 2019 ........................................ 100 19 0 0 0 0 0
March 2020 ........................................ 100 15 0 0 0 0 0
March 2021 ........................................ 100 11 0 0 0 0 0
March 2022 ........................................ 100 7 0 0 0 0 0
March 2023 ........................................ 100 4 0 0 0 0 0
March 2024 ........................................ 92 1 0 0 0 0 0
March 2025 ........................................ 83 0 0 0 0 0 0
March 2026 ........................................ 73 0 0 0 0 0 0
March 2027 ........................................ 61 0 0 0 0 0 0
March 2028 ........................................ 48 0 0 0 0 0 0
March 2029 ........................................ 34 0 0 0 0 0 0
March 2030 ........................................ 17 0 0 0 0 0 0
March 2031 ........................................ 0 0 0 0 0 0 0
Weighted Average Life to Maturity (years) ......... 26.59 12.51 8.08 6.10 5.62 4.77 4.24
Weighted Average Life to Call* (years) ............ 26.59 12.47 8.04 6.07 5.59 4.76 4.22
- ----------
* Assuming early termination by repurchase by the servicer of the related
mortgage loans on the first applicable date.
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ORIGINATION AND SERVICING OF THE MORTGAGE LOANS
THE ORIGINATORS
Approximately 99.44% of the statistic calculation loans (by aggregate
principal balance) were originated by or acquired through affiliates of the
sponsor. The remaining 0.56% of the statistic calculation loans were acquired by
the sponsor in arm's-length transactions from entities not affiliated with the
sponsor. The proportion of mortgage loans in the final mortgage pool (after
inclusion of the subsequent mortgage loans) will not be materially different
from the proportion of statistic calculation loans shown above.
UNDERWRITING OF MORTGAGE LOANS
Mortgage loans originated by affiliated originators have been underwritten
in accordance with standard guidelines, called the sponsor's guidelines,
developed by the sponsor and the related affiliated originator, as described in
the prospectus. Mortgage loans originated by unaffiliated originators are
re-underwritten in accordance with the sponsor's guidelines.
MORTGAGE LOAN DELINQUENCY AND FORECLOSURE EXPERIENCE
The following table sets forth delinquency and foreclosure experience of
home equity loans included in the sponsor's servicing portfolio as of or for the
periods indicated. Certain of the information concerning the delinquency and
foreclosure experience relates to home equity loans serviced by affiliates of
the sponsor, including loans pooled and securitized or sold in the secondary
market. Such information also includes delinquency and foreclosure experience of
home equity loans originated by affiliates of the sponsor or purchased by the
sponsor and, in each case, serviced by or on behalf of the sponsor as of the end
of the period indicated.
SIX MONTH
PERIOD ENDING YEAR ENDED YEAR ENDED
DECEMBER 31, 2000 JUNE 30, 2000 JUNE 30, 1999
------------------- --------------- --------------
(DOLLARS IN THOUSANDS)
Percentage of dollar amount of delinquent loans to loans
serviced (period end)(1)(2)(3)(4)
One month ................................................ 2.3% 1.9% 2.4%
Two months ............................................... 0.9 0.8 1.0
Three or more months:
Not foreclosed(5) ...................................... 9.2 9.0 10.3
Foreclosed(6) .......................................... 1.7 1.9 2.0
---- ---- ----
Total ................................................. 14.1% 13.6% 15.7%
==== ==== ====
Percentage of dollar amount of loans foreclosed during the
period to average servicing portfolio(4)(8) .............. 1.4% 3.6% 2.9%
Number of loans foreclosed during the period .............. 681 1,854 1,680
Number of loans liquidated during the period .............. 634 2,749 1,518
Principal amount at time of foreclosure of loans foreclosed
during the period ........................................ $ 47,876 $ 135,629 $ 122,445
Net losses on liquidations during the period(7) ........... $ 49,472 $ 96,119 $ 51,730
Percentage of annualized losses to average servicing
portfolio(4)(8) .......................................... 2.9% 2.6% 1.2%
Servicing portfolio at period end ......................... $3,128,000 $3,560,000 $3,841,000
S-54
- ----------
(1) Delinquent loans are loans for which more than one payment is past due.
(2) The delinquency and foreclosure percentages are calculated on the basis
of the total dollar amount of mortgage loans serviced by the sponsor and
any subservicers, as of the end of the periods indicated.
(3) At December 31, 2000, the dollar volume of loans delinquent more than 90
days in ten of the sponsor's securitization trusts exceeded the permitted
limits in the related pooling and servicing agreements. At December 31,
2000, ten of the aforementioned trusts plus four additional
securitization trusts have also exceeded certain loss limits. We refer
you to the related discussion in this section following this table.
(4) The servicing portfolio used in the percentage calculations includes
$488.5 million, $280.2 million and $84.0 million of loans subserviced for
others by the sponsor on an interim basis at December 21, 2000, June 30,
2000 and June 30, 1999, respectively.
(5) Represents loans that are in foreclosure but as to which foreclosure
proceedings have not concluded.
(6) Represents properties acquired following a foreclosure sale and still
serviced by the sponsor at period end.
(7) Represents losses, net of gains, on properties sold through foreclosure
or other default management activities during the periods indicated.
(8) The percentages were calculated to reflect the dollar volume of loans
foreclosed or annualized losses, as the case may be, to the average
dollar amount of mortgage loans serviced by the sponsor and any
subservicers during the related periods indicated.
There is no assurance that the delinquency, foreclosure and loss experience
with respect to any of the mortgage loans will be comparable to the experience
reflected above or in the prospectus. As a lender that specializes in loans made
to credit impaired borrowers, the actual rates of delinquencies, foreclosures
and losses on such mortgage loans can be higher than those historically
experienced in the mortgage lending industry in general, particularly in periods
during which the values of the related mortgaged properties decline. In
addition, the rate of delinquencies, foreclosures and losses with respect to the
mortgage loans will also be affected by, among other things, interest rate
fluctuations and general and regional economic conditions.
In connection with securitization transactions, the sponsor has entered
into pooling and servicing agreements that contain specified limits on
delinquencies and losses that may be incurred in each trust. At December 31,
2000, the dollar volume of loans delinquent more than 90 days in ten of the
sponsor's securitization trusts have exceeded the permitted limits specified in
the related pooling and servicing agreements. The higher delinquency rates
negatively affect the sponsor's cash flows by obligating the sponsor to advance
past due interest and permit the related monoline insurance company to terminate
the sponsor's servicing rights to the affected trusts.
At December 31, 2000, ten of the above-mentioned trusts plus four
additional securitization trusts, have also exceeded one or both of the
permitted loss limits, which
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permits the related monoline insurance company to terminate the sponsor's
servicing rights with respect to the affected trusts. Current loss levels have
increased in part due to a loss mitigation strategy of minimizing the period in
which foreclosed upon properties are held prior to liquidation. Current loss
levels have also increased due to the seasoning of the loans in the sponsor's
portfolio. The seasoning of the portfolio may contribute to an increase in
losses over time.
Although the related monoline insurance company for each securitization has
the right to terminate servicing with respect to the trusts referred to above,
to date no servicing rights have been terminated. There can be no assurance,
however, that the sponsor's servicing rights with respect to the mortgage loans
in such trusts, or any other trusts that exceed the specified delinquency or
loss limits in future periods, will not be terminated.
The performance of the mortgage loans in any securitization trust other
than the trust to which the offered certificates relate will not affect the
performance of the mortgage loans contained in the trust. The performance of the
mortgage loans in such other securitization trusts is not necessarily predictive
of the performance of the mortgage loans contained in the trust, and no
assurance can be made as to the levels of delinquencies and losses that may be
experienced by the trust with respect to the mortgage loans contained therein.
THE SERVICER
The information set forth in the following paragraphs has been provided by
the servicer. None of the sponsor, the trustee or the underwriters or any of
their respective affiliates has made or will make any representation as to the
accuracy or completeness of this information.
Countrywide Home Loans, Inc., called Countrywide, will act as servicer
under the pooling and servicing agreement. During the servicing transfer period
expected to be completed by May 1, 2001, the sponsor will directly service the
mortgage loans as interim subservicer on behalf of Countrywide. Upon completion
of the servicing transfer, Countrywide will directly service the mortgage loans.
Both the sponsor, as interim subservicer, and Countrywide, as servicer, will
service the mortgage loans in accordance with the terms of the pooling and
servicing agreement.
Countrywide is a New York corporation and a subsidiary of Countrywide
Credit Industries, Inc. Countrywide is engaged primarily in the mortgage banking
business, and as such, originates, purchases, sells and services mortgage loans.
Countrywide originates mortgage loans through a retail branch system and through
mortgage loan brokers and correspondents nationwide. Countrywide's mortgage
loans are principally first-lien, fixed-rate or adjustable-rate mortgage loans
secured by single-family residences.
As of December 31, 2000, Countrywide provided servicing for mortgage loans
with an aggregate principal balance of approximately $284.2 billion,
substantially all of which are being serviced for unaffiliated persons. As of
December 31, 2000, Countrywide provided servicing for approximately $15.2
billion in subprime mortgage loans.
The principal executive offices of Countrywide are located at 4500 Park
Granada, Calabasas, California 91302. Its telephone number is (818) 225-3000.
Countrywide conducts operations from its headquarters in Calabasas and from
offices throughout the nation.
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Loan Servicing
Countrywide has established standard policies for the servicing and
collection of mortgage loans. Servicing includes, but is not limited to:
(a) collecting, aggregating and remitting mortgage loan payments,
(b) accounting for principal and interest,
(c) holding escrow (impound) funds for payment of taxes and
insurance,
(d) making inspections as required of mortgaged properties,
(e) preparation of tax related information in connection with
mortgage loans,
(f) supervision of delinquent mortgage loans,
(g) loss mitigation efforts,
(h) foreclosure proceedings and, if applicable, the disposition of
mortgaged properties, and
(i) generally administering mortgage loans, for which it receives
servicing fees.
Billing statements with respect to mortgage loans are mailed monthly by
Countrywide. The statement details all debits and credits and specifies the
payment due. Notice of changes in the applicable loan rate are provided by
Countrywide to the mortgagor with such statements.
Countrywide currently reports borrower payment performance to three
nationally recognized credit repositories.
Collection Procedures
When a mortgagor fails to make a payment on a subprime mortgage loan,
Countrywide attempts to cause the deficiency to be cured by corresponding with
the mortgagor. Pursuant to Countrywide's subprime servicing procedures,
Countrywide generally mails to the mortgagor a notice of intent to foreclose
after the loan becomes 31 days past due (two payments due but not received) and,
within 30 days thereafter, if the loan remains delinquent, institutes
appropriate legal action to foreclose on the mortgaged property. Foreclosure
proceedings may be terminated if the delinquency is cured. Mortgage loans to
borrowers in bankruptcy proceedings may be restructured in accordance with law
and with a view to maximizing recovery of such loans, including any
deficiencies.
Once foreclosure is initiated by Countrywide, a foreclosure tracking system
is used to monitor the progress of the proceedings. The system includes state
specific parameters to monitor whether proceedings are progressing within the
time frame typical for the state in which the mortgaged property is located.
During the foreclosure proceeding, Countrywide determines the amount of the
foreclosure bid and whether to liquidate the mortgage loan.
If foreclosed, the mortgaged property is sold at a public or private sale
and may be purchased by Countrywide. After foreclosure, Countrywide may
liquidate the mortgaged property and charge-off the loan balance which was not
recovered through liquidation proceeds.
Servicing and charge-off policies and collection practices with respect to
subprime mortgage loans may change over time in accordance with, among other
things, Countrywide's business judgment, changes in the servicing portfolio and
applicable laws and regulations.
S-57
SERVICING OF MORTGAGE LOANS
The servicer will service the mortgage loans in accordance with the
provisions of the pooling and servicing agreement and the policies, procedures
and practices customarily employed by the servicer in servicing other comparable
mortgage loans. Consistent with the foregoing, the servicer may, in its
discretion
(a) waive any assumption fees, late payment charges, charges for checks
returned for insufficient funds or other fees that may be collected in the
ordinary course of servicing a mortgage loan,
(b) arrange a schedule for the payment of delinquent payments on the
related mortgage loan, subject to conditions set forth in the pooling and
servicing agreement, if a mortgagor is in default or about to be in default
because of such mortgagor's financial condition, or
(c) modify monthly payments on mortgage loans in accordance with the
servicer's general policy on mortgage loans subject to the Soldiers' and
Sailors' Civil Relief Act of 1940, as amended.
In any case in which the servicer becomes aware that a mortgaged property
has been or is about to be conveyed by the related mortgagor, the pooling and
servicing agreement will require the servicer to enforce any due-on-sale clause
contained in the related mortgage note or mortgage, to the extent permitted by
the related mortgage note and mortgage and applicable law or regulation, but
only to the extent such enforcement will not adversely affect or jeopardize
coverage under any related insurance policy or result in legal action by the
mortgagor. Additionally, the servicer may, to the extent permitted in the
pooling and servicing agreement, enter into certain assumption and modification
agreements with the person to whom such mortgaged property has been or is about
to be conveyed.
The servicer, acting as agent for the trust, will not consent to the
subsequent placement of a deed of trust or mortgage, as applicable, on any
mortgaged property that is of equal or higher priority to that of the lien
securing the related mortgage loan unless such mortgage loan is prepaid in full,
thereby removing such mortgage loan from the trust.
Under the terms of each mortgage loan, the mortgagor agrees to pay a late
charge (which the servicer is entitled to retain as additional servicing
compensation under the pooling and servicing agreement) if a monthly payment on
a mortgage loan is not received within the number of days specified in the
mortgage note after its due date. If the mortgage loan remains delinquent, the
servicer will attempt to contact the mortgagor to determine the cause of the
delinquency and to obtain a commitment to cure the delinquency at the earliest
possible time.
The servicer will foreclose upon or otherwise comparably convert to
ownership mortgaged properties securing such of the mortgage loans as come into
default and as to which no satisfactory arrangements can be made for the
collection of delinquent payments.
SUB-SERVICING
The servicer may enter into sub-servicing agreements with other mortgage
servicing institutions, each called a sub-servicer, which may include the
sponsor or affiliates of the
S-58
sponsor, meeting the requirements set forth in the pooling and servicing
agreement, to initially service and administer certain mortgage loans on behalf
of the servicer. Any such sub-servicing arrangements will provide that the
sub-servicer will service the mortgage loans specified therein in accordance
with the provisions and requirements of the pooling and servicing agreement,
but will not relieve the servicer of any liability associated with servicing
the mortgage loans. Compensation for the services of any sub-servicer will be
paid by the servicer.
HAZARD INSURANCE
Each mortgage loan requires the mortgagor to maintain a hazard insurance
policy for the corresponding mortgaged property in an amount that is at least
equal to the least of
(i) the outstanding principal balance owing on the mortgage loan and
any senior mortgage loan on the property,
(ii) the full insurable value of the related mortgage property and
(iii) the minimum amount required to compensate for damage or loss on a
replacement cost basis. Hazard insurance policies generally insure against
loss by fire and by hazards included within the term "extended coverage"
for the term of the corresponding mortgage loan.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by hazards
such as fire, lightning, explosion and smoke. The existence of a hazard
insurance policy is verified upon origination of any mortgage loan. In the event
the servicer is made aware of any expiration or cancellation of a hazard
insurance policy, the servicer will generally force-place hazard insurance
covering loss by fire and by hazards included within the term "extended
coverage."
SERVICING AND OTHER COMPENSATION; PAYMENT OF EXPENSES
A servicing fee, called the monthly servicing fee, will be the primary
compensation to be paid to the servicer in respect of its servicing activities
and will be paid to the servicer on each deposit date out of collections of
interest for the related mortgage loan group received on or in respect of the
related mortgage loans for the related collection period. The monthly servicing
fee will equal one-twelfth of the product of (a) 0.50% and (b) the aggregate
principal balance of the mortgage loans in the related mortgage loan group at
the beginning of such collection period. Certain fees collected from mortgagors
will be retained by the servicer as additional servicing compensation.
MONTHLY ADVANCES
Not later than the close of business on the deposit date prior to each
distribution date, the servicer will deposit into the collection account the
interest component, net of the monthly servicing fee, of any payment due during
the related collection period and not yet received. The servicer is required to
advance such amount, called a monthly advance, if it reasonably believes that
the delinquent interest payment will be recoverable from subsequent collections
on the related mortgage loan. The servicer shall make such advance either out of
its own funds or to a limited extent from collections on
S-59
other mortgage loans received since the end of the related collection period.
To the extent the servicer uses collections from other mortgage loans, the
servicer must reimburse the trust prior to the next succeeding deposit date.
The servicer is entitled to reimbursement of a monthly advance made from its
own funds from collections on the related mortgage loan in respect of which
such monthly advance was made.
To the extent that the servicer has made a monthly advance that the
servicer reasonably believes will not be recoverable from subsequent collections
on the related mortgage loan, the servicer will be entitled to reimbursement for
such advance from collections on any mortgage loans in the related mortgage loan
group.
SERVICING ADVANCES
The servicer will advance all reasonable and customary "out-of-pocket"
costs and expenses incurred in the performance of its servicing obligations as
it deems appropriate and advisable under the circumstances including, but not
limited to, the cost of
o the preservation, restoration and protection of the mortgaged
properties,
o any enforcement or judicial proceedings, including foreclosures, and
o the management and liquidation of mortgaged properties acquired in
satisfaction of the related mortgage.
Each expenditure will constitute a servicing advance. The servicer will not
be required to make any servicing advance to the extent it reasonably believes
that such servicing advance would not be recoverable from collections or net
liquidation proceeds on the related mortgage loan.
The servicer may reimburse itself for a servicing advance from the
mortgagor on whose behalf the servicing advance was made or from proceeds
realized upon the liquidation of the related mortgage loan. To the extent that
the servicer has made a servicing advance that the servicer reasonably believes
will not be recoverable from subsequent collections on the related mortgage
loan, the servicer will be entitled to reimbursement for such advance from
collections on any mortgage loans in the related mortgage loan group.
COMPENSATING INTEREST AND INTEREST SHORTFALLS
With respect to each mortgage loan (i) as to which a prepayment was
received, (ii) that became a liquidated mortgage loan or (iii) that was
otherwise charged off during the collection period related to a distribution
date, the servicer will be required with respect to such distribution date to
remit to the trustee an interest payment, equal to the difference, if any,
between the interest due for such collection period and the amount of interest
actually received on such mortgage loan during such collection period. Such
interest payments are called compensating interest payments and are required to
be made by the servicer only from amounts otherwise payable to the servicer as
the monthly servicing fee from the related mortgage loan group. The servicer
will not be entitled to be reimbursed from collections on the mortgage loans or
any assets of the trust for any compensating interest payments made. If the
monthly servicing fee for the related mortgage loan group in respect of any
collection period is insufficient to make the entire required compensating
interest payment, the resulting
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shortfall, called a prepayment interest shortfall, will reduce the amount of
interest due and payable on the certificates on such distribution date in the
following order: first, to the Class C certificates in reduction of interest
amounts payable to such class on the related distribution date and, to the
extent the amount of such shortfall exceeds the interest due and payable to the
Class C certificates on such distibution date, thereafter to the offered
certificates pro rata based on the respective Class Monthly Interest Amount for
each class. In addition, the application of the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended, or similar legislation to any mortgage loan may
adversely affect, for an indeterminate period of time, the ability of the
servicer to collect full amounts of interest on such mortgage loan.
CERTAIN MATTERS REGARDING SERVICER'S SERVICING OBLIGATIONS
The pooling and servicing agreement will provide that the servicer may not
resign from its obligations and duties as the servicer thereunder, except upon
determination that its duties thereunder are no longer permissible under
applicable law or regulation or are in material conflict by reason of applicable
law or regulation with any other of its activities carried on as of the date of
the pooling and servicing agreement. No such resignation will become effective
until the trustee or a successor servicer has assumed the servicing obligations
and duties of the servicer under the pooling and servicing agreement.
The pooling and servicing agreement will also provide that neither the
servicer, nor any of its directors, officers, employees or agents, will be
liable to the trustee, the trust or the certificateholders for any action taken
or for refraining from the taking of any action by the servicer pursuant to the
pooling and servicing agreement, or for errors in judgment, except in the case
of willful misfeasance, bad faith or negligence.
Any corporation into which the servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the servicer shall be a party, or any corporation succeeding to the business of
the servicer shall be the successor of the servicer under the agreement, without
the execution or filing of any paper or any further act on the part of any of
the parties to the pooling and servicing agreement, anything in the pooling and
servicing agreement to the contrary notwithstanding.
PRIMARY MORTGAGE INSURER
Mortgage Guaranty Insurance Corporation the primary mortgage insurer, with
its principal offices in Milwaukee, Wisconsin, is a monoline private mortgage
insurance company. The primary mortgage insurer provides mortgage guaranty
insurance coverage on residential mortgage loans. The primary mortgage insurer
is a wholly-owned subsidiary of MGIC Investment Corporation. The primary
mortgage Insurer is licensed in 50 states and the District of Columbia to offer
such insurance and is approved as a private mortgage insurer by Fannie Mae and
Freddie Mac.
Currently, the primary mortgage insurer has a rating on its claims-paying
ability of "AA+" from S&P, "AA+" from Fitch and "Aa2" from Moody's. The rating
agency issuing the claims-paying ability rating can withdraw or change its
rating at any time. The primary mortgage insurer's business is subject to a
number of risks that could materially and adversely affect its claims-paying
ability. Certain of such risks are
S-61
described under the caption "risk factors" in Item 2 of MGIC Investment
Corporation's Quarterly Report on Form 10-Q for the quarter ended December 31,
2000 filed with the Securities and Exchange Commission.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Multiple elections will be made to treat certain assets of the trust (other
than the net rate cap fund) as separate real estate mortgage investment
conduits, each called a REMIC, for federal income tax purposes. The offered
certificates, the Class P certificates and the Class C certificates will
represent regular interests in a REMIC, and the Class R certificates will
represent the residual interest in each REMIC. We refer you to "Certain Federal
Income Tax Consequences" in the prospectus. In addition, as described below, the
offered certificates, other than the Class A-IO certificates, will represent an
undivided beneficial ownership interest in an interest rate cap agreement.
The offered certificates generally will be treated as newly originated debt
instruments for federal income tax purposes. Beneficial owners of the offered
certificates will be required to report income on such certificates in
accordance with the accrual method of accounting. It is anticipated that the
offered certificates (other than the Class A-IO certificates and Class B
certificates) will not be issued with original issue discount and that the Class
A-IO certificates and Class B certificates will be issued with original issue
discount for federal income tax purposes. Certificateholders are urged to
consult their tax advisors with respect to the tax consequences of holding the
offered certificates.
The prepayment assumptions to be used in determining whether the offered
certificates are issued with original issue discount and the rate of accrual of
original issue discount is 115% of the prepayment scenario in the case of the
fixed rate loans and 27% CPR in the case of the hybrid loans, as such terms are
defined in "Prepayment and Yield Considerations -- Decrement Tables," above. No
representation is made as to the actual rate at which the mortgage loans will
prepay.
NET RATE CAP CARRYOVER
The beneficial owners of the offered certificates, other than the Class
A-IO certificates, and the related rights to receive Net Rate Cap Carryover,
will be treated for tax purposes as owning two separate assets: (a) the
applicable certificates without the rights to receive Net Rate Cap Carryover,
which constitute regular interests in a REMIC, and (b) the related rights to
receive Net Rate Cap Carryover. Accordingly, a purchaser of an applicable
offered certificate must allocate its purchase price between the two assets
comprising the related certificate. In general, the allocation would be based on
the relative fair market values of the assets on the date of purchase of the
certificates. No representation is or will be made as to the relative fair
market values. We recommend that all holders of applicable offered certificates
consult their tax advisors regarding the taxation of Net Rate Cap Carryover,
which is generally governed by the provisions of the Internal Revenue Code and
Treasury regulations relating to notional principal contracts and possibly those
relating to straddles.
S-62
The rights to receive Net Rate Cap Carryover will not constitute
(a) a "real estate asset" within the meaning of section 856(c)(4)(A) of
the Internal Revenue Code for a real estate investment trust;
(b) a "qualified mortgage" or a "permitted investment" within the
meaning of section 860G(a)(3) and section 860G(a)(5), respectively, of the
Internal Revenue Code if held by a REMIC; or
(c) an asset described in section 7701(a)(19)(C)(xi) of the Internal
Revenue Code if held by a domestic building and loan association.
Further, the Net Rate Cap Carryover will not constitute income described in
section 856(c)(3)(B) of the Internal Revenue Code for a real estate investment
trust. Moreover, other special rules may apply to some investors, including
dealers in securities and dealers in notional principal contracts
ERISA CONSIDERATIONS
Any fiduciary of an employee benefit plan or other retirement arrangement
subject to Title I of the Employee Retirement Income Security Act of 1974, as
amended, called ERISA, and/or Section 4975 of the Internal Revenue Code,
collectively called a plan, 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 Internal Revenue Code, of the plan's
acquisition and ownership of the certificates.
The U.S. Department of Labor has granted an administrative exemption to
Greenwich Capital Markets, Inc. (Prohibited Transaction Exemption, abbreviated
as PTE, 90-59), which was amended by PTE 97-34 and was further recently amended
by PTE 2000-58, which administrative exemption is referred to as the exemption,
which exempts from the application of the prohibited transaction rules
transactions relating to (1) the acquisition, sale and holding by plans of
particular certificates representing an undivided interest in asset-backed
pass-through trusts, with respect to which Greenwich Capital Markets, Inc. or
any of its affiliates is the sole underwriter or the manager or co-manager of
the underwriting syndicate; and (2) the servicing, operation and management of
the asset-backed pass-through trusts, provided that the general conditions and
other conditions set forth in the exemption are satisfied. The exemption will
apply to the acquisition, holding and resale of the offered certificates by a
plan provided that its conditions are met. We refer you to "ERISA
Considerations" in the prospectus.
It is expected that the exemption will apply to the acquisition and holding
of the offered certificates by plans and that all conditions of the exemption
other than those within the control of the investors will be met.
The exemption provides only limited relief to plans sponsored by the
seller, the underwriters, the trustee, the securities administrator, the
servicer, any other servicers or any mortgagor with respect to mortgage loans
included in the trust constituting more than 5% of the aggregate unamortized
principal balance of the assets in the trust or any affiliate of the parties,
called the restricted group. No exemption from certain prohibited transactions
is provided for the acquisition or holding of offered certificates on behalf of
an excluded plan by any person who is a fiduciary with respect to the assets of
the excluded plan and relief from certain fiduciary prohibited transactions is
available only
S-63
if the fiduciary (and its affiliate) are obligated for no more than 5% of the
aggregate unauthorized principal balance of the assets in the trust. For
purposes of the offered certificates, an excluded plan is a plan sponsored by
any member of the restricted group. In addition, no plan's investment in any
class of offered certificates may exceed 25% of all of the certificates of the
class outstanding at the time of the plan's acquisition and after the plan's
acquisition, of the class of offered certificates, no more than 25% of the
assets over which the fiduciary has investment authority may be invested in
securities of a trust containing assets which are sold or serviced by the same
entity. Finally, in the case of initial issuance, but not secondary market
transactions, at least 50% of each class of offered certificates, and at least
50% of the aggregate interest in the trust, must be acquired by persons
independent of the restricted group.
We recommend that any plan fiduciary considering whether to purchase any
offered certificates on behalf of a plan consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Internal Revenue Code to the investment. Among other
things, before purchasing any offered certificates, a fiduciary of a plan
subject to the fiduciary responsibility provisions of ERISA or an employee
benefit plan subject to the prohibited transaction provisions of the Internal
Revenue Code should make its own determination as to the availability of the
exemptive relief provided in the exemption, and also consider the availability
of any other prohibited transaction exemptions.
USE OF PROCEEDS
The sponsor intends to use the net proceeds to be received from the sale of
the offered certificates to pay off certain indebtedness incurred in connection
with the acquisition of the mortgage loans, to repay warehouse facilities
(including certain amounts owing to affiliates of the underwriters) and to pay
other expenses associated with the pooling of the mortgage loans and the
issuance of the certificates.
LEGAL INVESTMENT CONSIDERATIONS
The offered certificates will NOT constitute "mortgage related securities"
for purposes of the secondary mortgage market enhancement act of 1984.
Accordingly, many institutions with legal authority to invest in comparably
rated securities may not be legally authorized to invest in the offered
certificates. No representation is made in this prospectus supplement as to
whether the offered certificates constitute legal investments for any entity
under any applicable statute, law, rule, regulation or order. You are urged to
consult with your counsel concerning the status of the offered certificates as
legal investments for you prior to investing in the offered certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
and the related pricing agreement, collectively called the underwriting
agreement, among the sponsor and the underwriters named below, the sponsor has
agreed to sell to the underwriters, and each of the underwriters has severally
agreed to purchase from the sponsor the principal amount of offered certificates
set forth below opposite their respective names.
S-64
UNDERWRITER CLASS A-1 CLASS A-2 CLASS M-1 CLASS M-2 CLASS B
- ----------- --------- --------- --------- --------- -------
Greenwich Capital Markets, Inc. ............ $ 70,000,000 $18,200,000 $6,825,000 $5,775,000 $4,200,000
Countrywide Securities Corporation ......... $ 10,000,000 $ 2,600,000 $ 975,000 $ 825,000 $ 600,000
Morgan Stanley & Co. Incorporated .......... $ 10,000,000 $ 2,600,000 $ 975,000 $ 825,000 $ 600,000
Lehman Brothers, Inc. ...................... $ 10,000,000 $ 2,600,000 $ 975,000 $ 825,000 $ 600,000
------------ ----------- ---------- ---------- ----------
Totals: ................................. $100,000,000 $26,000,000 $9,750,000 $8,250,000 $6,000,000
============ =========== ========== ========== ==========
In the underwriting agreement, the underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase the entire principal amount
of the offered certificates.
The sponsor has been advised that the underwriters propose initially to
offer the offered certificates to some dealers at the price set forth on the
cover less a selling concession not to exceed the applicable percentage of the
certificate denomination set forth below, and that the underwriters may allow
and the dealers may reallow a reallowance discount not to exceed the applicable
percentage of the certificate denomination set forth below:
SELLING REALLOWANCE
CLASS CONCESSION DISCOUNT
- ----- ---------- --------
Class A-1 ................................... 0.13500% 0.09000%
Class A-2 ................................... 0.13500% 0.09000%
Class M-1 ................................... 0.33000% 0.22000%
Class M-2 ................................... 0.42000% 0.28000%
Class B ..................................... 0.55125% 0.36750%
After the initial public offering, the public offering prices, concessions
and discounts may be changed.
Distribution of the Class A-IO certificates will be made by Greenwich
Capital Markets, Inc. from time to time in negotiated transactions or otherwise
at varying prices to be determined at the time of sale. Proceeds to the sponsor
from Class A-IO certificates are expected to be approximately $2,058,501 plus
accrued interest, before deducting a portion of the total expenses payable by
the sponsor which total is estimated to be $700,000. In connection with the
purchase and sale of the Class A-IO certificates, Greenwich Capital Markets,
Inc. may be deemed to have received compensation from the sponsor in the form of
underwriting discounts and commissions.
The sponsor has been advised by the underwriters that they presently intend
to make a market in the offered certificates. However, no underwriter is
obligated to do so, any market-making may be discontinued at any time, and there
can be no assurance that an active public market for any class of offered
certificates will develop or if one does develop, that it will continue for the
life of the applicable class or that it will provide certificateholders with a
sufficient level of liquidity of investment.
Until the distribution of the offered certificates is completed, rules of
the Securities and Exchange Commission may limit the ability of the underwriters
and some selling group members to bid for and purchase the offered certificates.
As an exception to these rules, the underwriters are permitted to engage in
particular transactions that stabilize the prices of the offered certificates
(other than the Class A-IO Certificates). These transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
offered certificates (other than the Class A-IO Certificates).
S-65
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of these purchases.
Neither the sponsor nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the related offered certificates. In
addition, neither the seller nor any of the underwriters makes any
representation that the underwriters will engage in these transactions or that
the transactions, once commenced, will not be discontinued without notice.
The underwriting agreement provides that the sponsor will indemnify the
underwriters against particular civil liabilities, including liabilities under
the Securities Act of 1933, as amended.
All of the underwriters have represented that: (i) it has not offered or
sold and will not offer or sell, prior to the date six months after their date
of issuance, any offered certificates to persons in the united kingdom, except
to persons whose activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances that have not resulted in and will not
result in an offer to the public in the united kingdom within the meaning of the
public offers of securities regulations 1995; (ii) it has complied and will
comply with all applicable provisions of the financial services act 1986 with
respect to anything done by it in relation to the offered certificates in, from
or otherwise involving the united kingdom; and (iii) it has only issued or
passed on and will only issue or pass on in the united kingdom any document
received by it in connection with the issuance of the offered certificates to a
person who is of a kind described in article 11(3) of the financial services act
1986 (investment advertisements) (exemptions) order 1997 or is a person to whom
the document can lawfully be issued or passed on.
The sponsor or its affiliates may apply all or any portion of the net
proceeds of this offering to the repayment of debt, including "warehouse" debt
secured by the mortgage loans (prior to their sale to the trust). One or more of
the underwriters (or their respective affiliates) has acted as a "warehouse
lender" to the sponsor or its affiliates, and may receive a portion of such
proceeds as repayment of such warehouse debt.
LEGAL MATTERS
Certain legal matters with respect to the certificates will be passed upon
for the sponsor by Stroock & Stroock & Lavan LLP, New York, New York. Brown &
Wood LLP, New York, New York, will act as counsel for the underwriters.
RATING OF THE OFFERED CERTIFICATES
It is a condition to the issuance of each class of offered certificates
that each such class shall be rated by Moody's Investors Service, Inc., called
Moody's, and by Standard and Poor's, a division of The McGraw-Hill Companies,
Inc., called S&P, which are collectively called the rating agencies as follows.
S-66
CLASS S&P MOODY'S
-------- ----- ---------
A-1 AAA Aaa
A-2 AAA Aaa
A-IO AAA Aaa
M-1 AA Aa2
M-2 A A2
B BBB Baa2
The ratings assigned by the rating agencies to mortgage pass-through
certificates address the likelihood of the receipt of all distributions on the
related mortgage loans by the related certificateholders under the agreements
pursuant to which such certificates are issued. The 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 such mortgage pool
is adequate to make payments required by such certificates. The ratings on such
certificates do not, however, constitute a statement regarding frequency of
prepayments on the related mortgage loans.
The ratings do not reflect the likelihood of payment of any net rate cap
carryover.
There is no assurance that any rating assigned to the offered certificates
will continue for any period of time or that such ratings will not be revised or
withdrawn. Any such revision or withdrawal of such ratings may have an adverse
effect on the market price or liquidity of the offered certificates.
The ratings of the offered certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities.
There can be no assurance as to whether any other rating agency will rate
the offered certificates, or, if one does, what rating will be assigned by such
other rating agency. A rating on the offered certificates by another rating
agency, if assigned at all, may be lower than the ratings assigned to the
offered certificates by Moody's or S&P.
S-67
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ANNEX A
DESCRIPTION OF THE MORTGAGE POOL
The following is a description of certain terms of the statistic
calculation loans in tabular form based on the statistic calculation loans and
each mortgage loan group as of the statistic calculation date.
GROUP I
STATISTIC CALCULATION DATE PRINCIPAL BALANCE
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
RANGE OF STATISTIC CALCULATION STATISTIC AGGREGATE AGGREGATE
DATE PRINCIPAL BALANCE CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- ------------------- ------------------- ------------------
$ 9,986 to $ 50,000 ........... 523 $ 18,145,179.09 19.77%
$ 50,001 to $100,000 ........... 510 36,145,881.39 39.38
$100,001 to $150,000 ........... 162 19,862,763.09 21.64
$150,001 to $200,000 ........... 55 9,584,459.90 10.44
$200,001 to $250,000 ........... 27 6,113,808.11 6.66
$250,001 to $300,000 ........... 6 1,581,632.10 1.72
$300,001 to $348,903 ........... 1 348,902.65 0.38
--- ---------------- ------
Total .................... 1,284 $ 91,782,626.33 100.00%
===== ================ ======
GROUP I
MORTGAGE INTEREST RATES
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
RANGE OF MORTGAGE STATISTIC AGGREGATE AGGREGATE
INTEREST RATES CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------- ------------------- ------------------- ------------------
7.460% to 7.500% ......... 1 $ 97,500.00 0.11%
7.501% to 8.000% ......... 8 941,197.38 1.03
8.001% to 8.500% ......... 15 1,229,120.93 1.34
8.501% to 9.000% ......... 47 4,777,467.26 5.21
9.001% to 9.500% ......... 75 8,058,938.44 8.78
9.501% to 10.000% ......... 161 14,738,699.52 16.06
10.001% to 10.500% ......... 169 14,122,641.20 15.39
10.501% to 11.000% ......... 172 12,762,825.00 13.91
11.001% to 11.500% ......... 120 8,669,839.52 9.45
11.501% to 12.000% ......... 135 7,829,898.10 8.53
12.001% to 12.500% ......... 76 4,639,280.95 5.05
12.501% to 13.000% ......... 103 5,188,445.34 5.65
13.001% to 13.500% ......... 69 3,486,899.62 3.80
13.501% to 14.000% ......... 62 2,646,330.14 2.88
14.001% to 14.500% ......... 33 1,287,278.68 1.40
14.501% to 15.000% ......... 34 1,183,746.73 1.29
15.001% to 15.500% ......... 2 72,150.00 0.08
15.501% to 16.000% ......... 1 22,398.81 0.02
16.501% to 16.875% ......... 1 27,968.71 0.03
--- --------------- ------
Total ................ 1,284 $ 91,782,626.33 100.00%
===== =============== ======
The lender has acquired mortgage insurance on certain mortgage loans included
in the preceding table. The mortgage interest rates for such mortgage loans are
shown at the mortgage rates exclusive of any premium for the related mortgage
insurance coverage. As of the statistic calculation date, the weighted average
mortgage rate of the statistic calculation loans net of the related premiums
for such mortgage insurance is expected to be approximately 10.8354% per annum.
A-1
GROUP I
ORIGINAL TERM TO MATURITY
PERCENTAGE OF
STATISTIC STATISTIC
RANGE OF NUMBER OF CALCULATION DATE CALCULATION DATE
ORIGINAL TERMS TO STATISTIC AGGREGATE AGGREGATE
MATURITY (MONTHS) CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ------------------- ------------------- ------------------
60 to 60 .......... 3 $ 85,000.00 0.09%
109 to 120 .......... 18 571,801.78 0.62
169 to 180 .......... 182 9,293,540.91 10.13
229 to 240 .......... 114 4,896,348.95 5.33
349 to 360 .......... 967 76,935,934.69 83.82
--- --------------- ------
Total ............. 1,284 $ 91,782,626.33 100.00%
===== =============== ======
GROUP I
REMAINING TERM TO MATURITY
PERCENTAGE OF
STATISTIC STATISTIC
RANGE OF NUMBER OF CALCULATION DATE CALCULATION DATE
REMAINING TERMS TO STATISTIC AGGREGATE AGGREGATE
MATURITY (MONTHS) CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ------------------- ------------------- ------------------
60 to 60 .......... 3 $ 85,000.00 0.09%
115 to 120 .......... 18 571,801.78 0.62
175 to 180 .......... 182 9,293,540.91 10.13
229 to 234 .......... 2 69,242.30 0.08
235 to 240 .......... 112 4,827,106.65 5.26
355 to 360 .......... 967 76,935,934.69 83.82
--- --------------- ------
Total ............. 1,284 $ 91,782,626.33 100.00%
===== =============== ======
GROUP I
COMBINED LOAN-TO-VALUE RATIOS
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
RANGE OF COMBINED STATISTIC AGGREGATE AGGREGATE
LOAN-TO-VALUE RATIOS CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- ------------------- ------------------- ------------------
9.90% to 10.00% ......... 1 $ 10,000.00 0.01%
10.01% to 15.00% ......... 2 36,925.67 0.04
15.01% to 20.00% ......... 9 266,709.84 0.29
20.01% to 25.00% ......... 7 370,507.77 0.40
25.01% to 30.00% ......... 9 365,878.14 0.40
30.01% to 35.00% ......... 17 627,616.08 0.68
35.01% to 40.00% ......... 26 1,098,586.68 1.20
40.01% to 45.00% ......... 18 1,065,107.24 1.16
45.01% to 50.00% ......... 29 1,506,443.99 1.64
50.01% to 55.00% ......... 22 1,389,901.18 1.51
55.01% to 60.00% ......... 57 3,298,833.91 3.59
60.01% to 65.00% ......... 85 5,302,650.59 5.78
65.01% to 70.00% ......... 155 10,015,838.93 10.91
70.01% to 75.00% ......... 242 18,118,843.00 19.74
75.01% to 80.00% ......... 355 30,042,356.34 32.73
80.01% to 85.00% ......... 62 4,511,397.06 4.92
85.01% to 90.00% ......... 91 6,670,778.21 7.27
90.01% to 95.00% ......... 75 6,352,051.05 6.92
95.01% to 100.00% ......... 22 732,200.65 0.80
--- --------------- ------
Total ................... 1,284 $ 91,782,626.33 100.00%
===== =============== ======
At the date of origination.
A-2
GROUP I
OCCUPANCY STATUS
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
OCCUPANCY STATUS CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ------------------- ------------------- ------------------
Non-owner ........... 120 $ 7,367,953.84 8.03%
Primary ............. 1,155 83,738,320.01 91.24
Second Home ......... 9 676,352.48 0.74
----- --------------- ------
Total ............. 1,284 $ 91,782,626.33 100.00%
===== =============== ======
GROUP I
TYPE OF MORTGAGED PROPERTY
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
PROPERTY TYPE CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ------------------- ------------------- ------------------
Condominium .................. 48 $ 3,043,181.57 3.32%
Manufactured Housing ......... 4 173,064.99 0.19
Single Family ................ 1,149 80,927,011.50 88.17
Two-Four Family .............. 83 7,639,368.27 8.32
----- --------------- ------
Total .................. 1,284 $ 91,782,626.33 100.00%
===== =============== ======
GROUP I
ORIGINATORS OF THE MORTGAGE LOANS
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
ORIGINATOR CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- ------------------- ------------------- ------------------
Broker .......................... 241 $ 19,710,970.75 21.48%
National Loan Center ............ 90 8,067,974.54 8.79
Retail .......................... 951 63,767,845.69 69.48
Unaffiliated Originator ......... 2 235,835.35 0.26
--- ---------------- ------
Total ..................... 1,284 $ 91,782,626.33 100.00%
===== ================ ======
A-3
GROUP I
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
STATE CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- ------------------- ------------------- ------------------
Arizona ................ 20 $ 1,038,269.48 1.13%
Arkansas ............... 2 76,271.72 0.08
California ............. 153 16,189,045.27 17.64
Colorado ............... 5 309,272.53 0.34
Connecticut ............ 8 665,560.30 0.73
Florida ................ 125 10,181,048.84 11.09
Georgia ................ 13 936,570.33 1.02
Hawaii ................. 9 836,640.40 0.91
Idaho .................. 8 411,221.57 0.45
Illinois ............... 62 4,155,618.45 4.53
Indiana ................ 29 1,818,356.39 1.98
Iowa ................... 34 1,739,588.21 1.90
Kansas ................. 3 111,174.68 0.12
Kentucky ............... 6 320,600.00 0.35
Louisiana .............. 8 343,003.51 0.37
Maine .................. 1 80,000.00 0.09
Maryland ............... 6 365,349.17 0.40
Massachusetts .......... 11 1,417,391.84 1.54
Michigan ............... 92 5,622,495.86 6.13
Minnesota .............. 13 931,850.55 1.02
Mississippi ............ 8 536,948.48 0.59
Missouri ............... 42 1,846,450.69 2.01
Montana ................ 2 115,718.45 0.13
Nebraska ............... 3 109,331.37 0.12
Nevada ................. 33 2,428,929.38 2.65
New Hampshire .......... 1 153,600.00 0.17
New Jersey ............. 14 1,173,583.70 1.28
New York ............... 75 6,297,457.39 6.86
North Carolina ......... 16 985,100.10 1.07
Ohio ................... 86 5,097,051.12 5.55
Oklahoma ............... 41 2,231,388.63 2.43
Oregon ................. 15 1,329,748.92 1.45
Pennsylvania ........... 55 3,329,660.13 3.63
Rhode Island ........... 3 310,000.00 0.34
South Carolina ......... 3 169,472.59 0.18
South Dakota ........... 1 44,886.34 0.05
Tennessee .............. 34 1,953,236.52 2.13
Texas .................. 199 12,317,718.17 13.42
Utah ................... 8 610,356.21 0.67
Virginia ............... 5 496,025.57 0.54
Washington ............. 22 2,158,311.04 2.35
West Virginia .......... 2 107,467.98 0.12
Wisconsin .............. 7 334,887.76 0.36
Wyoming ................ 1 95,966.69 0.10
--- --------------- ------
Total ................ 1,284 $ 91,782,626.33 100.00%
===== =============== ======
A-4
GROUP I HYBRID LOANS
RANGE OF GROSS MARGINS
PERCENTAGE OF
NUMBER OF STATISTIC STATISTIC
STATISTIC CALCULATION DATE CALCULATION DATE
RANGE OF CALCULATION AGGREGATE AGGREGATE
GROSS MARGINS LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------- ------------- ------------------- ------------------
5.000% to 5.000% ......... 1 $ 34,434.60 0.38%
5.001% to 5.500% ......... 2 131,500.00 1.45
5.501% to 6.000% ......... 7 689,198.04 7.60
6.001% to 6.500% ......... 13 1,308,146.33 14.43
6.501% to 7.000% ......... 65 6,745,986.30 74.42
7.001% to 7.500% ......... 2 64,864.74 0.72
7.501% to 8.000% ......... 1 90,860.00 1.00
-- -------------- ------
Total .................. 91 $ 9,064,990.01 100.00%
== ============== ======
GROUP I HYBRID LOANS
RANGE OF MAXIMUM MORTGAGE INTEREST RATES
PERCENTAGE OF
NUMBER OF STATISTIC STATISTIC
RANGE OF MAXIMUM STATISTIC CALCULATION DATE CALCULATION DATE
MORTGAGE CALCULATION AGGREGATE AGGREGATE
INTEREST RATES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------- ------------- ------------------- ------------------
14.990% to 15.000% ......... 1 $ 78,457.03 0.87%
15.001% to 15.500% ......... 2 283,988.30 3.13
15.501% to 16.000% ......... 7 744,359.20 8.21
16.001% to 16.500% ......... 42 4,303,725.19 47.48
16.501% to 17.000% ......... 20 1,772,888.12 19.56
17.001% to 17.500% ......... 12 1,192,299.11 13.15
17.501% to 18.000% ......... 5 505,814.27 5.58
18.001% to 18.500% ......... 1 92,598.79 1.02
19.501% to 19.990% ......... 1 90,860.00 1.00
-- -------------- ------
Total ................ 91 $ 9,064,990.01 100.00%
== ============== ======
GROUP I HYBRID LOANS
RANGE OF MINIMUM MORTGAGE INTEREST RATES
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
RANGE OF MINIMUM STATISTIC AGGREGATE AGGREGATE
MORTGAGE INTEREST RATES CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------- ------------------- ------------------- ------------------
8.990% to 9.000% ......... 1 $ 78,457.03 0.87%
9.001% to 9.500% ......... 2 283,988.30 3.13
9.501% to 10.000% ......... 7 744,359.20 8.21
10.001% to 10.500% ......... 42 4,303,725.19 47.48
10.501% to 11.000% ......... 20 1,772,888.12 19.56
11.001% to 11.500% ......... 12 1,192,299.11 13.15
11.501% to 12.000% ......... 5 505,814.27 5.58
12.001% to 12.500% ......... 1 92,598.79 1.02
13.501% to 13.990% ......... 1 90,860.00 1.00
-- -------------- ------
Total ................ 91 $ 9,064,990.01 100.00%
== ============== ======
A-5
GROUP I
PRODUCT TYPE
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
PRODUCT CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- ------------------- ------------------- ------------------
3/27 6 Month LIBOR ARM ......... 91 $ 9,064,990.01 9.88%
Fixed Rate ..................... 1,193 82,717,636.32 90.12
----- --------------- ------
Total .................... 1,284 $ 91,782,626.33 100.00%
===== =============== ======
GROUP I
PREPAYMENT PENALTY TERM
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
ORIGINAL PREPAY STATISTIC AGGREGATE AGGREGATE
PENALTY TERM (MONTHS) CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------- ------------------- ------------------- ------------------
0 .................... 410 $ 23,886,697.33 26.03%
12 .................... 79 6,725,217.18 7.33
24 .................... 3 440,402.09 0.48
36 .................... 189 15,027,122.34 16.37
42 .................... 9 786,622.78 0.86
60 .................... 594 44,916,564.61 48.94
--- ---------------- ------
Total ............... 1,284 $ 91,782,626.33 100.00%
===== ================ ======
GROUP I
DOCUMENTATION TYPE
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
DOCUMENTATION TYPE CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ------------------- ------------------- ------------------
Full ................ 1,110 $ 77,141,852.28 84.05%
Light ............... 70 5,510,289.96 6.00
Stated .............. 104 9,130,484.09 9.95
----- ---------------- ------
Total ............. 1,284 $ 91,782,626.33 100.00%
===== ================ ======
A-6
GROUP I
CREDIT GRADE
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
CREDIT GRADE CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ------------------- ------------------- ------------------
A ................... 191 $ 14,683,313.63 16.00%
A+ .................. 19 1,444,148.85 1.57
A- .................. 347 28,197,784.71 30.72
B ................... 190 13,568,763.13 14.78
B+ .................. 152 11,481,849.62 12.51
B- .................. 58 3,639,034.42 3.96
C ................... 166 9,849,582.46 10.73
C+ .................. 66 3,976,233.05 4.33
C- .................. 57 2,981,655.83 3.25
D ................... 38 1,960,260.63 2.14
--- ---------------- ------
Total ............. 1,284 $ 91,782,626.33 100.00%
===== ================ ======
GROUP I HYBRID LOANS
MONTH OF NEXT CHANGE DATE
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
MONTH OF NEXT STATISTIC AGGREGATE AGGREGATE
CHANGE DATE CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------- ------------------- ------------------- ------------------
December 2003 ......... 1 $ 114,271.86 1.26%
January 2004 .......... 48 5,156,225.33 56.88
February 2004 ......... 37 3,301,017.82 36.42
March 2004 ............ 5 493,475.00 5.44
-- -------------- ------
Total ............... 91 $ 9,064,990.01 100.00%
== ============== ======
GROUP I
FICO SCORE
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
FICO SCORE CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------- ------------------- ------------------- ------------------
Not available ......... 1 $ 29,800.00 0.03%
451 to 500 ............ 8 453,580.62 0.49
501 to 550 ............ 244 14,348,461.48 15.63
551 to 600 ............ 489 35,849,978.01 39.06
601 to 650 ............ 414 33,225,443.14 36.20
651 to 700 ............ 95 5,538,541.55 6.03
701 to 750 ............ 26 1,867,059.88 2.03
751 to 777 ............ 7 469,761.65 0.51
--- --------------- ------
Total ............... 1,284 $ 91,782,626.33 100.00%
===== =============== ======
A-7
GROUP I
LIEN POSITION
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
LIEN POSITION CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ------------------- ------------------- ------------------
First Lien .......... 1,197 $ 89,209,574.22 97.20%
Second Lien ......... 87 2,573,052.11 2.80
----- ---------------- ------
Total ............. 1,284 $ 91,782,626.33 100.00%
===== ================ ======
A-8
GROUP II
STATISTIC CALCULATION DATE PRINCIPAL BALANCE
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
RANGE OF STATISTIC CALCULATION STATISTIC AGGREGATE AGGREGATE
DATE PRINCIPAL BALANCE CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- ------------------- ------------------- ------------------
$ 9,956 to $ 50,000 ........... 128 $ 4,238,425.01 17.59%
$ 50,001 to $100,000 ........... 112 7,828,423.19 32.48
$100,001 to $150,000 ........... 28 3,381,512.08 14.03
$150,001 to $200,000 ........... 14 2,481,769.65 10.30
$200,001 to $250,000 ........... 4 910,809.45 3.78
$250,001 to $300,000 ........... 3 842,830.37 3.50
$300,001 to $350,000 ........... 7 2,303,925.11 9.56
$350,001 to $400,000 ........... 3 1,162,911.98 4.83
$450,001 to $500,000 ........... 2 950,778.16 3.94
--- --------------- ------
Total ...................... 301 $ 24,101,385.00 100.00%
=== =============== ======
GROUP II
MORTGAGE INTEREST RATES
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
RANGE OF MORTGAGE STATISTIC AGGREGATE AGGREGATE
INTEREST RATES CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------- ------------------- ------------------- ------------------
7.990% to 8.000% ......... 2 $ 244,470.76 1.01%
8.001% to 8.500% ......... 5 811,469.18 3.37
8.501% to 9.000% ......... 13 1,866,170.34 7.74
9.001% to 9.500% ......... 23 2,994,624.37 12.43
9.501% to 10.000% ......... 38 4,072,460.24 16.90
10.001% to 10.500% ......... 36 2,672,210.57 11.09
10.501% to 11.000% ......... 36 3,937,336.76 16.34
11.001% to 11.500% ......... 41 2,559,544.49 10.62
11.501% to 12.000% ......... 34 1,651,645.56 6.85
12.001% to 12.500% ......... 18 912,575.51 3.79
12.501% to 13.000% ......... 14 684,304.74 2.84
13.001% to 13.500% ......... 13 602,706.13 2.50
13.501% to 14.000% ......... 11 450,142.54 1.87
14.001% to 14.500% ......... 9 318,659.73 1.32
14.501% to 15.000% ......... 6 244,121.28 1.01
15.001% to 15.500% ......... 1 31,000.00 0.13
15.501% to 15.850% ......... 1 47,942.80 0.20
-- --------------- ------
Total .................. 301 $ 24,101,385.00 100.00%
=== =============== ======
The lender has acquired mortgage insurance on certain mortgage loans included
in the preceding table. The mortgage interest rates for such mortgage loans are
shown at the mortgage rates exclusive of any premium for the related mortgage
insurance coverage. As of the statistic calculation date, the weighted average
mortgage rate of the statistic calculation loans net of the related premiums
for such mortgage insurance is expected to be approximately 10.5790% per annum.
A-9
GROUP II
ORIGINAL TERM TO MATURITY
PERCENTAGE OF
STATISTIC STATISTIC
RANGE OF NUMBER OF CALCULATION DATE CALCULATION DATE
ORIGINAL TERMS TO STATISTIC AGGREGATE AGGREGATE
MATURITY (MONTHS) CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ------------------- ------------------- ------------------
108 to 108 .......... 1 $ 90,000.00 0.37%
109 to 120 .......... 5 120,078.36 0.50
169 to 180 .......... 46 2,267,817.43 9.41
229 to 240 .......... 32 1,312,166.14 5.44
349 to 360 .......... 217 20,311,323.07 84.27
--- --------------- ------
Total ........... 301 $ 24,101,385.00 100.00%
=== =============== ======
GROUP II
REMAINING TERM TO MATURITY
PERCENTAGE OF
STATISTIC STATISTIC
RANGE OF NUMBER OF CALCULATION DATE CALCULATION DATE
REMAINING TERMS TO STATISTIC AGGREGATE AGGREGATE
MATURITY (MONTHS) CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ------------------- ------------------- ------------------
108 to 108 .......... 1 $ 90,000.00 0.37%
115 to 120 .......... 5 120,078.36 0.50
175 to 180 .......... 46 2,267,817.43 9.41
223 to 228 .......... 1 11,856.20 0.05
235 to 240 .......... 31 1,300,309.94 5.40
355 to 360 .......... 217 20,311,323.07 84.27
--- --------------- ------
Total ........... 301 $ 24,101,385.00 100.00%
=== =============== ======
GROUP II
COMBINED LOAN-TO-VALUE RATIOS
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
RANGE OF COMBINED STATISTIC AGGREGATE AGGREGATE
LOAN-TO-VALUE RATIOS CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- ------------------- ------------------- ------------------
15.15% to 20.00% ......... 3 $ 87,584.38 0.36%
20.01% to 25.00% ......... 3 79,710.00 0.33
25.01% to 30.00% ......... 2 59,902.43 0.25
35.01% to 40.00% ......... 5 214,300.60 0.89
40.01% to 45.00% ......... 2 48,898.73 0.20
45.01% to 50.00% ......... 11 524,120.39 2.17
50.01% to 55.00% ......... 8 560,919.80 2.33
55.01% to 60.00% ......... 13 1,163,731.23 4.83
60.01% to 65.00% ......... 30 1,777,359.45 7.37
65.01% to 70.00% ......... 29 2,271,668.94 9.43
70.01% to 75.00% ......... 49 4,083,804.87 16.94
75.01% to 80.00% ......... 86 8,134,177.04 33.75
80.01% to 85.00% ......... 26 2,369,241.00 9.83
85.01% to 90.00% ......... 19 1,691,462.27 7.02
90.01% to 95.00% ......... 10 864,163.96 3.59
95.01% to 100.00% ......... 5 170,339.91 0.71
-- --------------- ------
Total ................. 301 $ 24,101,385.00 100.00%
=== =============== ======
At the date of origination.
A-10
GROUP II
OCCUPANCY STATUS
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
OCCUPANCY STATUS CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ------------------- ------------------- ------------------
Non-Owner ......... 26 $ 1,423,348.01 5.91%
Primary ........... 275 22,678,036.99 94.09
--- --------------- ------
Total ......... 301 $ 24,101,385.00 100.00%
=== =============== ======
GROUP II
TYPE OF MORTGAGED PROPERTY
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
PROPERTY TYPE CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ------------------- ------------------- ------------------
Condominium .................. 11 $ 876,920.09 3.64%
Manufactured Housing ......... 2 116,371.18 0.48
Single Family ................ 270 21,971,664.56 91.16
Two-Four Family .............. 18 1,136,429.17 4.72
--- --------------- ------
Total .................... 301 $ 24,101,385.00 100.00%
=== =============== ======
GROUP II
ORIGINATORS OF THE MORTGAGE LOANS
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
ORIGINATOR CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------------- ------------------- ------------------- ------------------
Broker .......................... 57 $ 4,416,056.10 18.32%
National Loan Center ............ 22 2,037,159.50 8.45
Retail .......................... 219 17,230,131.22 71.49
Unaffiliated Originator ......... 3 418,038.18 1.73
--- --------------- ------
Total ....................... 301 $ 24,101,385.00 100.00%
=== =============== ======
A-11
GROUP II
GEOGRAPHICAL DISTRIBUTION OF MORTGAGED PROPERTIES
PERCENTAGE OF
NUMBER OF STATISTIC STATISTIC
STATISTIC CALCULATION DATE CALCULATION DATE
CALCULATION AGGREGATE AGGREGATE
STATE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------ ------------- ------------------- ------------------
Arizona ................ 4 $ 283,387.48 1.18%
California ............. 45 6,562,114.39 27.23
Colorado ............... 2 244,215.41 1.01
Florida ................ 27 2,337,282.20 9.70
Georgia ................ 1 90,000.00 0.37
Hawaii ................. 2 78,250.00 0.32
Idaho .................. 2 167,703.89 0.70
Illinois ............... 9 724,210.94 3.00
Indiana ................ 5 160,648.93 0.67
Iowa ................... 7 261,311.08 1.08
Louisiana .............. 4 302,236.26 1.25
Maryland ............... 2 147,478.93 0.61
Michigan ............... 20 1,066,701.71 4.43
Minnesota .............. 3 84,427.29 0.35
Mississippi ............ 1 45,000.00 0.19
Missouri ............... 13 773,901.39 3.21
Montana ................ 3 670,327.62 2.78
Nebraska ............... 1 36,964.22 0.15
Nevada ................. 9 578,307.47 2.40
New Jersey ............. 5 357,605.39 1.48
New Mexico ............. 1 50,500.00 0.21
New York ............... 20 1,162,956.66 4.83
North Carolina ......... 5 306,318.05 1.27
Ohio ................... 24 1,528,547.97 6.34
Oklahoma ............... 7 416,220.51 1.73
Oregon ................. 2 113,499.31 0.47
Pennsylvania ........... 11 563,368.84 2.34
Rhode Island ........... 1 65,000.00 0.27
South Carolina ......... 2 261,600.00 1.09
Tennessee .............. 7 317,850.00 1.32
Texas .................. 46 3,705,442.21 15.37
Utah ................... 2 160,500.00 0.67
Virginia ............... 4 281,229.88 1.17
Washington ............. 3 137,776.97 0.57
Wisconsin .............. 1 58,500.00 0.24
-- --------------- ------
Total .............. 301 $ 24,101,385.00 100.00%
=== =============== ======
A-12
GROUP II HYBRID LOANS
RANGE OF GROSS MARGINS
PERCENTAGE OF
NUMBER OF STATISTIC STATISTIC
STATISTIC CALCULATION DATE CALCULATION DATE
RANGE OF CALCULATION AGGREGATE AGGREGATE
GROSS MARGINS LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------- ------------- ------------------- ------------------
5.875% to 6.000% ......... 1 $ 54,979.18 2.21%
6.001% to 6.500% ......... 6 535,574.13 21.52
6.501% to 7.000% ......... 10 1,463,227.88 58.79
7.001% to 7.500% ......... 1 321,157.44 12.90
8.001% to 8.125% ......... 1 114,000.00 4.58
-- -------------- ------
Total ................ 19 $ 2,488,938.63 100.00%
== ============== ======
GROUP II HYBRID LOANS
RANGE OF MAXIMUM MORTGAGE INTEREST RATES
PERCENTAGE OF
NUMBER OF STATISTIC STATISTIC
RANGE OF MAXIMUM STATISTIC CALCULATION DATE CALCULATION DATE
MORTGAGE CALCULATION AGGREGATE AGGREGATE
INTEREST RATES LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------- ------------- ------------------- ------------------
15.125% to 15.500% ......... 1 $ 178,549.46 7.17%
16.001% to 16.500% ......... 8 617,688.39 24.82
16.501% to 17.000% ......... 6 1,253,348.60 50.36
17.001% to 17.500% ......... 2 286,952.18 11.53
17.501% to 18.000% ......... 1 38,400.00 1.54
18.001% to 18.500% ......... 1 114,000.00 4.58
- -------------- ------
Total .................. 19 $ 2,488,938.63 100.00%
== ============== ======
GROUP II HYBRID LOANS
RANGE OF MINIMUM MORTGAGE INTEREST RATES
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
RANGE OF MINIMUM STATISTIC AGGREGATE AGGREGATE
MORTGAGE INTEREST RATES CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------- ------------------- ------------------- ------------------
9.1250% to 9.500% ......... 1 $ 178,549.46 7.17%
10.001% to 10.500% ......... 8 617,688.39 24.82
10.501% to 11.000% ......... 6 1,253,348.60 50.36
11.001% to 11.500% ......... 2 286,952.18 11.53
11.501% to 12.000% ......... 1 38,400.00 1.54
12.001% to 12.500% ......... 1 114,000.00 4.58
- -------------- ------
Total .................. 19 $ 2,488,938.63 100.00%
== ============== ======
A-13
GROUP II
PRODUCT TYPE
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
PRODUCT CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------------------- ------------------- ------------------- ------------------
3/27 6 Month LIBOR ARM ......... 19 $ 2,488,938.63 10.33%
Fixed Rate ..................... 282 21,612,446.37 89.67
--- --------------- ------
Total ...................... 301 $ 24,101,385.00 100.00%
=== =============== ======
GROUP II
PREPAYMENT PENALTY TERM
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
ORIGINAL PREPAY PENALTY TERM CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------------ ------------------- ------------------- ------------------
0 ........................... 91 $ 6,636,466.47 27.54%
12 ........................... 21 1,227,956.66 5.09
24 ........................... 2 89,502.12 0.37
36 ........................... 39 3,472,138.17 14.41
42 ........................... 1 63,750.00 0.26
60 ........................... 147 12,611,571.58 52.33
--- --------------- ------
Total .................... 301 $ 24,101,385.00 100.00%
=== =============== ======
GROUP II
DOCUMENTATION TYPE
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
DOCUMENTATION TYPE CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------------- ------------------- ------------------- ------------------
Full ............... 268 $ 20,947,699.58 86.91%
Light .............. 10 676,421.29 2.81
Stated ............. 23 2,477,264.13 10.28
--- ---------------- ------
Total .......... 301 $ 24,101,385.00 100.00%
=== ================ ======
A-14
GROUP II
CREDIT GRADE
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
CREDIT GRADE CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- ------------------- ------------------- ------------------
A ................. 45 $ 3,770,069.48 15.64%
A+ ................ 7 498,991.59 2.07
A- ................ 88 8,897,630.38 36.92
B ................. 46 3,638,429.18 15.10
B+ ................ 26 1,573,452.72 6.53
B- ................ 18 1,354,138.98 5.62
C ................. 38 2,185,404.73 9.07
C+ ................ 17 1,396,727.36 5.80
C- ................ 10 508,044.19 2.11
D ................. 6 278,496.39 1.16
-- --------------- ------
Total ......... 301 $ 24,101,385.00 100.00%
=== =============== ======
GROUP II HYBRID LOANS
MONTH OF NEXT CHANGE DATE
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
MONTH OF NEXT STATISTIC AGGREGATE AGGREGATE
CHANGE DATE CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------- ------------------- ------------------- ------------------
January 2004 .......... 8 $ 1,282,706.63 51.54%
February 2004 ......... 7 876,250.00 35.21
March 2004 ............ 4 329,982.00 13.26
- --------------- ------
Total ............. 19 $ 2,488,938.63 100.00%
== =============== ======
GROUP II
FICO SCORE
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
FICO SCORE CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------- ------------------- ------------------- ------------------
Not available ......... 1 $ 11,856.20 0.5%
451 to 500 ............ 2 207,979.33 0.86
501 to 550 ............ 48 3,082,711.37 12.79
551 to 600 ............ 108 8,236,685.71 34.18
601 to 650 ............ 108 9,873,368.03 40.97
651 to 700 ............ 26 2,129,470.28 8.84
701 to 750 ............ 6 500,814.08 2.08
751 to 787 ............ 2 58,500.00 0.24
--- --------------- ------
Total ............. 301 $ 24,101,385.00 100.00%
=== =============== ======
A-15
GROUP II
LIEN POSITION
PERCENTAGE OF
STATISTIC STATISTIC
NUMBER OF CALCULATION DATE CALCULATION DATE
STATISTIC AGGREGATE AGGREGATE
LIEN POSITION CALCULATION LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------- ------------------- ------------------- ------------------
First Lien .......... 276 $ 23,413,963.32 97.15%
Second Lien ......... 25 687,421.68 2.85
--- ---------------- ------
Total ........... 301 $ 24,101,385.00 100.00%
=== ================ ======
A-16
ANNEX B
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES
Except under limited circumstances, the globally offered Mortgage
Pass-Through Certificates, Series, refered to as global securities will be
available only in book-entry form. Investors in the global securities may hold
the global securities through any of DTC or, upon request, Euroclear or
Clearstream, Luxembourg. The global securities will be tradable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding global securities
through Euroclear and Clearstream, Luxembourg will be conducted in the ordinary
way in accordance with their normal rules and operating procedures and in
accordance with conventional eurobond practice i.e., seven calendar day
settlement.
Secondary market trading between investors holding global securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Mortgage Pass-Through Certificates
issues.
Secondary cross-market trading between Euroclear or Clearstream, Luxembourg
and DTC participants holding Certificates will be effected on a
delivery-against-payment basis through the respective depositaries of Euroclear
and Clearstream, Luxembourg and as DTC participants.
Non-U.S. holders as described below of global securities will be subject to
U.S. withholding taxes unless the holders meet established requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants
INITIAL SETTLEMENT
All global securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the global securities will
be represented through financial institutions acting on their behalf as direct
and indirect participants in DTC. As a result, Euroclear and Clearstream,
Luxembourg will hold positions on behalf of their participants through their
respective depositaries, which in turn will hold the positions in accounts as
DTC participants.
Investors electing to hold their global securities through DTC will follow
the settlement practices applicable to prior Mortgage Pass-Through Certificates
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 securities through Euroclear or
Clearstream, Luxembourg accounts will follow the settlement procedures
applicable to conventional eurobonds, except that there will be no temporary
global security and no "lock-up" or restricted period. Global securities will be
credited to the securities custody accounts on the settlement date against
payment in same-day funds
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and sellers'
accounts are located to ensure that settlement can be made on the desired value
date.
B-1
Trading between DTC Participants. Secondary market trading between DTC
participants will be settled using the procedures applicable to prior Home
Equity Loan Asset-Backed Certificates issues in same-day funds.
Trading between Euroclear and/or Clearstream, Luxembourg Participants.
Secondary market trading between Euroclear participants or Clearstream,
Luxembourg participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC Seller and Euroclear or Clearstream, Luxembourg
Purchaser. When global securities are to be transferred from the account of a
DTC participant to the account of a Euroclear participant or a Clearstream,
Luxembourg participant, the purchaser will send instructions to Euroclear or
Clearstream, Luxembourg through a Euroclear participant or Clearstream,
Luxembourg participant at least one business day prior to settlement. Euroclear
or Clearstream, Luxembourg will instruct the respective depositary, as the case
may be, to receive the global securities against payment. Payment will include
interest accrued on the global securities from and including the last coupon
payment date to and excluding the settlement date, on the basis of either the
actual number of days in the 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 securities. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. Payment will then be made by the respective depositary of the
DTC participant's account against delivery of the global securities. After
settlement has been completed, the global securities will be credited to the
respective clearing system and by the clearing system, in accordance with its
usual procedures, to the Euroclear participant's or Clearstream, Luxembourg
participant's account. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the global
securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Euroclear or Clearstream,
Luxembourg cash debt will be valued instead as of the actual settlement date.
Euroclear participants and Clearstream, Luxembourg 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 Euroclear or
Clearstream, Luxembourg. Under this approach, they may take on credit exposure
to Euroclear or Clearstream, Luxembourg until the global securities are credited
to their accounts one day later.
As an alternative, if Euroclear or Clearstream, Luxembourg has extended a
line of credit to them, Euroclear participants or Clearstream, Luxembourg
participants can elect not to preposition funds and allow that credit line to be
drawn upon the finance settlement. Under this procedure, Euroclear participants
or Clearstream, Luxembourg participants purchasing global securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
global securities were credited to their accounts. However, interest on the
global securities would accrue from the value date. Therefore, in many cases the
investment income on the global securities earned during
B-2
that one-day period may substantially reduce or offset the amount of the
overdraft charges, although this result will depend on each Euroclear
participant's or Clearstream, Luxembourg participant's particular cost of
funds.
Since the settlement is taking place during New York business hours, DTC
participants can employ their usual procedures for sending global securities to
the respective European depositary for the benefit of Euroclear participants or
Clearstream, Luxembourg 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 Euroclear or Clearstream, Luxembourg Seller and DTC
Purchaser. Due to time zone differences in their favor, Euroclear participants
and Clearstream, Luxembourg participants may employ their customary procedures
for transactions in which global securities are to be transferred by the
respective clearing system, through the respective depositary, to a DTC
participant. The seller will send instructions to Euroclear or Clearstream,
Luxembourg through a Euroclear participant or Clearstream, Luxembourg
participant at least one business day prior to settlement. In these cases
Euroclear or Clearstream, Luxembourg will instruct the respective depositary, as
appropriate, to deliver the global securities to the DTC participant's account
against payment. Payment will include interest accrued on the global securities
from and including the last coupon payment to and excluding the settlement date
on the basis of either the actual number of days in the 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 securities. 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 Euroclear participant or Clearstream, Luxembourg participant the
following day, and receipt of the cash proceeds in the Euroclear participant's
or Clearstream, Luxembourg participant's account would be back-valued to the
value date (which would be the preceding day, when settlement occurred in New
York). Should the Euroclear participant or Clearstream, Luxembourg 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 Euroclear participant's or Clearstream,
Luxembourg participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Euroclear or Clearstream, Luxembourg and that
purchase global securities from DTC participants for delivery to Euroclear
participants or Clearstream, Luxembourg participants should note that these
trades would automatically fail on the sale side unless affirmative action were
taken. At least three techniques should be readily available to eliminate this
potential problem:
(a) borrowing through Euroclear or Clearstream, Luxembourg for one day
(until the purchase side of the day trade is reflected in their Euroclear
or Clearstream, Luxembourg accounts) in accordance with the clearing
system's customary procedures;
(b) borrowing the global securities in the U.S. from a DTC participant
no later than one day prior to settlement, which would give the global
securities sufficient
B-3
time to be reflected in their Euroclear or Clearstream, Luxembourg 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 Euroclear
participant or Clearstream, Luxembourg participant
U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of global securities holding securities through
Clearstream, Luxembourg or Euroclear (or through DTC if the holder has an
address outside the U.S.) will be subject to the 30% (or in some cases 31%) U.S.
withholding tax that generally applies to payments of interest on registered
debt issued by U.S. persons, unless (1) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between the beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (2) the beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
Exemption for non-U.S. persons (Form W-8BEN). Beneficial owners of global
securities that are non-U.S. persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8BEN. If the information shown on Form
W-8BEN changes, a new Form W-8BEN must be filed within 30 days of the change.
Exemption for non-U.S. persons with effectively connected income (Form
W-8ECI). A non-U.S. person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI.
Exemption or reduced rate for non-U.S. persons resident in treaty countries
(Form W-8 BEN). Non-U.S. persons that are beneficial owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form W-8BEN
(including Part II thereof).
Exemption for U.S. persons (Form W-9). U.S. persons can obtain a complete
exemption from the withholding tax by filing Form W-9.
U.S. Federal Income Tax Reporting Procedure. The global securities holder
files by submitting the appropriate form to the person through whom he holds
(e.g., the clearing agency, in the case of persons holding directly on the books
of the clearing agency). Forms W-8 BEN and W-8ECI are generally effective for
three calendar years from the close of the calendar year in which collected.
U.S. Person. As used in this prospectus supplement the term "U.S. person"
means a beneficial owner of a certificate that is for United States federal
income tax purposes
(a) a citizen or resident of the United States,
(b) a corporation or partnership created or organized in or under the
laws of the United States or of any State thereof or the District of
Columbia,
B-4
(c) an estate the income of which is subject to United States federal
income taxation regardless of its source, or
(d) a trust if a court within the United States is able to exercise
primary supervision of the administration of the trust and one or more
United States persons have the authority to control all substantial
decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in
regulations, trusts in existence on August 20, 1996 and treated as United States
persons prior to that date that elect to continue to be so treated also will be
considered U.S. Persons. As used in this prospectus supplement, the term
"non-U.S. person" means a beneficial owner of a certificate that is not a U.S.
person.
Treasury regulations provide certain presumptions regarding the entity
classification and foreign or U.S. status of a holder that a payor generally
must apply in the absence of appropriate documentation from the holder, and
provide detailed documentation requirements and procedures for holders claiming
withholding tax exemptions through intermediaries. Prospective investors are
urged to consult their tax advisors regarding the effect of these regulations on
their ability to claim and the means for claiming exemptions from or reduced
rates of U.S. withholding taxes.
B-5
[THIS PAGE INTENTIONALLY LEFT BLANK]
PROSPECTUS
$2,003,994,800
ASSET-BACKED CERTIFICATES
ASSET-BACKED BONDS
---------------------
AAMES CAPITAL CORPORATION,
AAMES CAPITAL ACCEPTANCE CORP.,
EACH, A SPONSOR
---------------------
SECURITIES OFFERED
o asset-backed certificates, asset-backed bonds or a combination
o rated in one of the four highest rating categories by at least one
nationally recognized rating organization
o not listed on any trading exchange
ASSETS
o mortgage loans secured by first or second liens on residential or mixed
used properties
o securities backed by those types of mortgage loans
o may include one or more forms of enhancement
(sidebar)
- --------------------------------------------------------------------------------
The securities are obligations only of the related trust and are not insured or
guaranteed by any governmental agency.
The securities involve significant risks. We recommend that you review the
information under "Risk Factors" in the related prospectus supplement.
This prospectus must be accompanied by a prospectus supplement for the
particular series.
- --------------------------------------------------------------------------------
(end sidebar)
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. MAKING ANY CONTRARY REPRESENTATION IS A
CRIMINAL OFFENSE.
The applicable sponsor may offer securities through underwriters or by
other methods described under the caption "Method of Distribution."
The date of this prospectus is March 13, 2001
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The applicable sponsor, as creator of each trust, has filed with the
Securities and Exchange Commission a Registration Statement under the Securities
Act of 1933, as amended, with respect to the bonds and the certificates offered
pursuant to this prospectus. The Registration Statement includes information
about the securities which is not included in this prospectus. Prospective
investors may read the Registration Statement and make copies of it at the
Commission's main office located at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the Commission's regional offices located at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 6061-2511 and Seven World
Trade Center, New York, New York 10048. Prospective investors also may obtain a
copy of the Registration Statement by paying a fee set by the Commission and
requesting a copy from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Prospective
investors who have access to the Internet also may read the Registration
Statement at the Commission's site on the World Wide Web located at
http://www.sec.gov.
Each trust will be required to file with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the securities Exchange Act of 1934, as amended,
(a) a Current Report on Form 8-K each month after the month of formation of that
trust and prior to the expiration of the fiscal year of the sponsor in which
that trust was formed and (b) an annual report on Form 10-K within 90 days after
the end of the calendar year in which the trust was formed. Each Form 8-K will
include as an exhibit the monthly statement to securityholders of the related
series. The Form 10-K will include certain summary information about the trust.
Any reports and documents so filed by or on behalf of a trust before the
termination of the offering of the securities of that trust will be incorporated
in this prospectus. If the information incorporated by reference in this
prospectus modifies or changes the information in this prospectus, the modified
or changed information will control, and if any information incorporated by
reference in this prospectus is itself modified or changed by subsequent
information incorporated by reference, the latter information will control. Any
reports and documents that are incorporated in this prospectus will not be
physically included in this prospectus or delivered with this prospectus.
The applicable sponsor will provide without charge to each person,
including any beneficial owner of securities, to whom a copy of this prospectus
is delivered, on the written or oral request of any person, a copy of any or all
of the documents incorporated in this prospectus or in any related prospectus
supplement, other than exhibits to the documents unless these exhibits are
specifically incorporated by reference in the document. Written requests for
copies should be directed to General Counsel, Aames Capital Corporation, 350
South Grand Avenue, 43rd Floor, Los Angeles, California 90071. Telephone
requests for copies should be directed to the sponsor, at (323) 210-5000. IN
ORDER TO RECEIVE ANY REQUESTED INFORMATION IN A TIMELY FASHION, PROSPECTIVE
INVESTORS MUST MAKE THEIR REQUESTS NO LATER THAN FIVE BUSINESS DAYS BEFORE THEY
MUST MAKE THEIR INVESTMENT DECISIONS.
2
USE OF PROCEEDS
The sponsor will apply all or substantially all of the net proceeds from
the sale of each series of securities for one or more of the following
purposes:
o to establish any reserve fund, pre-funding account or segregated trust
account,
o to pay costs of structuring and issuing the securities, including the
costs of obtaining enhancement and
o for its general corporate purposes.
AAMES CAPITAL ACCEPTANCE CORP.
Aames Capital Acceptance Corp., called either ACAC or the sponsor, was
incorporated in the State of Delaware on February 4, 1997 and is a wholly owned
limited purpose finance subsidiary of Aames Capital Corporation. ACAC maintains
its principal office at 350 South Grand Avenue, 43rd Floor, Los Angeles,
California 90071 and its telephone number is (323) 210-5000. ACAC was organized
for the sole purpose of facilitating transactions of the type described in this
prospectus; specifically, the purchasing, holding, owning and transferring all
right, title and interest in Mortgage Loans and any activities incidental to and
necessary or convenient for the accomplishment of such purpose. ACAC does not
have, and is not expected in the future to have, any significant assets.
ACAC's Certificate of Incorporation places substantial restrictions on the
operations and management of ACAC such that a voluntary or involuntary
application for bankruptcy protection is unlikely. Neither ACAC nor any of its
affiliates will insure or guarantee distributions on the securities of any
series.
AAMES CAPITAL CORPORATION
GENERAL
Aames Capital Corporation, called either ACC or the sponsor, was
incorporated in the State of California on August 13, 1993 and is a wholly owned
subsidiary of Aames Financial Corporation. ACC is primarily engaged in
acquiring, owning, transferring and servicing mortgage loans. ACC maintains its
principal offices at 350 South Grand Avenue, 43rd Floor, Los Angeles, California
90071 and its telephone number is (323) 210-5000. Neither ACC nor any of its
affiliates will insure or guarantee distributions on the securities of any
series. Either ACC, or such other entity identified in the related Pooling and
Servicing Agreement, will act as servicer with respect to the mortgage loans
included in the mortgage pool for any series of securities.
3
MORTGAGE LOAN DELINQUENCY AND FORECLOSURE EXPERIENCE
The following table sets forth delinquency, foreclosure and loss
information relating to ACC's servicing portfolio as of or for the periods
indicated:
AS OF OR FOR THE FISCAL YEARS ENDED JUNE 30,
-----------------------------------------------
1998 1999 2000
---- ---- ----
(DOLLARS IN THOUSANDS)
Percentage of dollar amount of delinquent loans to
loans serviced (period end)(1)(2)(3)
One Month ................................................ 3.8% 2.4% 1.9%
Two Months ............................................... 1.3% 1.0 0.8
Three or More Months:
Not Foreclosed(4) ...................................... 9.0% 10.3 9.0
Foreclosed(5) .......................................... 1.5% 2.0 1.9
Total .................................................. 15.6% 15.7 13.6
Percentage of dollar amount of loans foreclosed
during the period to loans serviced (2)(3) ............... 2.0% 2.9 3.6
Number of loans foreclosed during the period .............. 1,125 1,680 1,854
Principal amount of foreclosed loans during the
period ................................................... $ 84,613 $ 122,445 $ 135,629
Net losses on liquidations during the period(6) ........... $ 26,488 $ 51,730 $ 96,199
Percentage of losses to average servicing portfolio(3)..... 0.7% 1.2% 2.6%
Servicing portfolio at period end ......................... $4,147,000 $3,841,000 3,560,000
- ----------
(1) Delinquent loans are loans for which more than one payment is past due.
(2) The delinquency and foreclosure percentages are calculated on the basis
of the total dollar amount of mortgage loans originated or purchased by
ACC and, in each case, serviced by ACC and any subservicers as of the end
of the periods indicated.
(3) The servicing portfolio used in the percentage calculations includes $82
million of loans subserviced by ACC on an interim basis at June 30, 1998.
(4) Represents loans which are in foreclosure but as to which foreclosure
proceedings have not concluded.
(5) Represents properties acquired following a foreclosure sale and still
serviced by ACC at period end.
(6) Represents losses net of gains on foreclosed properties sold during the
period indicated. ACC's servicing portfolio has grown over the periods
presented. However, because foreclosures and losses typically occur
months or years after a loan is originated, data relating to
delinquencies, foreclosures and losses as a percentage of the current
portfolio can understate the risk of future delinquencies, losses or
foreclosures.
There is no assurance that the delinquency, foreclosure and loss experience
with respect to any of the mortgage loans or with respect to any mortgage pool
will be comparable to the experience reflected above for home equity mortgage
loans originated or purchased and serviced by affiliates of ACC. Because certain
mortgage loans may have been underwritten pursuant to standards that rely
primarily on the value of the related mortgaged properties rather than the
creditworthiness of the related mortgagors, the actual rates of delinquencies,
foreclosures and losses on such mortgage loans, particularly in periods during
which the
4
value of the related mortgaged properties has declined, could be higher than
those historically experienced by the mortgage lending industry in general. To
the extent the underwriting guidelines of ACC permit higher initial combined
loan-to-value ratios than those that have been required historically, or to the
extent mortgage pools contain a larger percentage of higher credit grade loans
than have historically been the case, losses realized on foreclosures of the
related mortgaged properties may be higher than the experience reflected above
for home equity mortgage loans originated or purchased and serviced by
affiliates of ACC. In addition, the rate of delinquencies, foreclosures and
losses with respect to the mortgage loans will also be affected by, among other
things, interest rate fluctuations and general and regional economic
conditions.
5
THE ORIGINATORS
ACC may either acquire mortgage loans originated by one or more
subsidiaries of Aames Financial Corporation, which are called affiliated
originators in this prospectus, or originated by entities unaffiliated with ACC,
which are called unaffiliated originators in this prospectus. The affiliated
originators and unaffiliated originators are collectively called originators.
UNDERWRITING GUIDELINES
All mortgage loans originated by affiliated originators will be
underwritten in accordance with standard underwriting guidelines developed by
ACC and the related affiliated originator, as described below. Unless otherwise
specified in the related Prospectus supplement, mortgage loans originated by
unaffiliated originators are reunderwritten in accordance with the applicable
underwriting guidelines. In connection with certain purchases of mortgage loans
from unaffiliated originators, ACC may decide, after evaluating a number of
factors, including ACC's previous experiences with a particular unaffiliated
originators, the size of the loan portfolio and other relevant information to
complete such purchase without re-underwriting the entire loan portfolio. In
such cases, ACC will re-underwrite a statistically significant sample of the
loans in that portfolio to confirm compliance with ACC's underwriting
guidelines.
ACC's underwriting guidelines are designed to assess the borrower's
creditworthiness and the adequacy of the real property as collateral for the
loan. The borrower's creditworthiness is assessed by examination of a number of
factors, generally including calculation of debt-to-income ratios (which is the
sum of the borrower's monthly debt payments divided by the borrowers' monthly
income before taxes and other payroll deductions) an examination of the
borrower's credit history and credit score through standard credit reporting
bureaus, and by evaluating the borrower's payment history with respect to
existing mortgages, if any, on the property.
An assessment of the adequacy of the real property as collateral for the
loan is primarily based upon an appraisal of the real property and a calculation
of the ratio of all mortgages existing on the property (including the loan
applied for) to the appraised value of the real property at the time of
origination. This ratio is called the combined loan-to-value ratio. As a lender
that specializes in loans made to credit impaired borrowers, ACC ordinarily
makes mortgage loans to borrowers with credit histories or other factors that
would typically disqualify them from consideration for a loan from traditional
financial institutions. Consequently, ACC's underwriting guidelines generally
require lower combined loan-to-value ratios than would typically be the case if
the borrower could qualify for a loan from a traditional financial institution.
Appraisers determine a property's value by reference to the sales prices of
comparable properties recently sold, adjusted to reflect the condition of the
real property as determined through inspection. Appraisals on loans purchased by
ACC are reviewed by ACC's own appraisers or by qualified contract appraisers
approved by ACC to assure that they meet ACC's standards.
The underwriting of a mortgage loan to be originated or purchased by ACC
includes a review of the completed loan package, which includes the loan
application, a current appraisal, a preliminary title report and a credit
report. All loan applications and all closed loans offered to ACC for purchase
must be approved by ACC in accordance with its
6
underwriting criteria. ACC regularly reviews its underwriting guidelines and
makes changes when appropriate to respond to market conditions, the performance
of loans representing a particular loan product or changes in laws or
regulations.
ACC requires title insurance coverage issued on an American Land Title
Association (or similar) form of title insurance on all residential real
property securing mortgage loans it originates or purchases. The loan
originator and its assignees are generally named as the insured. Title
insurance policies indicate the lien position of the mortgage loan and protect
ACC against loss if the title or lien position is not as indicated. The
applicant is also required to maintain hazard and, in certain instances, flood
insurance, in an amount sufficient to cover the new loan and any senior
mortgage, subject to the maximum amount available under the National Flood
Insurance Program.
ACC has two general underwriting programs through which it implements the
above:
o the "traditional" underwriting program, under which the borrower's
mortgage credit and consumer credit are each scored and weighted to
determine the overall credit grade of the borrower with the borrower
then being assigned an "A" through "D" credit grade, and
o a credit score/and loan-to-value ratio based underwriting program,
referred to as the "SNAP program", under which the borrower's credit
score as reported by various reporting agencies and the loan-to-value
ratio, known as the LTV, of the loan are used to determine whether the
borrower qualifies for the loan requested and the appropriate pricing
for that loan.
"Traditional" Underwriting Program. Under its "traditional" underwriting
program, ACC assigns a letter credit grade (A, A--, B, C, C-- and D) to each
loan it originates or purchases depending on the risk profile of the loan, with
the higher credit grades exhibiting a lower risk profile and the lower credit
grades exhibiting increasingly higher risk profiles. Generally, the higher
credit grade loans have higher loan-to-value ratios and carry a lower interest
rate. The following chart generally outlines the parameters of the credit grades
of ACC's traditional underwriting program as at the date hereof:
7
"A" CREDIT "A--" CREDIT "B" CREDIT
GRADE GRADE GRADE
------------------ ------------------ -------------------
GENERAL Has good credit. Has good credit Generally good
REPAYMENT but might have mortgage pay
some minor history but may
delinquency. have marginal
consumer credit
history.
EXISTING No lates in past No more than No more than
MORTGAGE LOANS 12 months. 59 days late at 89 days late at
closing and a closing and a
maximum of two maximum of
30-day lates in four 30-day lates
the past 12 in the past 12
months. months or one
60-day late and
two 30-day lates.
CONSUMER Consumer credit Consumer credit Consumer credit
CREDIT is good in the is good in the must be
last 12 months. last 12 months. satisfactory in
Less than 25% Less than 35% the last 12
of credit report of credit report months. Less
items derogatory items derogatory than 40% of
with no 60-day with no 90-day credit report
or more lates. or more lates. items
Generally, Generally, derogatory.
requires a requires a Generally,
minimum credit minimum credit requires a
score of 600. score of 580. minimum credit
score of 560.
BANKRUPTCY 2 years since 2 years since 1 year since
discharge or discharge or discharge with
dismissal with dismissal with reestablished
reestablished reestablished "B" credit or 18
"A" credit. "A-" credit. months since
discharge
without
reestablished
credit.
DEBT Generally not to Generally not to Generally not to
SERVICE-TO- exceed 45%. exceed 45%. exceed 50%.
INCOME RATIO
MAXIMUM LOAN-
TO-VALUE RATIO:
OWNER OCCUPIED Generally 90% Generally 90% Generally 80%
for a 1 to 4 for a 1 to 4 for a 1 to 4
family dwelling. family dwelling. family dwelling.
NON-OWNER Generally 80% Generally 70% Generally 65%
OCCUPIED for a 1 to 4 for a 1 to 4 for a 1 to 2
family dwelling. family dwelling. family dwelling.
"C" CREDIT "C--" CREDIT "D" CREDIT
GRADE GRADE GRADE
--------------------- ------------------ -----------------
GENERAL Marginal credit Marginal credit Designed to
REPAYMENT history which is history not provide a
offset by other offset by other borrower with
positive positive poor credit
attributes. attributes. history an
opportunity to
correct past
credit problems.
EXISTING Can have No more than Greater than
MORTGAGE LOANS multiple 30-day 149 days 150 days
lates and two delinquent in delinquent in
60-day lates or the past 12 the past 12
one 90-day late months. Can months.
in the past 12 have multiple
months; 90-day lates or
currently not one 120 day late
more than 119 in the past 12
days late at months.
closing.
CONSUMER Consumer credit Consumer credit Consumer credit
CREDIT is fair in the last is poor in the is poor in the
12 months. The last 12 months last 12 months.
majority of the with currently The majority of
credit is not delinquent the credit is
currently accounts. Less derogatory
delinquent. Less than 60% of (more than
than 50% of credit report 60%).
credit report items Percentage of
items derogatory. derogatory items
derogatory. Generally, not a factor.
Generally, requires a Generally,
requires a minimum credit requires a
minimum credit score of 500. minimum credit
score of 530. score of 500.
BANKRUPTCY Bankruptcy Bankruptcy filed Current
filing 12 months within last 12 bankruptcy must
old, discharged months and be paid through
or dismissed discharged or loan.
prior to dismissed prior
application. to application.
DEBT Generally not to Generally not to Generally not to
SERVICE-TO- exceed 55%. exceed 60%. exceed 60%.
INCOME RATIO
MAXIMUM LOAN-
TO-VALUE RATIO:
OWNER OCCUPIED Generally 75% Generally 70% Generally 65%
for a 1 to 4 for a 1 to 4 for a 1 to 4
family dwelling. family dwelling. family dwelling.
NON-OWNER Generally 65% Generally 65% Generally 60%
OCCUPIED for a 1 to 4 for a 1 to 4 for a 1 to 4
family dwelling. family dwelling. family dwelling.
"SNAP" Underwriting Program. Under the SNAP program, ACC uses the credit
score of the borrower to determine its program eligibility and then to determine
the interest rate
8
and maximum LTV for which the borrower may qualify. Credit scores are described
in the next section, below. Generally, the minimum acceptable credit score
under the SNAP program is 500. In most cases the payment history of the
borrower under the existing mortgage loan is also taken into consideration.
Borrowers with lower credit scores generally qualify for lower maximum LTVs and
are charged higher interest rates than borrowers with higher credit scores.
The SNAP program was developed by ACC to enhance its ability to price its
loan products based on the risk of a borrower, in order to reduce subjectivity
and simplify the underwriting process. Under the SNAP program, ACC verifies each
borrower's mortgage payment history under his existing mortgage loan over the
most recent 12 months if the borrower's credit score is less than 600. The
maximum LTV allowed and the interest rate for the loan are based on the credit
score and are then adjusted based on the borrower's past mortgage payment
history. A poor mortgage payment history results in a lower maximum LTV and a
higher interest rate in order to reflect the increased risk of default. The LTV
and credit score adjustments are set forth in the chart below.
- ----------------------------------------------------------------------------------------------------
ACTUAL
CREDIT ADJUSTED CREDIT SCORE AND MAXIMUM LTV
SCORE BASED UPON MORTGAGE LATES IN PREVIOUS 12 MONTHS
- ----------------------------------------------------------------------------------------------------
4x30 and 0x60; 12x30 and 2x60;
2x30 2x30 and 1x60 12x30 and 1x90 12x60 and 1x120 1x150
- ----------------------------------------------------------------------------------------------------
700+ 600 560; 80%max LTV 550; 75%max LTV 520; 70%max LTV 500; 65%max LTV
- ----------------------------------------------------------------------------------------------------
680 600 560; 80%max LTV 550; 75%max LTV 520; 70%max LTV 500; 65%max LTV
- ----------------------------------------------------------------------------------------------------
660 600 560; 80%max LTV 550; 75%max LTV 520; 70%max LTV 500; 65%max LTV
- ----------------------------------------------------------------------------------------------------
640 600 560; 80%max LTV 550; 75%max LTV 520; 70%max LTV 500; 65%max LTV
- ----------------------------------------------------------------------------------------------------
620 600 560; 80%max LTV 550; 75%max LTV 520; 70%max LTV 500; 65%max LTV
- ----------------------------------------------------------------------------------------------------
600 600 560; 80%max LTV 550; 75%max LTV 520; 70%max LTV 500; 65%max LTV
- ----------------------------------------------------------------------------------------------------
580 580 560; 80%max LTV 550; 75%max LTV 520; 70%max LTV 500; 65%max LTV
- ----------------------------------------------------------------------------------------------------
560 560 560; 80%max LTV 550; 75%max LTV 520; 70%max LTV 500; 65%max LTV
- ----------------------------------------------------------------------------------------------------
540 540 540 540 520; 70%max LTV 500; 65%max LTV
- ----------------------------------------------------------------------------------------------------
520 520 520 520 520; 70%max LTV 500; 65%max LTV
- ----------------------------------------------------------------------------------------------------
500 500 500 500 500 500
- ----------------------------------------------------------------------------------------------------
CREDIT SCORES
"Credit scores" are obtained by many lenders in connection with mortgage
loan applications to help assess a borrower's credit-worthiness. Credit scores
are obtained from credit reports provided by various credit reporting
organizations, each of which may employ differing computer models and
methodologies. The credit score is designed to assess a borrower's credit
history at a single point, using objective information currently on file for the
borrower at a particular credit reporting organization. Information utilized to
create a credit score may include, among other things,
o payment history,
o delinquencies on accounts,
o level of outstanding indebtedness,
o length of credit history,
o types of credit, and bankruptcy experience.
A credit score purports only to be a measurement of the relative degree of
risk a borrower represents to a lender. Credit scores were not developed
specifically for use in
9
connection with mortgage loans, but for consumer loans in general; therefore,
credit scores do not take into consideration the differences between mortgage
loans and consumer loans generally. As such, there is no assurance that the
credit scores of the mortgagors will be an accurate predictor of the likelihood
of repayment of the related mortgage loans.
DOCUMENTATION
ACC's mortgage programs include several levels of documentation used to
verify the borrower's income:
o Full Documentation: The highest level of income documentation.
Generally a stable, two-year history of the income is required. A
wage-earner may document income by any of the following: a verification
of employment; the borrower's most recent two-years W-2 forms and a
current pay-stub reflecting year-to-date income; the borrower's most
recent two-years IRS Form 1040's and a year-to-date statement of
profit-and-loss; or the borrower's most recent 24-months personal bank
statements showing average monthly deposits sufficient to support the
qualifying income. A self-employed borrower may document income with
either the most recent two-years federal tax returns or bank
statements. Comparable documentation is required from self-employed
borrowers.
o Limited Documentation: For borrowers who have less than a two-year
history of stable income or who otherwise cannot meet the requirements
of the full documentation program. This program generally requires a
six-month history of stable income, together with six-months personal
bank statements to support their qualifying income.
o Stated Income: Available only for self-employed borrowers or wage
earners with "A" through "C" credit grades or a minimum 550 credit
score. The borrower's income used to qualify for the loan is taken from
the borrower's signed application and must be reasonable for the
borrower's line of work or profession. Self-employed borrowers with a
credit score between 550 and 600 must establish that their related
business has been in existence for at least six months.
REPRESENTATIONS BY ORIGINATORS AND THE TRANSFERORS
Generally, an unaffiliated originator will make certain representations
and warranties with respect to the mortgage loans, when the mortgage loans are
sold by such unaffiliated originator to the sponsor. The sponsor will make
comparable representations and warranties with respect to the mortgage loans
being transferred pursuant to the related pooling and servicing agreement or
indenture, as applicable.
Such representations and warranties generally include, among other things,
that (A) at the time of the sale by the originator of each mortgage loan and,
(B) at the time of the conveyance by the sponsor of each mortgage loan into the
related mortgage pool:
(i) the information with respect to each mortgage loan set forth in the
loan schedule and delivered upon conveyance of the mortgage loan is true
and correct as of the related cut-off date;
(ii) the proceeds of each mortgage loan have been fully disbursed and
there are no obligations to make further disbursements with respect to any
mortgage loan;
10
(iii) each mortgaged property is improved by a single, one-to four-
family residential dwelling, which may include a condominium, townhouse or
manufactured home which is permanently affixed to and treated as real
property under local law;
(iv) each mortgage loan had, at the time of origination, either an
attorney's certification of title or a title search or title policy;
(v) as of the related cut-off date, each mortgage loan is secured by a
valid and subsisting lien of record on the mortgaged property;
(vi) each originator held good and indefeasible title to, and was the
sole owner of, each mortgage loan conveyed by such originator; and
(vii) each mortgage loan was originated in accordance with law and is
the valid, legal and binding obligation of the related mortgagor, subject
to certain limitations.
Upon the discovery of a breach of a representation and/or warranty with
respect to a mortgage loan made by the sponsor under the related pooling and
servicing agreement or indenture, as applicable, after conveyance of the related
mortgage loan to a mortgage pool, the sponsor may be required to withdraw such
mortgage loan from such mortgage pool or remove such mortgage loan from the
mortgage pool and convey a substantially similar mortgage loan to the mortgage
pool in substitution therefore.
11
DESCRIPTION OF THE SECURITIES
GENERAL
Each series of bonds will be issued pursuant to an indenture between the
related trust and the entity named in the related prospectus supplement as
trustee with respect to that series. A form of indenture has been filed as an
exhibit to the registration statement of which this prospectus forms a part. The
certificates will also be issued in series pursuant to either a separate pooling
and servicing agreement or trust agreement among the seller, the servicer, if
the series relates to loans, and the trustee. A form of the pooling and
servicing agreement has been filed as an exhibit to the registration statement
of which this prospectus forms a part. A series may consist of both bonds and
certificates.
The following summaries describe the material provisions in the agreements
common to each series of securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the agreements and the prospectus supplement relating to each
series of securities. Where particular provisions or terms used in the
agreements are referred to, the actual provisions, including definitions of
terms, are incorporated in this prospectus by reference as part of the
summaries.
Each series of securities will consist of one or more classes of
securities, one or more of which may have different payment characteristics. A
series may also include one or more classes of subordinate securities. The
securities of each series will be issued only in fully registered form, without
coupons, in the authorized denominations for each class specified in the related
prospectus supplement. Upon satisfaction of the conditions, if any, applicable
to a class of a series, as described in the related prospectus supplement, the
transfer of the securities may be registered and the securities may be exchanged
at the office of the trustee specified in the prospectus supplement without the
payment of any service charge other than any tax or governmental charge payable
in connection with the registration of transfer or exchange. If specified in the
related prospectus supplement, one or more classes of a series may be available
in book-entry form only.
Unless otherwise specified in the related prospectus supplement,
distributions or payments, as applicable, on securities will be made only from
the assets of the related trust or trust estate, as applicable, and the
securities will not represent interests in or obligations of the sponsor, the
servicer, the trustee, any originator or any other person. The assets of each
trust or trust estate, as applicable, will consist of one or more of the
following, to the extent set forth in the related prospectus supplement:
o mortgage loans that from time to time are subject to the related
pooling and servicing agreement or indenture, as applicable;
o the assets of the trust or the trust estate that from time to time are
required by the pooling and servicing agreement or indenture, as
applicable, to be deposited in the certificate account or bond account,
as applicable, the collection account and any other accounts, which are
collectively called accounts, or invested in permitted investments;
o property and any proceeds from such property acquired by foreclosure;
o any financial guaranty insurance policy;
o any insurance policy relating to a mortgage loan;
12
o any bankruptcy bond;
o any funds on deposit in any reserve account; and
o all rights under any other insurance policies, guarantees, surety
bonds, letters of credit or other credit enhancement.
Payments of principal of and interest on a series of securities will be
made on the distribution dates specified in the related prospectus supplement,
which may be different for each class or for the payment of principal and
interest. Payments will be made by check mailed to holders of the applicable
series, registered at the close of business on the record date specified in the
related prospectus supplement applicable to that distribution date at their
addresses appearing on the security register. However payments may be made by
wire transfer which shall be at the expense of the holder requesting payment by
wire transfer in the circumstances described in the related prospectus
supplement. In addition, the final payment of principal in retirement of each
security will be made only upon presentation and surrender of that security at
the office of the trustee specified in the prospectus supplement. Notice of the
final payment on a security will be mailed to the holder of that security before
the distribution date on which the final principal payment is expected to be
made to the holder of that security.
Payments of principal of and interest on the securities will be made by the
trustee, or a paying agent on behalf of the trustee, as specified in the related
prospectus supplement. All payments with respect to the mortgage loans for a
series, amounts withdrawn from any reserve fund, and amounts available pursuant
to any other credit enhancement will be deposited directly into the collection
account or the certificate account. If provided in the related prospectus
supplement, the deposited amounts may be net of amounts payable to the servicer
and any other person specified in the prospectus supplement. These amounts may
subsequently be deposited into the certificate account and will be available to
make payments on the securities of the applicable series on the next applicable
distribution date.
BOOK-ENTRY SECURITIES
If specified in the related prospectus supplement, one or more classes of
securities may be issued in book-entry form. Persons acquiring beneficial
ownership interests in the book-entry securities will hold their securities
through the Depository Trust Company in the United States, or Clearstream,
Luxembourg or the Euroclear System in Europe if they are participants of those
systems, or indirectly through organizations which are participants in those
systems. The Depository Trust Company is referred to as DTC. The book-entry
securities will be issued in one or more certificates which equal the aggregate
principal balance of the applicable class or classes of securities and will
initially be registered in the name of Cede & Co., the nominee of DTC, referred
to as Cede. Clearstream, Luxembourg and Euroclear will hold omnibus positions on
behalf of their participants through customers' securities accounts in
Clearstream, Luxembourg and Euroclear's names on the books of their respective
depositaries which in turn will hold the omnibus positions in customers'
securities accounts in the depositaries' names on the books of DTC. Citibank
N.A. will act as depositary for Clearstream, Luxembourg and The Chase Manhattan
Bank will act as depositary for Euroclear. Except as described below, no person
acquiring a book-entry security will be entitled to receive a physical
certificate representing that security, called a "definitive security". Unless
and until definitive securities are issued, it is anticipated that the only
"certificateholder" or noteholder, as applicable, will be Cede & Co., as nominee
of DTC. Owners are only permitted to exercise their rights indirectly through
participants and DTC.
13
Ownership of a book-entry security will be recorded on the records of the
brokerage firm, bank, thrift institution or other financial intermediary that
maintains the beneficial owner's account for that purpose. In turn, the
financial intermediary's ownership of that book-entry security will be recorded
on the records of DTC, or of a participating firm that acts as agent for the
financial intermediary, whose interest will in turn be recorded on the records
of DTC, if the beneficial owner's financial intermediary is not a DTC
participant and on the records of Clearstream, Luxembourg or Euroclear, as
appropriate.
Owners will receive all distributions of principal of, and interest on, the
book-entry securities from the trustee through DTC and DTC participants. While
the book-entry securities are outstanding, except under the circumstances
described below, under the rules, regulations and procedures creating and
affecting DTC and its operations, DTC is required to make book-entry transfers
among participants on whose behalf it acts with respect to the securities and is
required to receive and transmit distributions of principal of, and interest on,
the securities. Participants and indirect participants with whom beneficial
owners have accounts with respect to securities are similarly required to make
book-entry transfers and receive and transmit distributions on behalf of their
respective owners. Accordingly, although owners will not possess certificates,
the rules provide a mechanism by which owners will receive distributions and
will be able to transfer their interests.
Beneficial owners will not receive or be entitled to receive certificates
representing their respective interests in the securities, except under the
limited circumstances described below. Unless and until definitive securities
are issued, beneficial owners who are not participants may transfer ownership of
securities only through participants and indirect participants by instructing
those participants and indirect participants to transfer securities, by
book-entry transfer, through DTC for the account of the purchasers of those
securities, which account is maintained with their respective participants.
Under the rules of DTC, 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 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. Those credits or any
transactions in the securities settled during processing will be reported to the
relevant Euroclear or Clearstream, Luxembourg participants on that 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.
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 by DTC in accordance with DTC rules
14
on behalf of the relevant European international clearing system by the
relevant depositary; however, those cross market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in that system in accordance with its rules and procedures
and within its established European time deadlines. 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 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.
ClearstreamBanking, Societe anonyme, Luxembourg, formerly Cedelbank and
which we call Clearstream, Luxembourg, has advised that it is incorporated under
the laws of the Grand Duchy of Luxembourg as a professional depository.
Clearstream, Luxembourg holds securities for its participating organizations and
facilitates the clearance and settlement of securities transactions between
Clearstream, Luxembourg participants through electronic book-entry changes in
accounts of Clearstream, Luxembourg participants, thus eliminating the need for
physical movement of certificates. 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
Commission for the Supervision of the Financial Sector. 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.
Distributions, to the extent received by the relevant depositary for
Clearstream, Luxembourg, with respect to the Securities held beneficially
through Clearstream, Luxembourg will be credited to cash accounts of
Clearstream, Luxembourg participants in accordance with its rules and
procedures.
Euroclear has advised that it was created in 1968 to hold securities for
its participants and to clear and settle transactions between Euroclear
participants through simultaneous electronic book-entry delivery against
payment, thus eliminating the need for physical movement of certificates and
eliminating any risk from lack of simultaneous transfers of securities and cash.
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
15
operated by Euroclear Bank S.A./NV, under contract with Euroclear Clearance
Systems S.C., a Belgian cooperative corporation. All operations are conducted
by Euroclear Bank S.A./NV, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with Euroclear Bank S.A./NV, not Euroclear
Clearance Systems S.C. Euroclear Clearance Systems S.C. establishes policy for
Euroclear on behalf of Euroclear participants. Euroclear Participants include
banks, including central banks, securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial
relationship with a Euroclear participant, either directly or indirectly.
Euroclear Bank S.A./NV has advised us that it is licensed by the Belgian
Banking and Finance Commission to carry out banking activities on a global
basis. As a Belgian bank, it is regulated and examined by the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with Euroclear Bank S.A./NV
are governed by the Terms and Conditions Governing Use of Euroclear and the
related operating procedures of the Euroclear System and applicable Belgian law.
Terms and conditions and the related operating procedures 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. Euroclear Bank
S.A./NV acts under the terms and conditions and the related operating procedures
only on behalf of Euroclear participants, and has no record of or relationship
with persons holding through Euroclear participants.
Distributions, to the extent received by the relevant depositary for
Euroclear, with respect to Securities held beneficially through Euroclear will
be credited to the cash accounts of Euroclear participants in accordance with
the terms and conditions.
Distributions on the book-entry securities will be made on each
distribution date by the trustee to DTC. DTC will be responsible for crediting
the amount of these payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing these payments to the beneficial owners of the
book-entry securities that it represents and to each financial intermediary for
which it acts as agent. Each financial intermediary will be responsible for
disbursing funds to the beneficial owners of the book-entry securities that it
represents.
Under a book-entry format, beneficial owners of the book-entry securities
may experience some delay in their receipt of payments, since payments will be
forwarded by the trustee to Cede. Distributions with respect to securities held
through Clearstream, Luxembourg or Euroclear will be credited to the cash
accounts of Clearstream, Luxembourg participants or Euroclear participants in
accordance with the relevant system's rules and procedures, to the extent
received by the relevant depositary. These distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Because DTC can only act on behalf of financial intermediaries, the ability of a
beneficial owner to pledge book-entry securities to persons or entities that do
not participate in the depository system, or otherwise take actions in respect
of book-entry securities, may be limited due to the lack of physical
certificates for book-entry securities. In addition, issuance of the book-entry
securities in book-entry form may reduce the liquidity of these securities in
the secondary market since potential investors may be unwilling to purchase
securities for which they cannot obtain physical certificates.
16
Monthly and annual reports on the applicable trust fund 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 beneficial owners' book-entry
securities are credited.
DTC has advised the trustee that, unless and until definitive securities
are issued, DTC will take any action permitted to be taken by the holders of the
book-entry securities under the applicable agreement only at the direction of
one or more financial intermediaries to whose DTC accounts the book-entry
securities are credited, to the extent that these actions are taken on behalf of
financial intermediaries whose holdings include book-entry securities.
Clearstream, Luxembourg or Euroclear Bank S.A./NV, as the case may be, will take
any other action permitted to be taken by a holder under the applicable
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 actions on its
behalf through DTC. DTC may take actions, at the direction of the related
participants, with respect to some securities which conflict with actions taken
with respect to other securities.
Definitive securities will be issued to beneficial owners of book-entry
securities, or their nominees, rather than to DTC, only if:
o DTC or the sponsor advises the trustee in writing that DTC is no longer
willing, qualified or able to discharge properly its responsibilities
as nominee and depository with respect to the book-entry securities and
the sponsor or the trustee is unable to locate a qualified successor,
or
o the sponsor, at its sole option, with the consent of the trustee,
elects to terminate a book-entry system through DTC.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will be required to notify all beneficial
owners of the occurrence of the event and the availability through DTC of
definitive securities. Upon surrender by DTC of the global certificate or
certificates representing the book-entry securities and instructions for
re-registration, the trustee will issue definitive securities, and thereafter
the trustee will then recognize the holders of the definitive securities as
certificateholders or bondholders, as applicable, under the applicable
agreement.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of securities among
participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform these procedures and the procedures
may be discontinued at any time.
None of the sponsor, the servicer nor the trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the book-entry securities held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to beneficial ownership interests.
DISTRIBUTIONS AND PAYMENTS ON SECURITIES
Unless otherwise specified in the related prospectus supplement or
indenture, distributions or payments of principal and interest on the related
certificates or bonds, as applicable, will be made by the trustee on each
distribution date or payment date, as
17
applicable, specified in the related prospectus supplement or indenture, in the
amounts specified in the related prospectus supplement or indenture.
Distributions or payments will be made to the persons in whose names the
securities are registered at the close of business on the record dates
specified in the prospectus supplement or indenture. Distributions or payments
will be made by check mailed to the persons entitled thereto at the address
appearing in the register maintained for securityholders or, to the extent
described in the related prospectus supplement, by wire transfer or by such
other means as are described therein, except that the final distribution or
payment 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 final distribution notice to securityholders.
With respect to a given series of certificates, each class of certificates
within such series will evidence the interests specified in the related
prospectus supplement. The prospectus supplement for each series of securities
will describe the method to be used in determining the amount of distributions
or payments, as applicable, on the securities of such series.
Distributions or payments allocable to principal and interest on the
securities of a series will be made by the trustee out of, and only to the
extent of, funds in a segregated account established and maintained by the
trustee for the deposits of such amounts which is called the certificate
account, with respect to certificates, and the bond account, with respect to
bonds. Unless otherwise specified in the prospectus supplement relating to a
given series of securities, distributions or payments, as applicable, on the
securities of any class of a series will be made pro rata to all related
securityholders of that class.
AVAILABLE FUNDS
All distributions or payments on the securities of each series on any
distribution date or payment date will be made from the funds available for
distribution or payment, as applicable, on such distribution date or payment
date in accordance with the terms described in the related prospectus
supplement. Unless otherwise specified in the related prospectus supplement,
such funds, called available funds, will consist of the following amounts:
(a) all payments of principal, including principal prepayments, if any,
and prepayment penalties, if so provided in the related prospectus
supplement, and interest on the mortgage loans in the related mortgage
pool, received by the servicer during the related collection period other
than:
o all payments which were due before the cut-off date;
o late payment fees and other amounts retained by the servicer as
additional compensation;
o reimbursements for advances made by the servicer;
o that portion of each collection of interest to be retained by the
servicer as servicing compensation; and
o trustee fees and expenses or other fees payable out of the
related trust or trust estate;
(b) net liquidations proceeds and insurance proceeds;
(c) the amount of any monthly advance or compensating interest payment
made by the servicer and deposited in the certificate account or bond
account; and
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(d) if applicable, amounts withdrawn from a reserve account or a
prefunding account or received in connection with other credit enhancement.
PAYMENTS OF INTEREST
The securities of each class by their terms entitled to receive interest
will bear interest calculated on the basis of a 360-day year and either the
actual number of days in the applicable accrual period or twelve 30-day months,
from the date and at the rate per annum specified, or calculated in the method
described, in the related prospectus supplement. Interest on the securities of
a series will be payable on the distribution date specified in the related
prospectus supplement. If so specified in the related prospectus supplement,
the distribution date for the payment of interest of a class may be different
from, or occur more or less frequently than, the distribution date for the
payment of principal of that class. Interest will accrue on the principal
balance or notional balance of the securities entitled to interest, at a fixed
rate or variable rate and for the periods specified in the related prospectus
supplement. Principal only securities may not be entitled to receive any
interest distributions or may be entitled to receive only nominal interest
distributions. Any interest on zero coupon securities that is not paid on the
related distribution date will accrue and be added to the principal of the
applicable zero coupon security on the related distribution date.
Interest payable on the securities on a distribution date will include all
interest accrued during the period specified in the related prospectus
supplement. In the event interest accrues during the calendar month preceding a
distribution date, the effective yield to holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the securities were to
accrue through the day immediately preceding the related distribution date.
PAYMENTS OF PRINCIPAL
On each distribution date for a series, principal payments will be made to
the holders of the securities of that series on which principal is then payable,
to the extent set forth in the related prospectus supplement. Payments will be
made in an aggregate amount as specified in the related prospectus supplement
and will be allocated among the respective classes of a series in the manner, at
the times and in the priority set forth in the related prospectus supplement. If
so specified in the related prospectus supplement, the distribution date for the
payment of principal of a class may be different from, or occur more or less
frequently than, the distribution date for the payment of interest for the
class.
The timing and amounts of distributions allocable to interest and principal
and, if applicable, principal prepayments and scheduled payments of principal,
to be made on any distribution date may vary among classes over time, or
otherwise, as specified in the prospectus supplement.
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REPORTS TO SECURITYHOLDERS
Except as otherwise set forth in the related prospectus supplement, on or
before each distribution date or payment date each securityholder of record of
the related series of securities will be entitled to receive a statement setting
forth, to the extent applicable to such series, the following information with
respect to the related distribution date or payment date:
(a) the amount of principal distributed to holders of the related
securities and the outstanding principal balance of the securities
following the distribution;
(b) the amount of interest distributed to holders of the related
securities and the current interest on the securities;
(c) the amounts of
o any overdue accrued interest included in the distribution,
o any remaining overdue accrued interest with respect to the
securities or
o any current shortfall in amounts to be distributed as accrued
interest to holders of the securities;
(d) the amounts of
o any overdue payments of scheduled principal included in the
distribution,
o any remaining overdue principal amounts with respect to the
related securities,
o any current shortfall in receipt of scheduled principal payments
on the related mortgage loans or
o any realized losses to be allocated as reductions in the
outstanding principal balances of the related securities;
(e) the amount received under any related credit enhancement, the
remaining amount available under that credit enhancement and the amount
reimbursed to the enhancer, if any;
(f) if applicable with respect to a given series of securities, the
aggregate amount
o otherwise allocable to the subordinated securityholders on such
distribution date and
o withdrawn from a reserve account, if any, that is included in the
amounts distributed with respect to senior securities;
(g) the aggregate outstanding principal balance of the mortgage loans,
on the distribution date or payment date, and that amount expressed as a
percentage of the cut-off date principal balance;
(h) if applicable with respect to a given series of certificates, the
percentage of principal payments on the mortgage loans, if any, which each
class will be entitled to receive on the following distribution date;
(i) for any variable rate security, the related interest applicable to
the distribution on the distribution date or payment date, as applicable;
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(j) the number and aggregate principal balance of mortgage loans in the
related mortgage pool that were delinquent
o one month,
o two months and
o three or more months
as of the end of the related collection period;
(k) the number and aggregate principal balance of all mortgage loans in
foreclosure or other similar proceedings, and the value of any real estate
acquired through foreclosure or grant of a deed in lieu of foreclosure;
(l) if applicable, the amount remaining in any reserve account or the
amount remaining of any other credit support, after giving effect to the
distribution or payment, as applicable, on the distribution date or payment
date, as applicable;
(m) if applicable, during the funding period, the remaining prefunding
amount and the portion of the prefunding amount used to acquire additional
mortgage loans since the preceding distribution date or payment date as
applicable;
(n) if applicable, during the funding period, the amount remaining in
the capitalized interest account; and
(o) the amount of monthly advances, servicing advances and/or
compensating interest payments, if any, made since the preceding
distribution date or payment date, as applicable.
Where applicable, any amount set forth above may be expressed as a dollar
amount of the related securities having the denomination or interest specified
either in the related prospectus supplement or in the report to securityholders.
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 person who was a
securityholder of record at any time during such calendar year (a) a report as
to the aggregate of amounts reported pursuant to (i) and (ii) above for such
calendar year or, in the event such person was a securityholder of record during
a portion of such calendar year, for the applicable portion of such year and (b)
such other customary information as may be deemed necessary or desirable for
securityholders to prepare their tax returns.
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CREDIT ENHANCEMENT
The amounts and types of credit enhancement arrangements and the provider
of credit enhancement, if applicable, with respect to a series or any class of
securities will be set forth in the related prospectus supplement. If specified
in the applicable prospectus supplement, credit enhancement for any series of
securities may cover one or more classes of bonds or certificates, and
accordingly may be exhausted for the benefit of a particular class of bonds or
certificates and subsequently be unavailable to other classes of bonds or
certificates. Further information regarding any provider of credit enhancement,
including financial information when material, will be included in the related
prospectus supplement.
If and to the extent provided in the related prospectus supplement, credit
enhancement may include one or more of the following or any combination of the
following:
o Financial Guaranty Insurance Policy which will be issued by a monoline
insurance company and which, subject to the terms of the policy, will
guarantee timely payment of interest on, and ultimate, as opposed to
timely, payment of principal of, the applicable class or classes of
securities;
o Overcollateralization which will equal the excess of the aggregate
principal balance of the mortgage loans over the aggregate principal
balance of the securities. Overcollateralization may take the form of
the initial or subsequent deposit of mortgage loans to create this
excess or may build over time from the application of excess cash
amounts generated by the mortgage loans to accelerate the amortization
of the applicable class or classes of securities;
o Crosscollateralization in which certain excess available funds with
respect to one group of securities will be available to cover certain
shortfalls and to create overcollateralization with respect to the
securities in another group of securities within 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 such cross-support feature;
o Letter of Credit which will be issued by a bank or other financial
institution in a maximum amount which may be permanently reduced as
draws are made or may be replenished as previous draws are repaid from
excess cash amounts generated by the mortgage loans. Draws may be made
to cover shortfalls generally in collections, with respect to
particular types of shortfalls such as those due to particular types of
losses or with respect to specific situations such as shortfalls in
amounts necessary to pay current interest;
o Cash Reserve Fund which may be partially or fully funded on the date of
issuance or may be funded over time from excess cash amounts generated
by the mortgage loans. Withdrawals may be made in circumstances similar
to those for which draws may be made on a letter of credit;
o Insurance Policies which may insure a portion of the loans or
underlying loans against credit losses, bankruptcy losses, fraud losses
or special hazard losses not covered by typical homeowners insurance
policies;
o Subordinate securities which will be subordinated in the right to
receive distributions to one or more other classes of securities of the
same series, some or all of which may themselves be subordinated to
other classes of that series. Subordination may be
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with respect to distributions of interest, principal or both. In
addition, all or portions of particular types of losses on the mortgage
loans may be allocated to one or more classes of the subordinate
securities prior to the allocation of those losses to other classes of
subordinate certificates and/or the senior securities of the applicable
series; or
o Derivative Products which may include a swap to convert floating or
fixed rate payments, as applicable, on the mortgage loans into fixed or
floating rate payments, as applicable, on the securities or a cap or
floor agreement intended to provide protection against changes in
floating rates of interest payable on the mortgage loans and/or the
securities. Any derivative product will constitute or will be
structured so as to be an insurance policy or an exempt security.
The presence of credit enhancement is intended to increase the likelihood
of receipt by the certificateholders and the bondholders of the full amount of
principal and interest due on the applicable certificates and bonds and to
decrease the likelihood that the certificateholders and the bondholders will
experience losses, or may be structured to provide protection against changes in
interest rates or against other risks, to the extent and under the conditions
specified in the related prospectus supplement. The credit enhancement for a
class of securities generally will not provide protection against all risks of
loss and may not guarantee repayment of the entire principal and interest on a
class of securities. If losses occur which exceed the amount covered by any
credit enhancement or which are not covered by any credit enhancement,
securityholders will bear their allocable share of deficiencies. In addition, if
a form of credit enhancement covers more than one class of securities of a
series, securityholders of that class will be subject to the risk that the
credit enhancement will be exhausted by the claims of securityholders of other
classes.
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THE POOLING AND SERVICING AGREEMENT
Set forth below is a summary of the material provisions of each pooling and
servicing agreement that are not described elsewhere in this prospectus. The
summary does not purport to describe all provisions of each pooling and
servicing agreement, and is subject to, and qualified in its entirety by
reference to, the provisions of each pooling and servicing agreement. Where
provisions or terms used in a particular pooling and servicing agreement are
different than as described herein, a description of such provisions or terms
will be included in the related prospectus supplement.
The mortgage loans to be included in a mortgage pool for a series of bonds
will be assigned to the trustee pursuant to provisions included in the related
indenture that are substantially the same as, and the obligations of the sponsor
(or the related bond issuer, if a different entity, to the extent described in
the related prospectus supplement), and the trustee with respect to the mortgage
loans so conveyed will be substantially similar to, those described under " --
Assignment of mortgage loans" below. In addition, the mortgage loans included in
a mortgage pool for a series of bonds will be serviced pursuant to the terms of
a servicing agreement and any such servicing agreement will contain provisions
governing the servicing of such mortgage loans that are substantially similar to
the provisions included in each pooling and servicing agreement relating to
servicing and collection procedures with respect to the related mortgage loans
as described below. We refer you to "The Indenture -- General" herein.
ASSIGNMENT OF MORTGAGE LOANS
Transfer of the Mortgage Loans. At the time of issuance of the securities
of a series, the sponsor will transfer, convey and assign to the trust all
right, title and interest of the sponsor in the mortgage loans and other
property to be transferred to the trust for a series. An assignment will include
all principal and interest due or received on or with respect to the mortgage
loans after the cut-off date to the extent specified in the related prospectus
supplement, except for any retained interests. The trustee will, concurrently
with an assignment, execute and deliver the securities.
The sponsor will, as to each loan, deliver or cause to be delivered to the
trustee, or, as specified in the related prospectus supplement a custodian on
behalf of the trustee,
o the mortgage note endorsed without recourse to the order of the trustee
or in blank,
o the original mortgage with evidence of recording indicated thereon,
except for any mortgage not returned from the public recording office,
in which case the sponsor will certify that the original of such
mortgage was delivered to such recording office,
o an assignment of the mortgage in recordable form,
o all assumption, modification and substitution agreements, if any, in
those instances where the terms or provisions of a mortgage have been
modified or a mortgage note has been assumed,
o all intervening mortgage assignments with evidence of recording
sufficient to show a complete chain of assignment from the originator
of the mortgage loan to the related transferor, and
o the original lender's title insurance policy.
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The trustee or the custodian, will hold such documents in trust for the benefit
of the holders.
The sponsor will, at the time of issuance of the securities, cause
assignments to the trustee of the mortgages relating to the loans for a series
to be recorded in the appropriate public office for real property records,
except in states where, in the opinion of counsel acceptable to the trustee,
recording is not required to protect the trustee's interest in the related loans
or as to which the rating agencies advise that the omission to record therein
will not affect the ratings of the Securities. If specified in the related
prospectus supplement, the sponsor will cause assignments to the trustee to be
so recorded within the time after issuance of the securities as is specified in
the related prospectus supplement, in which event the applicable agreement may
require the sponsor to repurchase from the trustee any loan the related mortgage
of which is not recorded within the specified time, at the price described below
with respect to repurchases by reason of defective documentation. The
enforcement of the repurchase obligation would constitute the sole remedy
available to the holders or the trustee for the failure of a mortgage to be
recorded.
Each loan will be identified in a schedule appearing as an exhibit to the
related agreement. This schedule will specify with respect to each loan:
o the original principal amount and unpaid principal balance as of the
cut-off date;
o the current interest rate;
o the current scheduled payment of principal and interest;
o the maturity date, if any, of the related mortgage note; and
o if the loan is an adjustable rate loan, the lifetime rate cap, if any,
and the index.
Review of the mortgage file. The trustee will review each mortgage file
within 45 days after the closing date to determine if the documents described
above have been executed and received, and that such documents relate to the
mortgage loans in the loan schedule.
If within such 45-day period the trustee finds that any document
constituting a part of a mortgage file is not properly executed, has not been
received or is unrelated to the mortgage loans identified in the related loan
schedule, or that any mortgage loan does not conform in a material respect to
the description thereof as set forth in the related loan schedule, the trustee
will be required to promptly notify the sponsor of any defect. The sponsor will
use reasonable efforts to remedy a material defect in a document constituting
part of a mortgage file within 60 days after the trustee's notice. Thereafter,
the trustee shall also certify that it has received all of the documents
referred to above and that all corrections or curative actions required to be
taken by the sponsor within the 60-day period have been completed or effected,
or that the related mortgage loans will be withdrawn or substituted, as
specified below.
Repurchase and substitution of non-conforming mortgage loans. If any
document in the file relating to the mortgage loans delivered by the sponsor to
the trustee, or custodian, is found to be defective in any material respect and
the sponsor does not cure that defect within 60 days, or within any other period
specified in the related prospectus supplement, the sponsor will, not later than
60 days or within any other period specified in the related prospectus
supplement, after the trustee's notice to the sponsor of the defect, repurchase
the related mortgage loan or any property acquired in respect of the mortgage
loan from the trustee at a price equal to the outstanding principal balance of
the mortgage loan and accrued and unpaid interest to the date of the
repurchase/substitution of the mortgage loan at the rate set forth in the
related agreement.
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The sponsor, may, rather than repurchase the mortgage loan as described
above, remove the mortgage loan from the trust fund and substitute in its place
one or more other mortgage loans provided, however, that:
(a) with respect to a trust fund for which no REMIC election is made,
the substitution must be effected within 90 days of the date of initial
issuance of the securities and
(b) with respect to a trust fund for which a REMIC election is made,
the substitution must be effected within a specified time period, and the
trustee must have received a satisfactory opinion of counsel that the
substitution will not cause the trust fund to lose its status as a REMIC or
otherwise subject the trust fund to a prohibited transaction tax.
Any substitute mortgage loan will have, on the date of substitution,
o an outstanding principal balance, after deduction of all
scheduled payments due in the month of substitution, not in
excess of and not substantially less than the outstanding
principal balance of the deleted mortgage loan, the amount of any
shortfall to be deposited to the collection account in the month
of substitution for distribution to holders,
o an interest rate not less than, and not more than 1% greater
than, the interest rate or margin of the removed mortgage loan,
o a remaining term-to-stated maturity neither one year or more
greater than, nor one year or more less than, that of the removed
mortgage loan, and
o will comply with all of the representations and warranties set
forth in the applicable agreement as of the date of substitution.
The above-described cure, repurchase or substitution obligations constitute
the sole remedies available to the holders or the trustee for a material defect
in a document for a mortgage loan.
The sponsor will make representations and warranties with respect to
mortgage loans for a series. If the sponsor cannot cure a breach of any of the
representations and warranties in all material respects within the time period
specified in the related prospectus supplement after notification by the trustee
of the breach, and if the breach is of a nature that materially and adversely
affects the value of the mortgage loan, the sponsor is obligated to repurchase
the affected mortgage loan or, if provided in the related prospectus supplement,
provide a substitute mortgage loan for the affected mortgage loan, subject to
the same conditions and limitations on purchases and substitutions as described
above.
PAYMENTS ON THE MORTGAGE LOANS
Unless otherwise specified in the related prospectus supplement, the
pooling and servicing agreement will require the servicer to establish and
maintain a collection account. The servicer will deposit all collections related
to the mortgage loans into the collection account no later than the second
business day after receipt. All funds in the collection accounts will be
invested in as permitted investments, as described below.
The servicer may make withdrawals from the collection account only for the
following purposes:
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(a) to make deposits into the certificate account;
(b) to pay itself any monthly servicing fees;
(c) to make any servicing advance or to reimburse itself for any
servicing advance or monthly advance previously made;
(d) to withdraw amounts that have been deposited to the collection
account in error; and
(e) to clear and terminate the collection account.
Unless otherwise specified in the related prospectus supplement, not later
than the third day prior to any distribution date, which date is called the
deposit date, the servicer will transfer to the certificate account all
available funds in the collection account.
INVESTMENT OF ACCOUNTS
Unless otherwise specified in the related prospectus supplement, amounts
in any account may be invested and reinvested in one or more investments,
called permitted investments. No investment in the collection account may
mature later than the deposit date next succeeding the date of investment. The
trustee will not in any way be held liable by reason of any insufficiency in
any account resulting from any loss on any permitted investment included
therein. Unless otherwise specified in the related prospectus supplement, all
income or other gain from investments in any account will be held in such
account for the benefit of the servicer and will be subject to withdrawal from
time to time as permitted by the related pooling and servicing agreement.
Unless otherwise specified in the related prospectus supplement, each
pooling and servicing agreement will define "permitted investments" generally
as follows:
(a) Direct general obligations of the United States or the obligations
of any agency or instrumentality of the United States, the timely payment
or the guarantee of which constitutes a full faith and credit obligation of
the United States.
(b) Federal Housing Administration debentures, but excluding any such
securities whose terms do not provide for payment of a fixed dollar amount
upon maturity or call for redemption.
(c) Federal Home Loan Mortgage Corporation senior debt obligations, but
excluding any such securities whose terms do not provide for payment of a
fixed dollar amount upon maturity or call for redemption.
(d) Fannie Mae senior debt obligations, but excluding any such
securities whose terms do not provide for payment of a fixed dollar amount
upon maturity or call for redemption.
(e) Federal funds, certificates of deposit, time and demand deposits,
and bankers' acceptances (having original maturities of not more than 365
days) of any domestic bank or trust company, the short-term debt
obligations of which have been assigned a minimum rating specified in the
related pooling and servicing agreement by the applicable rating agency.
(f) Deposits of any bank or savings and loan association which has
combined capital, surplus and undivided profits of at least $50,000,000
which deposits are not in
27
excess of the applicable limits insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation, provided that the long-term deposits of such bank or savings
and loan association are assigned a minimum rating specified in the related
pooling and servicing agreement by the applicable rating agency.
(g) Commercial paper, having original maturities of not more than 180
days, assigned a minimum rating specified in the related pooling and
servicing agreement by the applicable rating agency.
(h) Investments in money market funds assigned a minimum rating
specified in the related pooling and servicing agreement by the applicable
rating agency.
(i) Other investments acceptable to the applicable rating agency.
No instrument described above may evidence either the right to receive only
interest with respect to obligations underlying such instrument or both
principal and interest payments derived from obligations underlying such
instrument where the interest and principal payments with respect to such
instrument provided a yield to maturity at par greater than 120% of the yield to
maturity at par of the underlying obligations, and no instrument described above
may be purchased at a price greater than par if such instrument may be prepaid
or called at a price less than its purchase price prior to stated maturity.
ADVANCES AND COMPENSATING INTEREST
The related prospectus supplement will describe the circumstances, if any,
under which the servicer will make advances with respect to delinquent payments
of principal and/or interest on loans. If specified in the related prospectus
supplement, the servicer will be obligated to make monthly advances, and this
obligation may be limited in amount, or may not be activated until a certain
portion of a specified reserve fund is depleted. Monthly advances are intended
to provide liquidity and, except to the extent specified in the related
prospectus supplement, not to guarantee or insure against losses. Accordingly,
to the extent specified in the related prospectus supplement, any funds advanced
are recoverable by the servicer out of amounts received on particular loans
which represent late recoveries of principal or interest, proceeds of insurance
policies or liquidation proceeds respecting which any monthly advance was made
or, to the extent provided in the prospectus supplement, from payments or
proceeds from other loans. If and to the extent specified in the related
prospectus supplement, the servicer will advance its own funds to pay for any
related expenses of foreclosure and disposition of any liquidated loan or
related property. The servicer will be entitled to be reimbursed for any
advances by the servicer to the extent provided in the prospectus supplement. If
an advance by the servicer is made and subsequently determined to be
nonrecoverable from late collections, proceeds of insurance policies, or
liquidation proceeds from the related loan, the servicer will be entitled to
reimbursement from other funds in the collection account, certificate account or
distribution account, as the case may be, or from a specified reserve fund as
applicable, to the extent provided in the prospectus supplement.
With respect to any mortgage loan that is liquidated or otherwise charged
off during a collection period, if specified in the related prospectus
supplement, the servicer will be obligated to pay, from amounts otherwise
payable to the servicer as the servicing fee, any difference between the
scheduled interest on such mortgage loan and the portion of the
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liquidation proceeds applied to interest for the month of liquidation to the
date of liquidation. This amount is referred to as compensating interest. The
servicer will not be entitled to be reimbursed for any payments of compensating
interest. If the servicing fee in respect of such collection period is
insufficient to make the entire required compensating interest payment, the
resulting shortfall will reduce the amount of interest payable to the
securityholders on such distribution date and such reduction will not be
recoverable thereafter.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Unless otherwise specified in the related prospectus supplement, the
servicer is required to foreclose upon or otherwise comparably effect the
ownership of mortgaged properties as come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In connection with such foreclosure or other conversion, the servicer
is required to exercise or use foreclosure procedures with the same degree of
care and skill as it would ordinarily exercise or use under the circumstances in
the conduct of its own affairs. Any amounts advanced in connection with such
foreclosure or other action will constitute servicing advances.
In the case of a trust for which a REMIC election has been made, the
servicer generally will be required to liquidate any mortgaged property within
three years of its acquisition by the trustee. Unless otherwise specified in the
related prospectus supplement, the sponsor or the servicer may have the right
and the option to reacquire for its own account any Mortgage Loan which becomes
delinquent.
GENERAL SERVICING PROCEDURES
The servicer will service the mortgage loans, either directly or through
sub-servicers, in accordance with the provisions of each related pooling and
servicing agreement and the policies and procedures customarily employed by the
servicer in servicing other comparable mortgage loans. Servicing includes, but
is not limited to, loan processing, customer service, remittance handling,
collections and liquidations.
The servicer, or any sub-servicer, will:
(i) execute and deliver any and all instruments of satisfaction,
cancellation, release or discharge of the mortgage loans,
(ii) foreclosure on any mortgaged property and
(iii) hold title in its own name to any mortgaged property upon such
foreclosure.
During a foreclosure, any expenses incurred by the servicer are added to
the amount owed by the mortgagor. Upon completion of the foreclosure, the
property is sold to an outside bidder, or will be passed to the mortgagee and
liquidated. Servicing and charge-off policies and collection practices may
change over time.
SUB-SERVICERS
The servicer is permitted to enter into sub-servicing arrangements with
certain mortgage servicing institutions, known as sub-services. Any such
sub-servicing arrangements will not relieve the servicer of any liability
associated with servicing the mortgage loans. Compensation for the services of
the sub-servicer with respect to the mortgage loans will be paid by the
servicer.
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SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The servicer will be entitled to a periodic fee as servicing compensation
in an amount to be determined as specified in the related prospectus supplement.
The servicing fee may be fixed or variable, as specified in the related
prospectus supplement. In addition, the servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of property in connection with
defaulted loans.
The servicer will pay the expenses incurred in connection with the
servicing of the loans, and will also pay the fees and expenses of the trustee
and independent accountants, insurance policy premiums and the cost of credit
support, if any, and expenses incurred in preparation of reports to holders.
The servicer will be entitled to reimbursement for servicing advances by
the servicer. The related holders will suffer no loss by reason of these
servicing advances to the extent expenses are covered under related insurance
policies or from excess liquidation proceeds. If claims are either not made or
paid under the applicable insurance policies or if coverage under the applicable
insurance policies has been exhausted, the related holders will suffer a loss to
the extent that liquidation proceeds, after reimbursement of the servicing
advances by the servicer, are less than the outstanding principal balance of and
unpaid interest on the related loan which would be distributable to holders. The
servicer is generally also entitled to reimbursement from the collection account
for servicing advances by the servicer. In addition, the servicer will be
entitled to reimbursement for monthly advances as described above under "--
Advances and compensating interest."
The rights of the servicer to receive funds from the collection account for
a series, whether as the servicing fee or other compensation, or for the
reimbursement of delinquency advances and servicing advances by the servicer,
expenses or otherwise, are not subordinate to the rights of holders of that
series.
In addition, a sub-servicer may be entitled to a monthly servicing fee in a
minimum amount set forth in the related prospectus supplement. The sub-servicer
may also be entitled to collect and retain, as part of its servicing
compensation, any late charges or prepayment penalties provided in the mortgage
note or related instruments. The sub-servicer will be reimbursed by the servicer
for certain expenditures that it makes, generally to the same extent that the
servicer would be reimbursed for such expenditures. Compensation for the
services of the sub-servicer shall be paid by the servicer as a general
corporate obligation of the servicer.
MAINTENANCE OF HAZARD INSURANCE
The servicer will be required to maintain fire and hazard insurance with
extended coverage customary in the area where each mortgaged property is
located in an amount at least equal to the least of
(a) the outstanding principal balance owing on the mortgage loan and
the related senior lien, if any,
(b) the full insurable value of the related mortgaged property and
(c) the minimum amount required to compensate for damage or loss on a
replacement cost basis.
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If the mortgaged property is in an area identified in a federally
designated special flood hazard area, the servicer will be required to cause to
be maintained a flood insurance policy with a generally acceptable insurance
carrier, in an amount representing coverage not less than the least of
(a) the outstanding principal balance of the mortgage loan and the
senior lien, if any,
(b) the minimum amount required to compensate for damages or loss on a
replacement cost basis or
(c) the maximum amount of insurance available under the federal flood
insurance program.
The servicer will also be required to maintain fire, hazard and, if
applicable, flood insurance on each property acquired by the trust through
foreclosure in the respective amounts described above, as well as liability
insurance, in each case to the extent such insurance is available. Any amounts
collected by the servicer under any such policies not applied to the restoration
or repair of the mortgaged property, are required to be deposited by the
servicer in the collection account.
The servicer may obtain and maintain a blanket policy insuring against fire
and hazards of extended coverage on all of the mortgage loans. If such blanket
policy contains a deductible clause, the servicer will be required to pay to the
trustee the difference between the amount that would have been payable under a
policy described in the preceding paragraph and the amount paid under the
blanket policy.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When any mortgaged property is being conveyed by the obligor, the servicer
will be obligated to exercise its rights to accelerate the maturity of the
related loan under the applicable "due-on-sale" clause, if any, unless exercise
of the servicer's rights is not permitted under applicable law or if the
enforcement of the due on sale clause would result in loss of coverage under any
primary mortgage insurance policy. In this event, the servicer is authorized to
accept from or enter into an assumption agreement with the person to whom
property has been or is about to be conveyed, pursuant to which the person
becomes liable under the loan. To the extent permitted by applicable law, the
assumption of liability will not release the original borrower from its
obligation under the loan. The terms of a loan may not be changed in connection
with an assumption except to the extent specified in the related prospectus
supplement.
VOTING
The related prospectus supplement will set forth the method of determining
allocations of voting interests with respect to a series. Each certificateholder
of a class will have a voting interest equal to the product of the voting
interest to which such class is collectively entitled and the
certificateholder's percentage interest in such class. With respect to any
provisions of the pooling and servicing agreement providing for action, consent
or approval of a specified class or classes of certificates, each
certificateholder of such specified class will have a voting interest in such
class equal to such certificateholder's percentage interest in such class.
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AMENDMENTS
Without the consent of the certificateholders, the trustee, the sponsor and
the servicer may amend the related pooling and servicing agreement for the
purposes of
(a) curing any ambiguity or correcting or supplementing any provision
of such agreement that may be inconsistent with any other provision of such
agreement,
(b) if a REMIC election has been made and if accompanied by an
approving opinion of counsel, removing the restriction against the transfer
of a residual certificate or
(c) complying with the requirements of the Internal Revenue Code of
1986, as amended;
provided, however, that such action pursuant to clause (c) above shall not, as
evidenced by an opinion of counsel delivered to the trustee, materially and
adversely affect the interests of any certificateholder. Any amendment except
pursuant to clause (c) of the preceding sentence shall be deemed not to
adversely affect in any material respect the interests of any holder if the
trustee receives written confirmation from each rating agency rating the
securities that the amendment will not cause the rating agency to withdraw or
reduce the then current rating of the securities.
The related pooling and servicing agreement may also be amended by the
trustee, the sponsor and the servicer, with the prior written approval of not
less than a majority of the percentage interests represented by each affected
class of certificates then outstanding, as represented by all classes if all
classes are affected, for the purpose of adding, changing, or eliminating the
provisions thereof or modifying the rights of the certificateholders
thereunder; provided, however, that no such amendment shall
(a) change in any manner the amount of, or delay the timing of,
payments which are required to be distributed to any certificateholder
without the consent of such certificateholder or
(b) change the percentages of percentage interests which are required
to consent to any such amendments, without the consent of the
certificateholders of all certificates of the class or classes affected
then outstanding.
The trustee will be required to furnish a copy of any such amendment to
each certificateholder in the manner set forth in the related pooling and
servicing agreement.
EVENTS OF DEFAULT
Unless otherwise specified in the related prospectus supplement, events of
default with respect to certificates under a pooling and servicing agreement
will include
(a) any failure by the servicer to make a monthly advance as required;
(b) failure by the servicer to make a required deposit into the
collection account or certificate account;
(c) failure by the servicer to observe or perform in any material
respect its covenants or agreements in the pooling and servicing agreement;
(d) certain events of insolvency, readjustment of debt, or similar
proceedings indicating its insolvency or inability to pay its obligations;
and/or
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(e) the occurrence of delinquencies and/or losses in respect of the
mortgage loans in excess of levels, and for periods of time, as specified
in the pooling and servicing agreement.
RIGHTS UPON EVENTS OF DEFAULT
Unless otherwise specified in the related prospectus supplement, upon the
occurrence of an event of default, certificateholders evidencing voting
interests represented by all certificates aggregating not less than 51% or the
trustee may terminate all of the rights and obligations of the servicer,
whereupon the trustee will succeed the servicer. In the event that the trustee
is unwilling or legally unable to act, it may appoint, or have a court appoint,
any established institution that regularly services home equity loans that meets
certain requirements set forth in the related pooling and servicing agreement,
provided that the appointment of any such successor servicer will not result in
the qualification, reduction or withdrawal of the rating assigned to the
certificates by any applicable rating agency. Pending appointment of a successor
servicer, the trustee shall be obligated to act as servicer. The servicing
compensation to be paid, may not be greater than the servicing fee.
Unless otherwise specified in the related prospectus supplement, no
certificateholder may institute any action, suit or proceeding with respect to
the related pooling and servicing agreement unless such certificateholder
previously has given to the trustee written notice of default and unless
certificateholders evidencing voting interests represented by all certificates
aggregating not less than 51% have made written request upon the trustee to
institute such action, suit or proceeding, and the trustee for 60 days has
neglected or refused to institute any such action, suit or proceeding. However,
such certificateholders must first have offered to the trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred therein or thereby.
TERMINATION; OPTIONAL TERMINATION
Each series of certificates will terminate upon the payment to the related
certificateholders of all amounts held in any accounts or by the servicer, and
required to be paid to them following the final payment or other liquidation of
the last of the related mortgage loans. The seller, the servicer, or another
entity designated in the related prospectus supplement may, at its option, cause
an early termination of one or more classes of securities by purchasing all or
part of the mortgage loans from the trust fund on or after a date specified in
the related prospectus supplement, or on or after the time when the aggregate
outstanding principal amount of the securities or mortgage loans, as specified
in the related prospectus supplement is less than the amount or percentage
specified in the related prospectus supplement. The redemption, purchase or
repurchase price will be set forth in the related prospectus supplement. If
specified in the related prospectus supplement, in the event that a REMIC
election has been made, the trustee will receive a satisfactory opinion of
counsel that the optional redemption, purchase or termination will be conducted
so as to constitute a "qualified liquidation" under Section 860F of the Internal
Revenue Code of 1986, as amended.
EVIDENCE AS TO COMPLIANCE
Each pooling and servicing agreement will provide that each year, a firm of
independent public accountants will furnish a statement to the trustee to the
effect that the firm has examined certain documents and records relating to the
servicing of the loans by the
33
servicer and that this examination, which has been conducted substantially in
compliance with the requirements of the uniform single audit program for
mortgage bankers, has disclosed no items of non-compliance with the provisions
of the applicable pooling and servicing agreement that, in the opinion of the
firm, are material, except for the items of non-compliance as shall be
specified in such report.
The applicable pooling and servicing agreement for each series will also
provide for delivery to the trustee for that series of an annual statement
signed by an officer of the servicer to the effect that the servicer has
fulfilled its material obligations under the applicable pooling and servicing
agreement throughout the preceding calendar year.
INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE SPONSOR
The related pooling and servicing agreement will provide that neither the
sponsor nor any of its directors, officers, employees or agents shall have any
liability to the related trust or to any of the certificateholders, except with
respect to liabilities resulting from willful malfeasance, bad faith or gross
negligence or from the reckless disregard of obligations or duties arising under
the related pooling and servicing agreement. The related pooling and servicing
agreement will further provide that, with the exceptions stated above, the
sponsor and its directors, officers, employees and agents are entitled to be
indemnified and held harmless by the related trust against any loss, liability
or expense incurred in connection with legal actions relating to such pooling
and servicing agreement or the certificates.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the trustee for each series of securities will be set forth in
the related prospectus supplement. The pooling and servicing agreement will
provide that the trustee may resign at any time, upon appointing a successor
trustee. The sponsor may remove the trustee if the trustee ceases to be eligible
to continue as such under the pooling and servicing agreement or if the trustee
becomes insolvent, upon the appointment of a successor trustee. Each pooling and
servicing agreement will provide that the trustee is under no obligation to
exercise any of the rights or powers vested in it by the pooling and servicing
agreement at the request or direction of any of the holders of securities,
unless such holders of securities shall have offered to the trustee reasonable
security or indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction. The trustee may
execute any of the rights or powers granted by the pooling and servicing
agreement or perform any duties thereunder either directly or by or through
agents or attorneys, and the trustee is responsible for any misconduct or
negligence on the part of any agent or attorney appointed and supervised with
due care by it thereunder. Pursuant to the pooling and servicing agreement, the
trustee is not liable for any action it takes or omits to take in good faith
which it reasonably believes to be authorized by an authorized officer of any
person or within its rights or powers under the pooling and servicing agreement.
The trustee and any director, officer, employee or agent of the trustee may
rely and will be protected in acting or refraining from acting in good faith in
reliance on any certificate, notice or other document of any kind prima facie
properly executed and submitted by the authorized officer of any person
respecting any matters arising under the pooling and servicing agreement.
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THE INDENTURE
GENERAL
Each series of bonds will be issued pursuant to an indenture between the
related bond issuer and the related trustee. The mortgage loans to be included
in the related mortgage pool will be assigned to the trustee under provisions of
the related indenture that are substantially similar to those described under
"The Pooling And Servicing Agreement -- Assignment of mortgage loans" herein. In
addition, the mortgage loans will be serviced by the servicer under a servicing
agreement among the bond issuer, the servicer, and the trustee, which will
contain provisions substantially similar to the servicing and collection
provisions included in each pooling and servicing agreement and described under
"The Pooling And Servicing Agreement" herein. The following summaries describe
certain provisions of the indenture not described elsewhere in this prospectus.
MODIFICATION OF INDENTURE
With the consent of the holders of not less than 51% of the then aggregate
principal amount of the outstanding bonds of any series issued under an
indenture, the related trustee and the related bond issuer may execute a
supplemental indenture to add, change, or eliminate any provisions of the
indenture or modify certain rights of the bondholders.
Without the consent of the holder of each outstanding bond of such series
affected thereby, however, no supplemental indenture shall
(a) change the final payment date of the principal of, or any
installment of interest on, any bond of such series or reduce the principal
amount, interest rate, the redemption price or earliest optional redemption
date, or change any place of payment of any bond;
(b) reduce the percentage of bondholders required for consent to any
supplemental indenture, or waiver of compliance with certain provisions of
the indenture or of certain defaults thereunder;
(c) modify or alter the provisions of the indenture regarding the
voting percentages or remedies available to affected bondholders; or
(d) permit the creation of any lien ranking prior to or on the parity
with the lien of the indenture.
The related bond issuer and the respective trustee may also enter into
supplemental indentures, without obtaining the consent of bondholders of such
series, to cure ambiguities or make minor corrections, and to do such other
things as would not adversely affect the interests of the bondholders of such
series.
BOND EVENTS OF DEFAULT
Unless otherwise specified in the prospectus supplement relating to a
given series of bonds, a "bond event of default" with respect to any series of
bonds will include:
(a) a failure to pay the bonds of such series in full on or before the
final maturity date;
(b) a default in the observance of certain covenants in the indenture
after notice to the related bond issuer;
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(c) any representation or warranty made by the related bond issuer
being materially incorrect; or
(d) certain events of bankruptcy, insolvency, receivership or
reorganization of the related bond issuer.
RIGHTS UPON BOND EVENTS OF DEFAULT
Unless otherwise specified in the prospectus supplement, upon a bond event
of default the trustee may, and on request of holders of not less than 51% in
principal amount of the bonds shall, declare the bonds to be due and payable.
The trustee would then sell the assets in the trust estate if collections in
respect of such assets would be insufficient to make all scheduled payments on
bonds of such series. Upon such sale of assets, the bonds of such series will
be payable pro rata, unless otherwise provided by the Indenture, out of the
collections on, or the proceeds from the sale of such assets.
Subject to the specific provisions of the indenture, in the case of a bond
event of default, the trustee shall be under no obligation to exercise any of
the rights and powers under the indenture at the request or direction of any of
the bondholders, unless such bondholders have offered to the trustee reasonable
security or indemnity satisfactory to it against its related costs, expenses
and liabilities. The holders of a majority in principal amount of the bonds of
a series may, in certain cases, direct the trustee to act or waive any bond
event of default, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the indenture that cannot be
modified without the waiver or consent of the holder of each outstanding bond
so affected.
LIST OF BONDHOLDERS
Unless otherwise specified in the related prospectus supplement three or
more holders of the bonds of any series may, by written request to the trustee,
obtain access to the list of all bondholders of such series maintained by the
trustee for the purpose of communicating with other such bondholders with
respect to their rights under the indenture. The trustee may instead mail the
desired communication or proxy to all bondholders
ANNUAL COMPLIANCE STATEMENT
The related bond issuer will be required to file annually with the trustee
a written statement stating that it has complied with its obligations under the
indenture
TRUSTEE'S ANNUAL REPORT
The trustee will be required to mail each year to all bondholders a brief
report stating
o its eligibility and qualifications to continue as the trustee under the
indenture,
o any amounts advanced by it under the indenture,
o the amount, interest rate and maturity date of certain indebtedness
owing by the related bond issuer to it in the trustee's individual
capacity,
o the property and funds physically held by the trustee,
o any release, or release and substitution, of property subject to the
lien of the indenture that has not been previously reported,
36
o any additional series of bonds not previously reported, and
o any action taken by it which materially affects the bonds and which has
not been previously reported.
SATISFACTION AND DISCHARGE OF INDENTURE
The indenture will be discharged upon the delivery of all the bonds to the
trustee for cancellation or, with certain limitations, upon deposit with the
trustee of funds sufficient to pay the bonds in full.
REDEMPTION OF BONDS
The bonds of any series may be
(i) redeemed at the option of the related bond issuer or another party
specified in the related prospectus supplement; or
(ii) subject to special redemption under certain circumstances.
The circumstances and terms under which the bonds of a series may be redeemed
will be described in the related prospectus supplement.
REPORTS BY TRUSTEE TO BONDHOLDERS
On each payment date, the trustee will send a report to each bondholder
setting forth, among other things, the amount of such payment representing
interest, representing principal and the outstanding principal amount of an
individual bond after giving effect to the payments made on such payment date.
LIMITATION ON SUITS
Unless otherwise specified in the prospectus supplement, no bondholder of
any series will have any right to sue under the indenture unless
(1) such holder has previously given written notice to the trustee of a
continuing bond event of default;
(2) the holders of at least 25% in principal amount of the bonds have
requested that the trustee institute proceedings in respect of such bond event
of default;
(3) such holders have offered to the trustee reasonable indemnity against
its related costs, expenses and liabilities to be incurred in compliance with
such request;
(4) the trustee has then failed to institute any such proceedings; and
(5) the trustee has not received an inconsistent direction by holders of at
least 51% of the principal amount of the bonds.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND
RELATED MATTERS
The following discussion contains summaries of legal aspects of mortgage
loans which are general in nature. Because some of these legal aspects are
governed by applicable state law which laws may differ substantially, the
summaries do not purport to be complete nor nor encompass the laws of all states
in which the properties securing the loans are situated.
MORTGAGES
The loans for a series will be secured by either mortgages or deeds of
trust or deeds to secure debt, referred to as mortgage loans, depending upon the
prevailing practice in the state in which the property subject to a mortgage
loan is located. In New York, for example, the prevailing practice is a
mortgage. The filing of a mortgage, deed of trust or deed to secure debt creates
a lien or title interest upon the real property covered by the instrument and
represents the security for the repayment of an obligation that is customarily
evidenced by a promissory note. The priority of the liens is important because,
among other things, the foreclosure of a senior lien will extinguish a junior
lien, and because the holder of a senior lien generally will have a right to
receive insurance, condemnation or other proceeds before the holder of a junior
lien.
Priority between mortgages and deeds of trust, or other instruments of
record, generally depends in the first instance on the order of filing with the
appropriate government records office. Priority also may be affected by the
express terms of the mortgage or the deed of trust and any subordination
agreement among the lenders.
Although priority among liens on the same property generally depends in the
first instance on the order of filing, there are a number of ways in which a
lien that is a senior lien when it is filed can become subordinate to a lien
filed at a later date. A deed of trust or mortgage generally is not prior to any
liens for real estate taxes and assessments, particular types of federal liens,
some mechanics and materialmen's liens, and other liens given priority by
applicable law.
There are two parties to a mortgage, the mortgagor, who is the
borrower/property owner or the land trustee, and the mortgagee, who is the
lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee a
note or bond and the mortgage. In the case of a deed of trust, there are three
parties because title to the property is held by a land trustee under a land
trust agreement of which the borrower/property owner is the beneficiary; at
origination of a mortgage loan, the borrower executes a separate undertaking to
make payments on the mortgage note. Under a deed of trust, the homeowner or
borrower, called the "grantor," grants the property securing the mortgage loan,
called the "security property" to a third-party grantee, called the "trustee,"
for the benefit of the lender, called the "beneficiary." The deed of trust, upon
the instructions of the beneficiary, gives the trustee the authority, if the
borrower defaults, to sell the security property in a "foreclosure" or
"trustee's sale" and to apply the sale proceeds to the secured debt. The
mortgagee's authority under a mortgage and the trustee's authority under a deed
of trust are governed by the law of the state in which the real property is
located, the express provisions of the mortgage or deed of trust, and, in some
cases, in deed of trust transactions, the directions of the beneficiary.
Certain of the mortgage loans may be loans secured by condominium units.
Condominium ownership is a form of ownership of a real property wherein each
owner is entitled
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to the exclusive ownership and possession of his or her individual condominium
unit and also owns a proportionate interest in condominium building, other than
the individual condominium units, and all common areas and facilities. The
condominium unit owners appoint or elect the condominium association to govern
the affairs of the condominium.
FORECLOSURE AND REPOSSESSION
Foreclosure of a mortgage is generally accomplished by judicial action, and
foreclosure of a deed of trust may be accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement or pursuant to a power of sale provided
in the mortgage. Foreclosure of a mortgage by advertisement is essentially
similar to foreclosure of a deed of trust by nonjudicial power of sale.
If a borrower defaults under a loan secured by a deed of trust, the lender
generally may bring suit against the borrower. The lender generally also may
attempt to collect the loan by causing the deed of trust to be enforced against
the property it encumbers. Enforcement of a deed of trust is accomplished in
most cases by a trustee's sale in which the trustee, upon default of the
grantor, and subject to the expiration of applicable cure periods, sells the
security property at a public sale under the terms of the loan documents and
subject to the applicable procedural provisions of state law. In certain states,
the lender must exhaust the security through foreclosure, either judicially or
non-judicially, prior to collecting on the loan. Whether a lender may
subsequently collect on the unpaid balance of the loan is governed by the
anti-deficiency statute in the applicable state.
The trustee's sale generally must be conducted by public auction in the
county or city in which all or some part of the security property is located. At
the sale, the trustee generally requires a bidder to deposit with the trustee a
set amount or a percentage of the full amount of the bidder's final bid in cash,
or a cash equivalent satisfactory to the trustee, prior to and as a condition to
recognizing the bid, and may conditionally accept and hold these amounts for the
duration of the sale. The beneficiary of the deed of trust generally need not
bid cash at the sale, but may instead make a "credit bid" up to the extent of
the total amount due under the deed of trust, including costs and expenses
actually incurred in enforcing the deed of trust, as well as the trustee's fees
and expenses. The trustee will sell the security property to the highest proper
bidder at the sale.
A sale conducted in accordance with the terms of the power of sale
contained in the deed of trust generally is presumed to be conducted regularly
and fairly, and, on a conveyance of the security property by trustee's deed,
confers absolute legal title to the security property to the purchaser, free of
all junior deeds of trust and free of all other liens and claims subordinate to
the deed of trust under which the sale is made. The purchaser's title, however,
is subject to all senior liens and other senior claims. Thus, if the deed of
trust being enforced is a junior deed of trust, the trustee will convey title to
the property to the purchaser subject to the first deed of trust and any other
prior liens and claims. A trustee's sale or judicial foreclosure under a junior
deed of trust generally has no effect on the first
39
deed of trust, with the possible exception of the right of a senior beneficiary
to accelerate its indebtedness under a default clause or a "due-on-sale" clause
contained in the senior deed of trust.
Because a potential buyer at the sale may find it difficult to determine
the exact status of title and other facts about the security property, and
because the physical condition of the security property may have deteriorated,
it generally is more common for the lender, rather than an unrelated third
party, to purchase the security property at a trustee's sale or judicial
foreclosure sale. The lender, or other purchaser at the trustee's sale, will be
subject to the burdens of ownership, including the obligations to service any
senior deed of trust, to obtain hazard insurance and to make repairs at its own
expense as are necessary to render the security property suitable for resale.
The lender commonly will attempt to resell the security property and obtain the
services of a real estate broker and agree to pay the broker a commission in
connection with the resale. Depending upon market conditions, the ultimate
proceeds of the resale of the security property may not be high enough to equal
the lender's investment.
The proceeds received by the trustee from the sale generally are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the deed of trust under which the sale was conducted.
Any remaining proceeds generally are payable to the holders of junior deeds of
trust and other liens and claims in order of their priority. Any balance
remaining generally is payable to the grantor. Following the sale, if there are
insufficient proceeds to repay the secured debt, the beneficiary under the
foreclosed lien generally may obtain a deficiency judgment against the grantor.
Some courts have been faced with the issue of whether federal or state
constitutional due process requires that borrowers under deeds of trust receive
notices in addition to the statutorily prescribed minimum. For the most part,
the courts in these cases have upheld the notice provisions and procedures
described above.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under some circumstances a court of
equity may relieve the mortgagor from an entirely technical default where the
default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and the sale occurred while the mortgagor was insolvent and within
one year, or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law, of the
filing of
40
bankruptcy. Similarly, a suit against the debtor on the related mortgage note
may take several years and, generally, is a remedy alternative to foreclosure,
the mortgagee being precluded from pursuing both at the same time.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty potential third party purchasers at the
sale have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus 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 a deficiency judgment is available. Subject
to the right of the borrower in some states to remain in possession during the
redemption period, the lender will subsequently assume the burdens of ownership,
including obtaining hazard insurance, paying taxes 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.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. 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 at a foreclosure
sale, or of any purchaser from the lender subsequent to foreclosure or sale
under a deed of trust. Consequently the practical effect of a right of
redemption 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. In New York,
with few exceptions, the right of redemption is forever barred by a valid
foreclosure.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGEES
The mortgage loans comprising or underlying the primary assets included in
the trust fund for a series will be secured by mortgages or deeds of trust which
may be second or more junior mortgages to other mortgages held by other lenders
or institutional investors. The rights of the trust, and therefore the holders,
as mortgagee under a junior mortgage, are subordinate to those of the mortgagee
under the senior mortgage, including the prior rights of the senior mortgagee to
receive hazard insurance and condemnation proceeds and to
41
cause the property securing the mortgage loan to be sold upon default of the
mortgagor, thus 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 some states, absent
a provision in the mortgage or deed of trust, no notice of default is required
to be given to a junior mortgagee. In addition, as described above, the rights
of the trust may be or become subject to liens for real estate taxes and other
obligations.
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 required to be maintained by the borrower and all
awards made in connection with condemnation proceedings. The lender generally
has the right, subject to the specific provisions of the deed of trust securing
its loan, to apply insurance proceeds and awards to repair of any damage to the
security property or to payment of any indebtedness secured by the deed of
trust, in any order the beneficiary 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 underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages or deeds of trust. If
available, proceeds in excess of the amount of senior mortgage indebtedness, in
most cases, will be applied to the indebtedness of a junior mortgage.
Another provision typically 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 of the property, 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 grantor or mortgagor to perform any of these
obligations, the mortgagee or beneficiary is given the right under some
mortgages to perform the obligation itself, at its election, with the mortgagor
agreeing to reimburse the mortgagee or beneficiary for any sums expended by the
mortgagee or beneficiary on behalf of the mortgagor or grantor. The mortgage or
deed of trust typically provide that all sums so expended by the mortgagee
become part of the indebtedness secured by the mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Some states have imposed statutory prohibitions which limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
However, some states calculate the deficiency as the difference between the
outstanding indebtedness and the greater of the fair market value of the
property and the sales price of the property. Other statutes require the
beneficiary or mortgagee to
42
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 some other states, the lender has the option of
bringing a personal action against the borrower on the debt without first
exhausting the security; however, in some of these states, the lender,
following judgment on a 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. 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 New York, for example, there is
no statutory prohibition limiting remedies to the lender, and the liability for
deficiency in a mortgage foreclosure action depends upon the contract. However,
by statute, where no express covenant or other separate instrument, such as a
guarantee, provides for the liability of a deficiency, the remedies of a lender
are confined to the mortgaged property.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through a Chapter 13 bankruptcy code
rehabilitative plan to cure a monetary default with respect to a loan on a
debtor's residence by paying arrearages within a reasonable time period and
reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security, provided no sale of the property has yet occurred, prior to the filing
of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that modifications may include
reducing the amount of each monthly payment, changing the rate of interest,
altering the repayment schedule and reducing the lender's security interest to
the value of the residence, thus leaving the lender a general unsecured creditor
for the difference between the value of the residence and the outstanding
balance of the loan. Federal bankruptcy law and limited case law indicate that
the foregoing modifications could not be applied to the terms of a loan secured
by property that is the principal residence of the debtor. In all cases, the
secured creditor is entitled to the value of its security plus post-petition
interest, attorney's fees and costs to the extent the value of the security
exceeds the debt.
In a Chapter 11 case under the bankruptcy code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's
43
interest in the collateral as of the date of the bankruptcy. The loan term may
be extended, the interest rate may be adjusted to market rates and the priority
of the loan may be subordinated to bankruptcy court-approved financing. The
bankruptcy court can, in effect, invalidate due-on-sale clauses through
confirmed Chapter 11 plans of reorganization.
The bankruptcy code provides priority to specified tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted loans. In addition, substantive requirements are imposed
upon lenders in connection with the origination and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. The laws
include the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act
and related statutes and regulations. These federal laws impose specific
statutory liabilities upon lenders who originate loans and who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 preempts state constitutional, statutory and case law that prohibits
the enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to certain exceptions. As a
result, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of due-on-sale clauses with respect to mortgage loans that were
(a) originated or assumed during the "window period" under the Garn-St.
Germain Depository Institutions 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 Depository Institutions 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.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under some circumstances, be
eliminated in any modified mortgage resulting from a 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
44
circumstances may provide for prepayment fees or penalties if the obligation is
paid prior to maturity. In some states, there are or may be specific
limitations, upon the late charges which a lender may collect from a borrower
for delinquent payments. Some states also limit the amounts that a lender may
collect from a borrower as an additional charge if the loan is prepaid. Late
charges and prepayment fees are typically retained by servicers as additional
servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his
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 substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under security agreements receive notices in addition to
the statutorily-prescribed minimums. For the most part, these cases have upheld
the notice provisions as being reasonable or have found that, in cases
involving the sale by a trustee under a deed of trust or by a mortgagee under a
mortgage having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or
in part without penalty. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to mortgage loans having higher mortgage
rates, may increase the likelihood of refinancing or other early retirements of
mortgage loans having higher mortgage rates.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 referred to as "Title V", provides that
state usury limitations shall not apply to specific types of residential first
mortgage loans originated by lenders after March 31, 1980. Similar federal
statutes were in effect with respect to mortgage loans made during the first
three months of 1980. Title V authorizes any state to reimpose interest rate
limits by adopting, before April 1, 1983, a state law, or by certifying that
the voters of the state have voted in favor of any provision, constitutional or
otherwise, which expressly rejects an application of the federal law. Fifteen
states adopted a similar law prior to the April 1, 1983 deadline. In addition,
even where Title V is not so rejected, any state is authorized by the law to
adopt a provision limiting discount points or other charges on mortgage loans
covered by Title V.
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ENVIRONMENTAL LEGISLATION
A federal statute, the Comprehensive Environmental Response, Compensation,
and Liability Act, and a growing number of state laws impose a statutory lien
for associated costs on property that is the subject of a cleanup action on
account of hazardous wastes or hazardous substances released or disposed of on
the property. This type of lien generally will have priority over all subsequent
liens on the property and, in some of these states, will have priority over
prior recorded liens, including the lien of a mortgage. The priority of the
environmental lien under federal law depends on the time of perfection of the
federal lien compared to the time of perfection of any competing liens under
applicable state law. In addition, under federal environmental legislation and
possibly under state law in a number of states, a secured party that takes a
deed in lieu of foreclosure or acquires a property at a foreclosure sale may be
liable for the costs of cleaning up a contaminated site. Although these costs
could be substantial, they would probably not be imposed on a secured lender,
such as the applicable trust fund, if it promptly marketed the foreclosed
property for resale. In the event that a trust fund acquired title to a property
securing a mortgage home equity loan and cleanup costs were incurred in respect
of the property, the holders of the securities might incur a delay in the
payment if the clean up costs were required to be paid by the trust fund.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service,
(a) are entitled to have interest rates reduced and capped at 6% per
annum, on obligations, including loans, incurred prior to the commencement
of military service for the duration of military service,
(b) may be entitled to a stay of proceedings on any kind of foreclosure
or repossession action in the case of defaults on any obligations entered
into prior to military service for the duration of military service and
(c) may have the maturity of any obligations incurred prior to military
service extended, the payments lowered and the payment schedule readjusted
for a period of time after the completion of military service.
However, the benefits of (a), (b), or (c) above are subject to challenge
by creditors and if, in the opinion of the court, the ability of a person to
comply with their obligations is not materially impaired by military service,
the court may apply equitable principles accordingly. If a borrower's
obligation to repay amounts otherwise due on a home equity loan included in a
trust fund for a series is relieved pursuant to the Soldiers' and Sailors'
Civil Relief Act of 1940, none of the trust fund, the servicer, the seller nor
the trustee will be required to advance these amounts, and any loss in respect
of the borrower's obligation may reduce the amounts available to be paid to the
holders of the securities of the related series. Unless otherwise specified in
the related prospectus supplement, any shortfalls in interest collections on
loans or underlying loans relating to the private securities, as applicable,
included in a trust fund for a series resulting from application of the
Soldiers' and Sailors' Civil Relief Act of 1940 will be allocated to each class
of securities of the related series that is entitled to receive interest in
respect of the loans or underlying loans in proportion to the interest that
each class of securities would have otherwise been entitled to receive in
respect of the loans or underlying loans had an interest shortfall not
occurred.
46
USE OF PROCEEDS
The seller will apply all or substantially all of the net proceeds from
the sale of each series of securities for one or more of the following
purposes:
o to establish any reserve fund, pre-funding account or segregated trust
account,
o to pay costs of structuring and issuing the securities, including the
costs of obtaining enhancement and
o for its general corporate purposes.
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FEDERAL INCOME TAX CONSIDERATIONS
This section sets forth
o certain federal income tax opinions of Stroock & Stroock & Lavan LLP,
special counsel to the seller, referred to as federal tax counsel, and
o a summary, based on the advice of Federal tax counsel, of the material
federal income tax consequences of the purchase, ownership and
disposition of securities.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special treatment
under the federal income tax laws. The summary focuses primarily on investors
who will hold securities as capital assets, generally, property held for
investment, within the meaning of Section 1221 of the of the Internal Revenue
Code of 1986, but much of the discussion is applicable to other investors as
well. Because tax consequences may vary based on the status or tax attributes
of the owner of a security, prospective investors are advised to consult their
own tax advisers concerning the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of the
securities. For purposes of this tax discussion, except with respect to
information reporting, or where the context indicates otherwise, any reference
to the holder means the beneficial owner of a security.
The summary is based upon the provisions of the Internal Revenue Code, the
regulations promulgated under the Internal Revenue Code, including, where
applicable, proposed regulations, and the judicial and administrative rulings
and decisions now in effect, all of which are subject to change or possible
differing interpretations. The statutory provisions, regulations, and
interpretations on which this summary is based are subject to change, and a
change could apply retroactively.
The federal income tax consequences to holders will vary depending on
whether
(a) the securities of a series are classified as indebtedness for
federal income tax purposes;
(b) an election is made to treat the trust fund, or certain assets of
the trust fund, relating to a particular series of securities as one or
more real estate mortgage investment conduits, known as a REMICs, under the
Internal Revenue Code;
(c) the securities represent an ownership interest for federal income
tax purposes in some or all of the assets included in the trust fund for a
series; or
(d) for federal income tax purposes the trust fund relating to a
particular series of certificates is classified as a partnership.
The prospectus supplement for each series of securities will specify how
the securities will be treated for federal income tax purposes and will discuss
whether one or more REMIC elections, if any, will be made with respect to each
series.
OPINIONS
Federal tax counsel is of the opinion that:
(a) If a prospectus supplement indicates that one or more classes of
securities of the related series are to be treated as indebtedness for
federal income tax purposes,
48
assuming that all of the provisions of the applicable agreement are
complied with, the securities so designated will be considered indebtedness
of the trust fund for federal income tax purposes;
(b) If a prospectus supplement indicates that one or more REMIC
elections will be made with respect to the related trust fund, assuming
that these REMIC elections are timely made and all of the provisions of the
applicable agreement are complied with
(1) each segregated pool of assets specified in the applicable
agreement will constitute a REMIC for federal income tax purposes,
(2) the class or classes of securities of the related series which
are designated as "regular interests" in the related prospectus
supplement will be considered regular interests in a REMIC for federal
income tax purposes and
(3) the class of securities of the related series which is
designated as the residual interest in the related prospectus
supplement will be considered the sole class of "residual interests" in
the applicable REMIC for federal income tax purposes;
(c) If a prospectus supplement indicates that a trust fund will be
treated as a grantor trust for federal income tax purposes, assuming
compliance with all of the provisions of the applicable agreement,
(1) the trust fund will be considered to be a grantor trust under
Subpart E, Part 1 of Subchapter J of the Internal Revenue Code and will
not be considered to be an association taxable as a corporation and
(2) a holder of the related securities will be treated for federal
income tax purposes as the owner of an undivided interest in the
primary assets included in the trust fund; and
(d) If a prospectus supplement indicates that a trust fund is to be
treated as a partnership for federal income tax purposes, assuming that all
of the provisions of the applicable agreements are complied with, that
trust fund will be considered to be a partnership for federal income tax
purposes and will not be considered to be an association or publicly traded
partnership taxable as a corporation.
Each opinion is an expression of an opinion only, is not a guarantee of
results and is not binding on the Internal Revenue Service or any third party.
TAXATION OF DEBT SECURITIES INCLUDING REGULAR INTEREST SECURITIES
Interest and acquisition discount. Securities representing a regular
interest in a REMIC, which are referred to as regular interest securities, are
generally taxable to holders in the same manner as evidences of indebtedness
issued by the REMIC. Stated interest on the regular interest securities will be
taxable as ordinary income and taken into account using the accrual method of
accounting, regardless of the holder's normal accounting method. Interest, other
than original issue discount, on securities, other than regular interest
securities, that are characterized as indebtedness for federal income tax
purposes will be includible in income by holders of those securities in
accordance with their usual methods of accounting. Securities characterized as
debt for federal income tax purposes and regular interest securities will from
here be referred to in this prospectus collectively as debt securities.
49
Debt securities that are compound interest securities will, and certain of
the other debt securities may, be issued with original issue discount, known as
OID. The following discussion is based in part on the rules governing OID which
are set forth in Sections 1271-1275 of the Internal Revenue Code of 1986 and the
Treasury regulations issued under the Internal Revenue Code of 1986. A holder
should be aware, however, that the OID regulations do not adequately address
some issues relevant to prepayable securities, such as the debt securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a debt security and its issue price. A holder of
a debt security must include OID in gross income as ordinary interest income as
it accrues under a prescribed method which takes into account an economic
accrual of the discount. In general, OID must be included in income in advance
of the receipt of the cash representing that income. The amount of OID on a debt
security will be considered to be zero if it is less than a de minimis amount
determined under the Internal Revenue Code of 1986.
The issue price of a debt security is the first price at which a
substantial amount of debt securities of that class are sold to the public,
excluding bond houses, brokers, underwriters or wholesalers. If less than a
substantial amount of a particular class of debt securities is sold for cash on
or prior to the closing date, the issue price for the class will be treated as
the fair market value of the class on the closing date. The stated redemption
price at maturity of a debt security includes the original principal amount of
the debt security, but generally will not include distributions of interest if
the distributions constitute qualified stated interest.
Under the OID regulations, interest payments will not be qualified stated
interest unless the interest payments are unconditionally payable. The OID
Treasury regulations state that interest is unconditionally payable if
reasonable legal remedies exist to compel timely payment, or the debt instrument
otherwise provides terms and conditions that make the likelihood of late
payment, other than late payment that occurs within a reasonable grace period or
nonpayment of interest, a remote contingency, as defined in the OID Treasury
regulations. It is unclear whether the terms and conditions of the loans
underlying the debt securities, or those of the debt securities, are considered
when determining whether the likelihood of late payment or nonpayment of
interest is a remote contingency.
Some debt securities will provide for distributions of interest based on a
period that is the same length as the interval between distribution dates but
ends prior to each distribution date. Any interest that accrues prior to the
closing date may be treated under the OID regulations either (a) as part of the
issue price and the stated redemption price at maturity of the debt securities
or (b) as not included in the issue price or stated redemption price. The OID
Treasury regulations provide a special application of the de minimis rule for
debt instruments with long first accrual periods where the interest payable for
the first period is at a rate which is effectively less than that which applies
in all other periods. In these cases, for the sole purpose of determining
whether original issue discount is de minimis, the OID Treasury regulations
provide that the stated redemption price is equal to the instrument's issue
price plus the greater of the amount of foregone interest or the excess, if any,
of the instrument's stated principal amount over its issue price.
Under the de minimis rule, OID on a debt security will be considered to be
zero if OID is less than 0.25% of the stated redemption price at maturity of the
debt security multiplied by the weighted average maturity of the debt security.
For this purpose, the weighted average maturity of the debt security is computed
as the sum of the amounts determined by
50
multiplying the number of full years (i.e., rounding down partial years) from
the issue date until each distribution in reduction of stated redemption price
at maturity is scheduled to be made by a fraction, the numerator of which is
the amount of each distribution included in the stated redemption price at
maturity of the debt security and the denominator of which is the stated
redemption price at maturity of the debt security. Holders generally must
report de minimis OID pro rata as principal payments are received, and this
income will be capital gain if the debt security is held as a capital asset.
However, accrual method holders may elect to accrue all de minimis OID as well
as market discount under a constant interest method.
The holder of a debt security issued with OID must include in gross income,
for all days during its taxable year on which it holds the debt security, the
sum of the daily portions of original issue discount. The amount of OID
includible in income by a holder will be computed by allocating to each day
during a taxable year a pro rata portion of the original issue discount that
accrued during the relevant accrual period. In the case of a debt security that
is not a regular interest security and the principal payments on which are not
subject to acceleration resulting from prepayments on the loans, the amount of
OID includible in income of a holder for an accrual period, generally the period
over which interest accrues on the debt instrument, will equal the product of
the yield to maturity of the debt security and the adjusted issue price of the
debt security, reduced by any payments of qualified stated interest. The
adjusted issue price is the sum of its issue price plus prior accruals of OID,
reduced by the total payments made with respect to the debt security in all
prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain classes of the debt securities, that is subject to
acceleration due to prepayments on other debt obligations securing these
instruments, called a pay-through security, is computed by taking into account
the anticipated rate of prepayments assumed in pricing the debt instrument,
called the prepayment assumption. The amount of OID that will accrue during an
accrual period on a pay-through security is the excess, if any, of the sum of
the present value of all payments remaining to be made on the pay-through
security as of the close of the accrual period and the payments during the
accrual period of amounts included in the stated redemption price of the
pay-through security, over the adjusted issue price of the pay-through security
at the beginning of the accrual period, over the adjusted issue price of the
pay-through security at the beginning of the accrual period.
The present value of the remaining payments is to be determined on the
basis of three factors:
(a) the original yield to maturity of the pay-through security,
determined on the basis of compounding at the end of each accrual period
and properly adjusted for the length of the accrual period,
(b) events which have occurred before the end of the accrual period and
(c) the assumption that the remaining payments will be made in
accordance with the original prepayment assumption.
The effect of this method is to increase the portions of OID required to be
included in income by a holder to take into account prepayments with respect to
the loans at a rate that exceeds the prepayment assumption, and to decrease,
but not below zero for any period, the portions of OID required to be included
in income by a holder of a pay-through security to take into account
prepayments with respect to the loans at a rate that is slower than the
51
prepayment assumption. Although OID will be reported to holders of pay-through
securities based on the prepayment assumption, no representation is made to
holders that loans will be prepaid at that rate or at any other rate.
Some classes of regular interest securities may represent more than one
class of REMIC regular interests. Unless the applicable prospectus supplement
specifies otherwise, the trustee intends, based on the OID regulations, to
calculate OID on these securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a debt security will also be required to include
OID in gross income, but a subsequent holder of a debt security who purchases
that debt security for an amount that exceeds its adjusted issue price will be
entitled, as will an initial holder who pays more than a debt security's issue
price, to offset the OID by comparable economic accruals of portions of the
excess.
Effects of defaults and delinquencies. Holders will be required to report
income with respect to the related securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the loans, except possibly to the extent that it can
be established that these amounts are uncollectible. As a result, the amount of
income, including OID, reported by a holder of a security in any period could
significantly exceed the amount of cash distributed to the holder in that
period. The holder will eventually be allowed a loss, or will be allowed to
report a lesser amount of income, to the extent that the aggregate amount of
distributions on the securities is reduced as a result of a home equity loan
default. However, the timing and character of losses or reductions in income
are uncertain and, accordingly, holders of securities should consult their own
tax advisors on this point.
Interest-only debt securities. The trust fund intends to report income
from interest-only classes of debt securities to the Internal Revenue Service
and to holders of interest-only debt securities based on the assumption that
the stated redemption price at maturity is equal to the sum of all payments
determined under the applicable prepayment assumption. As a result,
interest-only debt securities certificates will be treated as having original
issue discount.
Variable rate debt securities. Under the OID regulations, debt securities
paying interest at a variable rate are subject to special rules. A variable
rate debt security will qualify as a variable rate debt instrument if
(a) its issue price does not exceed the total noncontingent principal
payments due under the variable rate debt security by more than a specified
de minimis amount;
(b) it provides for stated interest, paid or compounded at least
annually, at
(1) one or more qualified floating rates,
(2) a single fixed rate and one or more qualified floating rates,
(3) a single objective rate or
(4) a single fixed rate and a single objective rate that is a
qualified inverse floating rate; and
(c) it does not provide for any principal payments that are contingent,
as defined in the OID regulations, except as provided in (a) above.
52
A qualified floating rate is any variable rate where variations in the
value of the rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
variable rate debt security is denominated. A multiple of a qualified floating
rate will generally not itself constitute a qualified floating rate for
purposes of the OID Treasury regulations. However, a variable rate equal to
(a) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35 or
(b) the product of a qualified floating rate and a fixed multiple that
is greater than 0.65 but not more than 1.35, increased or decreased by a
fixed rate
will constitute a qualified floating rate for purposes of the OID Treasury
regulations. In addition, under the OID Treasury regulations, two or more
qualified floating rates that can reasonably be expected to have approximately
the same values throughout the term of the variable rate debt security will be
treated as and presumed to be a single qualified floating rate. Two or more
qualified floating rates with values within 25 basis points of each other as
determined on the variable rate debt security's issue date will be conclusively
presumed to be a single qualified floating rate. Notwithstanding the foregoing,
a variable rate that would otherwise constitute a qualified floating rate but
which is subject to one or more restrictions such as a cap or floor, will not
be a qualified floating rate for purposes of the OID Treasury regulations
unless the restriction is fixed throughout the term of the variable rate debt
security or the restriction will not significantly affect the yield of the
variable rate debt security.
An objective rate is a rate that is not itself a qualified floating rate
but which is determined using a single fixed formula and which is based upon
objective financial or economic information. The OID Treasury regulations also
provide that other variable rates may be treated as objective rates if so
designated by the Internal Revenue Service in the future. An interest rate on a
REMIC regular interest that is the weighted average of the interest rates on
some or all of the qualified mortgages held by the REMIC should constitute an
objective rate. Despite the foregoing, a variable rate of interest on a
variable rate debt security will not constitute an objective rate if it is
reasonably expected that the average value of the rate during the first half of
the variable rate debt security's term will be either significantly less than
or significantly greater than the average value of the rate during the final
half of the variable rate debt security's term. Further, an objective rate does
not include a rate that is based on information that is in the control of or
unique to the circumstances of the issuer or a party related to the issuer. An
objective rate will qualify as a qualified inverse floating rate if the rate is
equal to a fixed rate minus a qualified floating rate and variations in the
rate can reasonably be expected to inversely reflect contemporaneous variations
in the qualified floating rate. The OID Treasury regulations also provide that
if a variable rate debt security provides for stated interest at a fixed rate
for an initial period of less than one year followed by a variable rate that is
either a qualified floating rate or an objective rate and if the variable rate
on the variable rate debt security's issue date is intended to approximate the
fixed rate, then the fixed rate and the variable rate together will constitute
either a single qualified floating rate or objective rate, as the case may be
called a presumed single variable rate. If the value of the variable rate and
the initial fixed rate are within 25 basis points of each other as determined
on the variable rate debt security's issue date, the variable rate will be
conclusively presumed to approximate the fixed rate.
53
For variable rate debt securities that qualify as a variable rate debt
instrument under the OID Treasury regulations and provide for interest at
either a single qualified floating rate, a single objective rate, a presumed
single qualified floating rate or a presumed single variable rate throughout
the term, original issue discount is computed as described above based on the
following:
(a) stated interest on the single variable rate debt security which is
unconditionally payable in cash or property, other than debt instruments of
the issuer, at least annually will constitute qualified stated interest;
(b) by assuming that the variable rate on the single variable rate debt
security is a fixed rate equal to:
(1) in the case of a single variable rate debt security with a
qualified floating rate or a qualified inverse floating rate, the value
of, as of the issue date, of the qualified floating rate or the
qualified inverse floating rate or
(2) in the case of a single variable rate debt security with an
objective rate, other than a qualified inverse floating rate, a fixed
rate which reflects the reasonably expected yield for the single
variable rate debt security; and
(c) the qualified stated interest allocable to an accrual period is
increased (or decreased) if the interest actually paid during an accrual
period exceeds (or is less than) the interest assumed to be paid under the
assumed fixed rate described in (b) above.
In general, any variable rate debt security other than a single variable
rate debt security, called a multiple variable rate debt security, that
qualifies as a variable rate debt instrument will be converted into an
equivalent fixed rate debt instrument for purposes of determining the amount
and accrual of original issue discount and qualified stated interest on the
multiple variable rate debt security. The OID Treasury regulations generally
require that a multiple variable rate debt security be converted into an
equivalent fixed rate debt instrument by substituting any qualified floating
rate or qualified inverse floating rate provided for under the terms of the
multiple variable rate debt security with a fixed rate equal to the value of
the qualified floating rate or qualified inverse floating rate, as the case may
be, as of the multiple variable rate debt security's issue date. Any objective
rate, other than a qualified inverse floating rate, provided for under the
terms of the multiple variable rate debt security is converted into a fixed
rate that reflects the yield that is reasonably expected for the multiple
variable rate debt security. In the case of a multiple variable rate debt
security that qualifies as a variable rate debt instrument and provides for
stated interest at a fixed rate in addition to either one or more qualified
floating rates or a qualified inverse floating rate, the fixed rate is
initially converted into a qualified floating rate or a qualified inverse
floating rate, if the multiple variable rate debt security provides for a
qualified inverse floating rate. Under these circumstances, the qualified
floating rate or qualified inverse floating rate that replaces the fixed rate
must be such that the fair market value of the multiple variable rate debt
security as of the multiple variable rate debt security's issue date is
approximately the same as the fair market value of an otherwise identical debt
instrument that provides for either the qualified floating rate or qualified
inverse floating rate rather than the fixed rate. Subsequent to converting the
fixed rate into either a qualified floating rate or a qualified inverse
floating rate, the multiple variable rate debt security is then converted into
an equivalent fixed rate debt instrument in the manner described above.
Once the multiple variable rate debt security is converted into an
equivalent fixed rate debt instrument pursuant to the foregoing rules, the
amount of original issue discount and
54
qualified stated interest, if any, are determined for the equivalent fixed rate
debt instrument by applying the original issue discount rules to the equivalent
fixed rate debt instrument in the manner described above. A holder of the
multiple variable rate debt security will account for original issue discount
and qualified stated interest as if the holder held the equivalent fixed rate
debt instrument. Each accrual period appropriate adjustments will be made to
the amount of qualified stated interest or original issue discount assumed to
have been accrued or paid with respect to the equivalent fixed rate debt
instrument in the event that these amounts differ from the accrual amount of
interest accrued or paid on the multiple variable rate debt security during the
accrual period.
If a variable rate debt security does not qualify as a variable rate debt
instrument under the OID Treasury regulations, then the variable rate debt
security would be treated as a contingent payment debt obligation. It is not
clear under current law how a variable rate debt security would be taxed if the
debt security were treated as a contingent payment debt obligation.
The Internal Revenue Services issued final regulations governing the
calculation of OID on instruments having contingent interest payments. The
final regulations specifically do not apply for purposes of calculating OID on
debt instruments subject to Internal Revenue Code Section 1272(a)(6), such as
the pay-through securities, including regular interest securities.
Additionally, the OID regulations do not contain provisions specifically
interpreting Internal Revenue Code Section 1272(a)(6). Until the Treasury
issues guidelines to the contrary, the trustee intends to base its computation
on Internal Revenue Code Section 1272(a)(6) and the OID Treasury regulations as
described in this prospectus. However, because no regulatory guidance exists
under Internal Revenue Code Section 1272(a)(6), there can be no assurance that
the methodology represents the correct manner of calculating OID.
Market discount. A purchaser of a security may be subject to the market
discount rules of Sections 1276-1278 of the Internal Revenue Code of 1986. A
holder that acquires a debt security with more than a prescribed de minimis
amount of market discount, generally, the excess of the principal amount of the
debt security over the purchaser's purchase price will be required to include
accrued market discount in income as ordinary income in each month, but limited
to an amount not exceeding the principal payments on the debt security received
in that month and, if the securities are sold, the gain realized. Market
discount would accrue in a manner to be provided in Treasury regulations but,
until applicable regulations are issued, market discount would in general
accrue either
(a) on the basis of a constant yield, in the case of a pay-through
security, taking into account a prepayment assumption, or
(b) in the ratio of
(1) in the case of securities, or in the case of a pass-through
security, as set forth below, the loans underlying the security, not
originally issued with original issue discount, stated interest payable
in the relevant period to total stated interest remaining to be paid at
the beginning of the period or
(2) in the case of securities or in the case of a pass-through
security, as described below, the loans underlying the security,
originally issued at a discount, OID accrued in the relevant period to
total OID remaining to be paid.
55
Section 1277 of the Internal Revenue Code provides that, regardless of the
origination date of the debt security, or, in the case of a pass-through
security, the loans, the excess of interest paid or accrued to purchase or
carry a security, or, in the case of a pass-through security, as described
below, the underlying loans, with market discount over interest received on the
security is allowed as a current deduction only to the extent the excess is
greater than the market discount that accrued during the taxable year in which
the interest expense was incurred. In general, the deferred portion of any
interest expense will be deductible when market discount is included in income,
including upon the sale, disposition, or repayment of the security, or in the
case of a pass-through security, an underlying loan. A holder may elect to
include market discount in income currently as it accrues, on all market
discount obligations acquired by that holder during the taxable year the
election is made and after, in which case the interest deferral rule will not
apply.
Premium. A holder who purchases a debt security, other than an interest
weighted security to the extent described above, at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the security at a premium, which it may elect to amortize as an
offset to interest income on the security, and not as a separate deduction
item, on a constant yield method. Although there are regulations addressing
amortizable bond premium, they specifically do not apply to prepayable debt
instruments subject to Internal Revenue Code Section 1272(a)(6), such as the
pay-through securities. The legislative history of the Tax Reform Act of 1986
indicates that premium is to be accrued in the same manner as market discount.
Accordingly, it appears that the accrual of premium on a class of pay-through
securities will be calculated using the prepayment assumption used in pricing
that class. If a holder makes an election to amortize premium on a debt
security, the election will apply to all taxable debt instruments, including
all REMIC regular interests and all pass-through certificates representing
ownership interests in a trust holding debt obligations, held by the holder at
the beginning of the taxable year in which the election is made, and to all
taxable debt instruments subsequently acquired by the holder, and will be
irrevocable without the consent of the Internal Revenue Service. We recommend
that purchasers who pay a premium for the securities consult their tax advisers
regarding the election to amortize premium and the method to be employed.
Election to treat all interest as original issue discount. The OID
Treasury regulations permit a holder of a debt security to elect to accrue all
interest, discount, including de minimis market or original issue discount, and
premium in income as interest, based on a constant yield method for debt
securities acquired on or after April 4, 1994. If an election were to be made
with respect to a debt security with market discount, the holder of the debt
security would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that the holder of the debt security acquires during the year
of the election or after. Similarly, a holder of a debt security that makes
this election for a debt security that is acquired at a premium will be deemed
to have made an election to amortize bond premium with respect to all debt
instruments having amortizable bond premium that the holder owns or acquires.
The election to accrue interest, discount and premium on a constant yield
method with respect to a debt security is irrevocable.
Sale or exchange. A holder's tax basis in its debt security is the price
the holder pays for a debt security, plus amounts of OID or market discount
included in income and reduced by any payments received, other than qualified
stated interest payments, and any amortized premium. Gain or loss recognized on
a sale, exchange, or redemption of a debt security,
56
measured by the difference between the amount realized and the debt security's
basis as so adjusted, will generally be capital gain or loss, assuming that the
debt security is held as a capital asset. In the case of a debt security held
by a bank, thrift, or similar institution described in Section 582 of the
Internal Revenue Code, however, gain or loss realized on the sale or exchange
of a debt security will be taxable as ordinary income or loss. In addition,
gain from the disposition of a regular interest security that might otherwise
be capital gain will be treated as ordinary income to the extent of the excess,
if any, of
(a) the amount that would have been includible in the holder's income
if the yield on the regular interest security had equaled 110% of the
applicable federal rate as of the beginning of the holder's holding period,
over
(b) the amount of ordinary income actually recognized by the holder
with respect to the regular interest security.
In addition, gain on the sale of a debt security purchased at a market discount
would be taxable as ordinary income in an amount not exceeding the market
discount that accrued while the security was held by the seller, reduced by
market discount included in income under the rules described above under
"Market discount."
TAXATION OF THE REMIC AND ITS HOLDERS
Status of regular interest securities as real property loans. Regular
interest securities and securities representing a residual interest in a REMIC
will be real estate assets for purposes of Section 856(c)(4)(A) of the Internal
Revenue Code and assets described in Section 7701(a)(19)(C) of the Internal
Revenue Code to the extent that the REMIC's assets are qualifying assets.
However, if at least 95 percent of the REMIC's assets are qualifying assets,
then 100 percent of the REMIC securities will be a qualifying asset. Similarly,
income on the REMIC securities will be treated as interest on obligations
secured by mortgages on real property within the meaning of Section
856(c)(3)(B) of the Internal Revenue Code, subject to the limitations of the
preceding two sentences. In addition to loans, the REMIC's assets will include
payments on loans held pending distribution to holders of REMIC securities,
amounts in reserve accounts, if any, other credit enhancements, if any, and
possibly buydown funds. The loans generally will be qualifying assets under
both of the foregoing sections of the Internal Revenue Code. However, loans
that are not secured by residential real property or real property used
primarily for church purposes may not constitute qualifying assets under
Section 7701(a)(19)(C)(v) of the Internal Revenue Code. In addition, to the
extent that the principal amount of a loan exceeds the value of the property
securing the loan, it is unclear and Federal tax counsel is unable to opine
whether the loan will be qualifying assets. The regulations under Sections 860A
through 860G of the Internal Revenue Code are known as the REMIC regulations
and treat credit enhancements as part of the mortgage or pool of mortgages to
which they relate, and therefore credit enhancements generally should be
qualifying assets. Regulations issued in conjunction with the REMIC regulations
provide that amounts paid on loans and held pending distribution to holders of
regular interest securities will be treated as qualifying assets. It is unclear
whether reserve funds or buydown funds would also constitute qualifying assets
under any of those provisions.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the residual interest securities. In the case of a single
class REMIC, however, the expenses
57
will be allocated, under Treasury regulations, among the holders of the regular
interest securities and the holders of the residual interest securities on a
daily basis in proportion to the relative amounts of income accruing to each
holder on that day. In the case of a holder of a regular interest security who
is an individual or a pass-through interest holder, including pass-through
entities but not including real estate investment trusts, expenses will be
deductible only to the extent that these expenses, plus other miscellaneous
itemized deductions of the holder, exceed 2% of the holder's adjusted gross
income, and the holder may not be able to deduct any fees and expenses to any
extent in computing the holder's alternative minimum tax liability. In
addition, the amount of itemized deductions otherwise allowable for the taxable
year for an individual whose adjusted gross income exceeds the applicable
amount will be reduced by the lesser of
(a) 3% of the excess of adjusted gross income over the applicable
amount, or
(b) 80% of the amount of itemized deductions otherwise allowable for
the related taxable year.
In the case of a partnership that has 100 or more partners and elects to be
treated as an electing large partnership, 70 percent of the partnership's
miscellaneous itemized deductions will be disallowed, although the remaining
deductions will generally be allowed at the partnership level and will not be
subject to the 2 percent floor that would otherwise be applicable to individual
partners. The reduction or disallowance of this deduction may have a
significant impact on the yield of the regular interest security to a holder.
In general terms, a single class REMIC is one that either
(a) would qualify, under existing Treasury regulations, as a grantor
trust if it were not a REMIC, treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes or
(b) is similar to a grantor trust which is not a REMIC and which is
structured with the principal purpose of avoiding the single class REMIC
rules.
Unless otherwise stated in the applicable prospectus supplement, the expenses
of the REMIC will be allocated to holders of the related residual interest
securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC structures. For certain series of securities, two or more
separate elections may be made to treat designated portions of the related
trust fund as REMICs for federal income tax purposes. Solely for purposes of
determining whether the REMIC certificates will be real estate assets within
the meaning of Section 856(c)(4)(A) of the Internal Revenue Code, and loans
secured by an interest in real property under Section 7701(a)(19)(C) of the
Internal Revenue Code, and whether the income on these certificates is interest
described in Section 856(c)(3)(B) of the Internal Revenue Code, the tiered
REMICs will be treated as one REMIC.
Calculation of REMIC income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with adjustments. In general, the taxable income or
net loss will be the difference between
58
(a) 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
(b) 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 these expenses, when aggregated with the
holder's other miscellaneous itemized deductions for that year, do not exceed
two percent of such holder's adjusted gross income and the holder may not be
able to deduct these fees and expenses to any extent in computing his
alternative minimum tax liability. In the case of a partnership that has 100 or
more partners and elects to be treated as an electing large partnership, 70
percent of the partnership's miscellaneous itemized deductions will be
disallowed, although the remaining deductions will generally be allowed at the
partnership level and will not be subject to the 2 percent floor that would
otherwise be applicable to individual partners.
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. This aggregate basis will
be allocated among the assets of the REMIC in proportion to their respective
fair market values.
The OID provisions of the Internal Revenue Code apply to loans of
individuals originated on or after March 2, 1984. Subject to possible
application of the de minimis rules, the method of accrual by the REMIC of OID
income on loans originated on or after March 2, 1984 will be equivalent to the
method under which holders of pay-through securities accrue original issue
discount, that is, under the constant yield method taking into account a
prepayment assumption. The REMIC will deduct OID on the regular interest
securities in the same manner that the holders of the regular interest
securities include discount in income, but without regard to the de minimis
rules. However, a REMIC that acquires loans at a market discount must include
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, presumably 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 September 27, 1985, it
is possible that the premium may be recovered in proportion to payments of loan
principal.
Prohibited transactions; Contributions tax; Tax on net income from
foreclosure property. The REMIC will be subject to a 100% tax on any net income
derived from a prohibited transaction. For this purpose, net income will be
calculated without taking into account any losses from prohibited transactions
or any deductions attributable to any prohibited transaction that resulted in a
loss. In general, prohibited transactions include:
o subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
59
o subject to a limited exception, the sale or other disposition of a cash
flow investment;
o the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Internal Revenue Code; or
o the receipt of any fees or other compensation for services rendered by
the REMIC.
It is anticipated that a REMIC will not engage in any prohibited transactions
in which it would recognize a material amount of net income.
In addition, subject to a number of exceptions, a tax is imposed at the
rate of 100% on amounts contributed to a REMIC after the startup day. In
addition, a REMIC is subject to tax, deductible from its income, on any net
income from foreclosure property, determined in accordance with Section
857(b)(4)(B) of the Internal Revenue Code as if the REMIC were a REIT. The
taxes will be paid out of the trust fund and will be allocated first to the
holders of secured securities and then pro rata to all outstanding classes of
securities of the REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The holder of a security representing a residual interest will take into
account the daily portion of the taxable income or net loss of the REMIC for
each day during the taxable year on which the holder held the residual interest
security. The daily portion is determined by allocating to each day in any
calendar quarter its ratable portion of the taxable income or net loss of the
REMIC for the relevant quarter, and by allocating that amount among the
holders, on that day, of the residual interest securities in proportion to
their respective holdings on that day.
The holder of a residual interest security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to income or loss. The reporting of
taxable income without corresponding distributions could occur, for example, in
some 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 some 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 is taxed on the
net income of the REMIC, the taxable income derived from a residual interest
security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the residual interest security may be less than that of a corporate
bond or stripped instrument, and may be negative.
Limitation on losses. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the
end of the calendar quarter in which the loss arises. A holder's basis in a
residual interest security will initially equal the
60
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 same REMIC. The
ability of holders of residual interest securities to deduct net losses may be
subject to additional limitations under the Internal Revenue Code, and we
recommend that holders 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 a payment exceeds a holder's adjusted basis in the
residual interest security, however, the holder will recognize gain, treated as
gain from the sale of the residual interest security, to the extent of the
excess.
Sale or exchange. A holder of a residual interest security will recognize
gain or loss on the sale or exchange of a residual interest security equal to
the difference, if any, between the amount realized and the holder's adjusted
basis in the residual interest security at the time of the sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a residual interest security will be disallowed if
the selling holder acquires any residual interest in a REMIC or similar
mortgage pool within six months before or after disposition.
Excess inclusions. The portion of the REMIC taxable income of a holder of
a residual interest security consisting of excess inclusion income may not be
offset by other deductions or losses, including net operating losses, on the
holder's federal income tax return. Further, if the holder of a residual
interest security is an organization subject to the tax on unrelated business
income imposed by Internal Revenue Code Section 511, the holder's excess
inclusion income will be treated as unrelated business taxable income of that
holder. In addition, under Treasury regulations yet to be issued, if a real
estate investment trust, a regulated investment company, a common trust fund,
or certain cooperatives were to own a residual interest security, a portion of
dividends or other distributions paid by the real estate investment trust or
other entity would be treated as excess inclusion income. If a residual
security is owned by a 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.
For purpose of the alternative minimum tax:
(a) alternative minimum taxable income for a residual holder is
determined without regard to the special rule that taxable income cannot be
less than excess inclusions;
(b) a residual holder's alternative minimum income for a tax year
cannot be less than excess inclusions for the year;
(c) the amount of any alternative minimum tax net operating loss
deductions must be computed without regard to any excess inclusions.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
residual interest security, over the daily accruals for the related quarterly
period of
(a) 120% of the long-term applicable federal rate on the startup date
multiplied by
61
(b) the adjusted issue price of the residual interest security at the
beginning of the related quarterly period.
The adjusted issue price of a residual interest security 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
security, 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.
Under the REMIC regulations, in some circumstances, transfers of residual
interest securities may be disregarded.
Restrictions on ownership and transfer of residual interest securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made
to prevent the ownership of a REMIC residual interest by any disqualified
organization. Disqualified organizations include the United States, any state
or political subdivision of the United States, 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 Internal Revenue Code, or any entity exempt from tax,
other than certain farmers' cooperatives, unless the entity is not subject to
tax on its unrelated business income. Accordingly, the applicable agreement
will prohibit disqualified organizations from owning a residual interest
security. In addition, no transfer of a residual interest security will be
permitted unless the proposed transferee shall have furnished to the trustee an
affidavit representing and warranting that it is neither a disqualified
organization nor an agent or nominee acing 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 that 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 an interest in a pass-through entity, 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.
All partners of electing partnerships having 100 or more partners will be
treated as disqualified organizations for purposes of the tax imposed on
pass-through entities if these electing large partnerships hold residual
interests in a REMIC. However, the electing large partnership would be entitled
to exclude the excess inclusion income from gross income for purposes of
determining the taxable income of the partners.
The REMIC regulations provide that a transfer of a noneconomic residual
interest will be disregarded for all federal income tax purposes unless
impeding the assessment or collection of tax was not a significant purpose of
the transfer. A residual interest will be treated as a noneconomic residual
interest unless, at the time of the transfer
(1) the present value of the expected future distributions on the residual
interest at least equals the product of
(x) the present value of all anticipated excess inclusions with respect
to the residual interest and
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(y) the highest corporate tax rate, currently 35 percent, and
(2) the transferor reasonably expects that for each anticipated excess
inclusion, the transferee will receive distributions from the REMIC, at or
after the time at which taxes on the excess inclusion accrue, sufficient to pay
the taxes on that excess inclusion.
A significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have
known that the transferee would be unwilling or unable to pay taxes due on its
share of the taxable income of the REMIC. A transferor will be presumed not to
know or have reason to know (the "safe harbor") if
(a) the transferor conducts, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and, as a result of
the investigation, the transferor finds that the transferee has historically
paid its debts as they came due and finds no significant evidence to indicate
that the transferee will not continue to pay its debts as they come due in the
future, and
(b) the transferee represents to the transferor that
(1) the transferee understands that it might incur tax liabilities in
excess of any cash received with respect to the residual interest and
(2) the transferee intends to pay the taxes associated with owning the
residual interest as they come due.
Proposed regulations and an IRS Notice provide that a third test that must be
satisfied to qualify for the safe harbor -- either the formula test or the
asset test (each as described below) is satisfied.
The formula test is satisfied if the present value of the anticipated tax
liabilities associated with holding the residual security does not exceed the
sum of the present values of (1) any consideration given to the transferee to
the acquire the residual security, (2) the expected future distributions on the
residual security, and (3) the anticipated tax savings associated with holding
the residual security as the REMIC generates losses. For purposes of this
calculation, the present values generally are calculated using a discount rate
equal to the applicable federal rate, and the transferee is assumed to pay tax
at the highest corporate rate of tax.
The asset test is satisfied if
(1) at the time of the transfer of the residual security, and at the
close of each of the transferee's two fiscal years preceding the year of
transfer, the transferee's gross assets for financial reporting purposes
exceed $100 million and its net assets for financial reporting purposes
exceed $10 million,
(2) the transferee is a taxable domestic C corporation, other than a
RIC, REIT, REMIC or Subchapter T cooperative (an "Eligible Corporation"),
that makes a written agreement that any subsequent transfer of the residual
security will be to another Eligible Corporation in a transaction that
satisfies the safe harbor described above, and the transferor does not
know, or have reason to know, that the transferee will not honor such
agreement, and
(3) the facts and circumstances known to the transferor on or before
the date of transfer do not reasonably indicate that the taxes associated
with the residual security will not be paid.
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For purposes of requirement (1) the gross and net assets of a
transferee do not include any obligations of a person related to the
transferee or any other asset if a principal purpose for holding or
acquiring the asset is to permit the transferee to satisfy the asset test.
Further, requirement (2) will not be treated as satisfied in the case of
any transfer or assignment of the residual security to a foreign branch of
an Eligible Corporation or any other arrangement by which the residual
security is at any time subject to net tax by a foreign country or
possession of the United States.
A different formulation of this rule applies to transfers of residual
interest security by or to foreign transferees.
Mark to market rules. Treasury regulations provide that for purposes of
the mark to market requirements of Internal Revenue Code Section 475, a REMIC
residual interest acquired after January 3, 1995 is not a security and cannot
be marked to market, regardless of the value of the REMIC residual interest.
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 Internal Revenue 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.
TAX STATUS AS A GRANTOR TRUST
As further described below, each holder of a pass-through security must
report on its federal income tax return the gross income from the portion of
the mortgages that is allocable to each pass-through security and may deduct
the portion of the expenses incurred or accrued by the trust fund that is
allocable to that pass-through security, at the same time and to the same
extent as these items would be reported by the holder if it had purchased and
held directly an interest in the mortgages and received or accrued directly its
share of the payments on the mortgages and incurred or accrued directly its
share of expenses incurred or accrued by the trust fund when those amounts are
received, incurred or accrued by the trust fund.
A holder of a pass-through security that is an individual, estate, or
trust will be allowed deductions for expenses only to the extent that the sum
of those expenses and the holder's other miscellaneous itemized deductions
exceeds two percent of the holder's adjusted gross income. Moreover, a holder
of a pass-through security that is not a corporation cannot deduct expenses for
purposes of the alternative minimum tax, if applicable. Deductions will include
servicing, guarantee and administrative fees paid to the servicer of the
mortgage loans. As a result, the trust fund will report additional taxable
income to holders of pass-through securities in an amount equal to their
allocable share of deductions, and individuals, estates, or trusts holding
pass-through securities may have taxable income in excess of the cash received.
Status of the pass-through securities as real property loans. The
pass-through securities will be "real estate assets" for purposes of Section
856(c)(5)(A) of the Internal Revenue Code and "loans . . . secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Internal Revenue Code to the extent that the trust fund's assets are
qualifying assets. The pass-through securities may not be qualifying assets
under any of the
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foregoing sections of the Internal Revenue Code to the extent that the trust
fund's assets include buydown funds, reserve funds, or payments on mortgages
held pending distribution to certificateholders. Further, the pass-through
securities may not be real estate assets to the extent loans held by the trust
are not secured by real property, and may not be loans secured by an interest
in real property to the extent loans held by the trust are not secured by
residential real property or real property used primarily for church purposes.
In addition, to the extent that the principal amount of a loan exceeds the
value of the property securing the loan, it is unclear and Federal tax counsel
is unable to opine whether the loans will be qualifying assets.
Taxation of pass-through securities under stripped bond rules. The federal
income tax treatment of the pass-through securities will depend on whether they
are subject to the rules of Section 1286 of the Internal Revenue Code. The
pass-through securities will be subject to those rules if stripped
interest-only certificates are issued. In addition, whether or not stripped
interest-only certificates are issued, the Internal Revenue Service may contend
that the rules of Internal Revenue Code Section 1286 apply on the ground that
the servicer's servicing fee, or other amounts, if any, paid to, or retained
by, the servicer or its affiliates, as specified in the applicable prospectus
supplement, represent greater than an arm's length consideration for servicing
the loans and should be characterized for federal income tax purposes as an
ownership interest in the loans. The Internal Revenue Service has taken the
position in Revenue Ruling 91-46 that a retained interest in excess of
reasonable compensation for servicing is treated as a stripped coupon under the
rules of Internal Revenue Code Section 1286.
If interest retained for the servicer's servicing fee or other interest is
treated as a stripped coupon, the pass-through securities will either be
subject to the OID rules or the market discount rules. A holder of a
pass-through security will account for any discount on the pass-through
security as market discount rather than OID if the loans are mortgages and
either (a) the amount of OID with respect to the pass-through security was
treated as zero under the OID de minimis rule when the pass-through security
was stripped or (b) no more than 100 basis points, including any amount of
servicing in excess of reasonable servicing, is stripped off from the loans. If
neither of the above exceptions applies, the OID rules will apply to the
pass-through securities.
If the OID rules apply, the holder of a pass-through security, whether a
cash or accrual method taxpayer, will be required to report interest income
from the pass-through security in each taxable year equal to the income that
accrues on the pass-through security in that year calculated under a constant
yield method based on the yield of the pass-through security, or, possibly, the
yield of each mortgage underlying the pass-through security, to the holder. The
yield would be computed at the rate, assuming monthly compounding, that, if
used in discounting the holder's share of the payments on the mortgages, would
cause the present value of those payments to equal the price at which the
holder purchased the pass-through security. With respect to certain categories
of debt instruments, Section 1272(a)(6) of the Internal Revenue Code requires
that OID be accrued based on a prepayment assumption determined in a manner
prescribed by forthcoming regulations. These regulations would apply to the
pass-through securities. It is anticipated that the trustee will calculate the
yield of the pass-through securities based on a representative initial offering
price of the pass-through securities and a reasonable assumed rate of
prepayment of the mortgages, although this yield may differ from the yield to
any particular holder that
65
would be used in calculating the interest income of that holder. The prospectus
supplement for each series of pass-through securities will describe the
prepayment assumption that will be used for this purpose, but no representation
is made that the mortgages will prepay at that rate or at any other rate.
In the case of a pass-through security acquired at a price equal to the
principal amount of the mortgages allocable to the pass-through security, the
use of a reasonable prepayment assumption would not have any significant effect
on the yield used in calculating accruals of interest income. In the case,
however, of a pass-through security acquired at a discount or premium with
respect to each underlying loan, that is, at a price less than or greater than
this principal amount, respectively, the use of a reasonable prepayment
assumption would increase or decrease the yield, and thus accelerate or
decelerate the reporting of interest income, respectively.
If a loan is prepaid in full, the holder of a pass-through security
acquired at a discount or premium generally will recognize ordinary income or
loss equal to the difference between the portion of the prepaid principal
amount of the loan that is allocable to the pass-through security and the
portion of the adjusted basis of the pass-through security that is allocable to
the loans. It is not clear whether any adjustments would be required to reflect
differences between the prepayment rate that was assumed in calculating yield
and the actual rate of prepayments.
Pass-through securities of some series may provide for a pass-through rate
based on the weighted average of the interest rates of the mortgages held by
the trust fund, which interest rates may be fixed or variable. In the case of a
variable rate pass-through security that is subject to the OID rules, the daily
portions of OID generally will be calculated under the principles discussed in
" -- Taxation of debt securities including regular interest securities-Variable
rate debt securities."
Taxation of pass-through securities if stripped bond rules do not
apply. If the stripped bond rules do not apply to a pass-through security, then
the holder will be required to include in income its share of the interest
payments on the mortgages in accordance with its tax accounting method. In
addition, if the holder purchased the pass-through security at a discount or
premium, the holder will be required to account for that discount or premium in
the manner described below. The treatment of any discount will depend on
whether the discount is OID as defined in the Internal Revenue Code and, in the
case of discount other than OID, whether this other discount exceeds a de
minimis amount. In the case of OID, the holder, whether a cash or accrual
method taxpayer, will be required to report as additional interest income in
each month the portion of the discount that accrues in that month, calculated
based on a constant yield method. In general it is not anticipated that the
amount of OID to be accrued in each month, if any, will be significant relative
to the interest paid currently on the mortgages. However, OID could arise with
respect to a loan, known as an ARM, that provides for interest at a rate equal
to the sum of an index of market interest rates and a fixed number. The OID for
ARMs generally will be determined under the principles discussed in "Taxation
of debt securities including regular interest securities -- Variable rate debt
securities."
If discount other than OID exceeds a de minimis amount, the holder will
also generally be required to include in income in each month the amount of
discount accrued through the applicable month and not previously included in
income, but limited, with respect to the portion of discount allocable to any
mortgage, to the amount of principal on the mortgage
66
received by the trust fund in that month. Because the mortgages will provide
for monthly principal payments, a discount may be required to be included in
income at a rate that is not significantly slower than the rate at which the
discount accrues, and therefore at a rate not significantly slower than the
rate at which the discount would be included in income if it were OID. The
holder may elect to accrue discount under a constant yield method based on the
yield of the pass-through security to the holder, or possibly based on the
yields of each loan. In the absence of an election, it may be necessary to
accrue discount under a more rapid straight-line method. Under the de minimis
rule, market discount with respect to a pass-through security will be
considered to be zero if it is less than the product of
(a) 0.25% of the principal amount of the mortgages allocable to the
pass-through security and
(b) the weighted average life, in complete years, of the mortgages
remaining at the time of purchase of the pass-through security.
If a holder purchases a pass-through security at a premium, the holder may
elect under Section 171 of the Internal Revenue Code to amortize the portion of
premium that is allocable to a loan under a constant yield method based on the
yield of the loan to the holder, provided that the loan was originated after
September 27, 1985. Premium allocable to a loan originated on or before that
date should be allocated among the principal payments on the loan and allowed
as an ordinary deduction as principal payments are made or, perhaps, upon
termination.
It is not clear whether the foregoing adjustments for discount or premium
would be made based on the scheduled payments on the loans or taking account of
a reasonable prepayment assumption, and Federal tax counsel is unable to opine
on this issue.
If a loan is prepaid in full, the holder of a pass-through security
acquired at a discount or premium will recognize ordinary income or loss equal
to the difference between the portion of the prepaid principal amount of the
loan that is allocable to the pass-through security and the portion of the
adjusted basis of the pass-through security that is allocable to the loans.
Adjustments might be required to reflect differences between the prepayment
rate that was assumed in accounting for discount or premium and the actual rate
of prepayments.
MISCELLANEOUS TAX ASPECTS
Backup withholding. A holder, other than a holder of a residual interest
security, may, under some circumstances, be subject to backup withholding at a
rate of 31% with respect to distributions or the proceeds of a sale of
certificates to or through brokers that represent interest or original issue
discount on the securities. This withholding generally applies if the holder of
a security
o fails to furnish the trustee with its taxpayer identification number;
o furnishes the trustee an incorrect taxpayer identification number;
o fails to report properly interest, dividends or other reportable
payments as defined in the Internal Revenue Code; or
o under particular circumstances, fails to provide the trustee or the
holder's securities broker with a certified statement, signed under
penalty of perjury, that the taxpayer identification number provided is
its correct number and that the holder is not subject to backup
withholding.
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Backup withholding will not apply, however, with respect to payments made to
holders, including payments to exempt recipients, such as exempt organizations,
and to foreign investors. Holders should consult their tax advisers as to their
qualification for exemption from backup withholding and the procedure for
obtaining the exemption.
Treasury regulations, which are generally effective with respect to
payments made after December 31, 2000 (the "Final Withholding Regulations"),
consolidate and modify the current certification requirements and means by
which a holder may claim exemption from United States federal income tax
withholding and provide presumptions regarding the status of holders when
payments to the holders cannot be reliably associated with appropriate
documentation provided to the payor. We recommend that holders consult their
tax advisors regarding the application of the Final Withholding Regulations.
The trustee will report to the holders and to the servicer for each
calendar year the amount of any reportable payments during the year and the
amount of tax withheld, if any, with respect to payments on the securities.
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to trust funds which are
treated as partnerships for federal income tax purposes and with respect to
certificates treated as debt for federal income tax purposes, unless interest,
including OID, paid on a security, other than a residual interest security, is
considered to be effectively connected with a trade or business conducted in
the United States by a foreign investor, the interest will normally qualify as
portfolio interest, except where
(a) the recipient is a holder, directly or by attribution, of 10% or
more of the capital or profits interest in the issuer, or
(b) the recipient is a controlled foreign corporation to which the
issuer is a related person, and will be exempt from federal income tax.
For this purpose, a foreign investor is any holder that is not
(a) a citizen or resident of the United States,
(b) a corporation or partnership, including any entity that is
classified as either a corporation or partnership for federal income tax
purposes, organized under the law of the United States or any state,
including the District of Columbia,
(c) an estate the income of which is includible in gross income
regardless of its source, or
(d) a trust other than a foreign trust, as the term is defined in
Section 7701(a)(31) of the Internal Revenue Code.
Upon receipt of appropriate ownership statements, the issuer normally will be
relieved of obligations to withhold tax from interest payments. These
provisions supersede the generally applicable provisions of United States law
that would otherwise require the issuer to withhold at a 30% rate, unless the
rate were reduced or eliminated by an applicable tax treaty, on, among other
things, interest and other fixed or determinable, annual or periodic income
paid to foreign investors. Holders of pass-through securities however, may be
subject to withholding to the extent that the loans were originated on or
before July 18, 1984.
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A holder who is not an individual or corporation (or an entity treated as
a corporation for federal income tax purposes) holding the security on its own
behalf may be substantially increased reporting requirements and should consult
its tax advisor.
Interest and OID of holders who are foreign investors are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder and timely provide an Internal Revenue Service Form
W-8ECI. They will, however, generally be subject to the regular United States
income tax.
The Final Withholding regulations consolidate and modify the current
certification requirements and means by which a holder may claim exemption from
United States federal income tax withholding. We recommend that holders consult
their tax advisors regarding the application of these regulations.
Payments to holders of residual interest securities who are foreign
investors will generally be treated as interest for purposes of the 30%, or
lower treaty rate, United States withholding tax. Holders should assume that
income does not qualify for exemption from United States withholding tax as
portfolio interest. It is clear that, to the extent that a payment represents a
portion of REMIC taxable income that constitutes excess inclusion income, a
holder of a residual interest security will not be entitled to an exemption
from or reduction of the 30%, or lower treaty rate, withholding tax rule. If
the payments are subject to United States withholding tax, they generally will
be taken into account for withholding tax purposes only when paid or
distributed, or when the residual interest security is disposed of. The
Treasury has statutory authority, however, to promulgate regulations which
would require these amounts to be taken into account at an earlier time in
order to prevent the avoidance of tax. Treasury regulations could, for example,
require withholding prior to the distribution of cash in the case of residual
interest securities that do not have significant value. Under the REMIC
regulations, if a residual interest security has tax avoidance potential, a
transfer of a residual interest security to a foreign investor will be
disregarded for all federal tax purposes. A residual interest security has tax
avoidance potential unless, at the time of the transfer the transferor
reasonably expects that the REMIC will distribute to the transferee residual
interest holder amounts that will equal at least 30% of each excess inclusion,
and that these amounts will be distributed at or after the time at which the
excess inclusions accrue and not later than the calendar year following the
calendar year of accrual. If a foreign investor transfers a residual interest
security to a United States person, that is, a person that is not a foreign
investor, and if the transfer has the effect of allowing the transferor to
avoid tax on accrued excess inclusions, then the transfer is disregarded and
the transferor continues to be treated as the owner of the residual interest
security for purposes of the withholding tax provisions of the Internal Revenue
Code.
Subject to the discussion in the previous paragraphs, any capital gain
realized on the sale, redemption, retirement or other taxable disposition of a
security by a foreign investor will be exempt from United States federal income
and withholding tax, provided that
(a) the gain is not effectively connected with the conduct of a trade
or business in the United States by the foreign investor and
(b) in the case of an individual foreign investor, the foreign investor
is not present in the United States for 183 days or more in the taxable
year.
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
If a trust fund is intended to be a partnership for federal income tax
purposes the applicable agreements will provide that the nature of the income
of the trust fund will
69
exempt it from the rule that certain publicly traded partnerships are taxable
as corporations or the issuance of the certificates will be structured as a
private placement under an Internal Revenue Service safe harbor, so that the
trust fund will not be characterized as a publicly traded partnership taxable
as a corporation.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES ISSUED BY A PARTNERSHIP
Treatment of the notes as indebtedness. The trust fund will agree, and the
noteholders will agree by their purchase of notes, to treat the notes as debt
for federal income tax purposes. Except as otherwise provided in the related
prospectus supplement, Federal tax counsel will advise the seller that the
notes will be classified as debt for federal income tax purposes. Consequently,
holders of notes will be subject to taxation as described in "Taxation of debt
securities including regular interest securities" above for debt securities
which are not regular interest securities.
Possible alternative treatment of the notes. If, contrary to the opinion
of Federal Tax Counsel, the Internal Revenue Service successfully asserted that
one or more of the notes did not represent debt for federal income tax
purposes, the notes might be treated as equity interests in the trust fund. If
so treated, the trust fund would likely be treated as a publicly traded
partnership that would not be taxable as a corporation because it would meet
qualifying income tests. Nonetheless, treatment of the notes as equity
interests in a publicly traded partnership could have adverse tax consequences
to some holders. For example, income to foreign holders generally would be
subject to United States federal income tax and United States federal income
tax return filing and withholding requirements, and individual holders might be
subject to limitations on their ability to deduct their share of the trust
fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES ISSUED BY A PARTNERSHIP
Treatment of the trust fund as a partnership. In the case of a trust fund
intended to qualify as a partnership for federal income tax purposes, the trust
fund and the seller will agree, and the certificateholders will agree by their
purchase of certificates, to treat the trust fund as a partnership for purposes
of federal and state income tax, franchise tax and any other tax measured in
whole or in part by income, with the assets of the partnership being the assets
held by the trust fund, the partners of the partnership being the
certificateholders, and the notes, if any, being debt of the partnership.
However, the proper characterization of the arrangement involving the trust
fund, the certificates, the notes, the trust fund and the servicer is not clear
because there is no authority on transactions closely comparable to that
contemplated in this prospectus.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust fund. This type of
characterization would not result in materially adverse tax consequences to
certificateholders as compared to the consequences from treatment of the
certificates as equity in a partnership, described below. The following
discussion assumes that the certificates represent equity interests in a
partnership. The following discussion also assumes that all payments on the
certificates are denominated in United States dollars, none of the certificates
have interest rates which would qualify as contingent interest under the OID
Treasury regulations, and that a series of securities includes a single class
of certificates. If these conditions are not satisfied with respect to any
given series of certificates, additional tax considerations with respect to the
certificates will be disclosed in the applicable prospectus supplement.
70
Partnership taxation. As a partnership, the trust fund will not be subject
to federal income tax. Rather, each certificateholder will be required to
separately take into account a Holder's allocated share of income, gains,
losses, deductions and credits of the trust fund. The trust fund's income will
consist primarily of interest and finance charges earned on the loans,
including appropriate adjustments for market discount, OID and bond premium,
and any gain upon collection or disposition of loans. The trust fund's
deductions will consist primarily of interest and OID accruing with respect to
the notes, servicing and other fees, and losses or deductions upon collection
or disposition of loans.
The tax items of a partnership are allocable to the partners in accordance
with the Internal Revenue Code, Treasury regulations and the partnership
agreement, here, the trust agreement and related documents. It is anticipated
that the trust agreement will provide, in general, that the certificateholders
will be allocated taxable income of the trust fund for each month equal to the
sum of
(a) the interest that accrues on the certificates in accordance with
their terms for the related month, including interest accruing at the
pass-through rate for the related month and interest on amounts previously
due on the certificates but not yet distributed;
(b) any trust fund income attributable to discount on the loans that
corresponds to any excess of the principal amount of the certificates over
their initial issue price;
(c) prepayment premium payable to the certificateholders for the
related month; and
(d) any other amounts of income payable to the certificateholders for
the related month.
This taxable income allocation will be reduced by any amortization by the trust
fund of premium on loans that corresponds to any excess of the issue price of
certificates over their principal amount. All remaining taxable income of the
trust fund will be allocated to the seller. Based on the economic arrangement
of the parties, this approach for allocating trust fund income should be
permissible under applicable Treasury regulations, although no assurance can be
given that the Internal Revenue Service would not require a greater amount of
income to be allocated to certificateholders, as a generated payment or
otherwise. Moreover, even under the foregoing method of allocation,
certificateholders may be allocated income equal to the entire pass-through
rate plus the other items described above even though the trust fund might not
have sufficient cash to make current cash distributions of that amount. Thus,
cash basis holders will in effect be required to report income from the
certificates on the accrual basis and certificateholders may become liable for
taxes on trust fund income even if they have not received cash from the trust
fund to pay these taxes. In addition, because tax allocations and tax reporting
will be done on a uniform basis for all certificateholders but
certificateholders may be purchasing certificates at different times and at
different prices, certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the trust fund.
If notes are also issued, all of the taxable income allocated to a
certificateholder that is a pension, profit sharing or employee benefit plan or
other tax-exempt entity, including an individual retirement account, will
constitute unrelated business taxable income generally taxable to this type of
holder under the Internal Revenue Code.
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An individual taxpayer's share of expenses of the trust fund, including
fees to the servicer but not interest expense, would be miscellaneous itemized
deductions. These deductions might be disallowed to the individual in whole or
in part and might result in the holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to the holder over the life of
the trust fund.
The trust fund intends to make all tax calculations relating to income and
allocations to certificateholders on an aggregate basis. If the Internal
Revenue Service were to require that tax calculations be made separately for
each loan, the trust fund might be required to incur additional expense but it
is believed that there would not be a material adverse effect on
certificateholders.
Discount and premium. It is believed that the loans will not have been
issued with OID and, therefore, the trust should not have OID income. However,
the purchase price paid by the trust fund for the loans may be greater or less
than the remaining principal balance of the loans at the time of purchase. If
so, the loan will have been acquired at a premium or discount, as the case may
be. As indicated above, the trust fund will make this calculation on an
aggregate basis, but might be required to recompute it on a loan by loan basis.
If the trust fund acquires the loans at a market discount or premium, the
trust fund will elect to include any market discount in income currently as it
accrues over the life of the loans or to offset any premium against interest
income on the loans. As indicated above, a portion of market discount income or
premium deduction may be allocated to certificateholders.
Section 708 termination. Under Section 708 of the Internal Revenue Code,
the trust fund will be deemed to terminate for federal income tax purposes if
50% or more of the capital and profits interests in the trust fund are sold or
exchanged within a 12-month period. The trust fund will not comply with the
technical requirements that might apply when a constructive termination occurs.
As a result, the trust fund may be subject to tax penalties and may incur
additional expenses if it is required to comply with those requirements.
Furthermore, the trust fund might not be able to comply due to lack of data.
Disposition of certificates. Generally, capital gain or loss will be
recognized on a sale of certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the certificates
sold. A certificateholder's tax basis in a certificate will generally equal the
holder's cost increased by the holder's share of trust fund income, includible
in income, and decreased by any distributions received with respect to the
certificate. In addition, both the tax basis in the certificates and the amount
realized on a sale of a certificate would include the holder's share of the
notes and other liabilities of the trust fund. A holder acquiring certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in those certificates, and, upon sale or other disposition of some of the
certificates, allocate a portion of the aggregate tax basis to the certificates
sold, rather than maintaining a separate tax basis in each certificate for
purposes of computing gain or loss on a sale of that certificate.
Any gain on the sale of a certificate attributable to the holder's share
of unrecognized accrued market discount on the loans would generally be treated
as ordinary income to the holder and would give rise to special tax reporting
requirements. The trust fund does not expect to have any other assets that
would give rise to special reporting requirements. Thus, to avoid those special
reporting requirements, the trust fund will elect to include market discount in
income as it accrues.
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If a certificateholder is required to recognize an aggregate amount of
income, not including income attributable to disallowed itemized deductions
described above, over the life of the certificates that exceeds the aggregate
cash distributions with respect to those certificates, the excess will
generally give rise to a capital loss upon the retirement of the certificates.
Allocations between sellers and transferees. In general, the trust fund's
taxable income and losses will be determined monthly and the tax items for a
particular calendar month will be apportioned among the certificateholders in
proportion to the principal amount of certificates owned by them as of the
close of the last day of the applicable month. As a result, a holder purchasing
certificates may be allocated tax items, which will affect its tax liability
and tax basis, attributable to periods before the actual transaction.
The use of a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed, or only applies to
transfers of less than all of the partner's interest, taxable income or losses
of the trust fund might be reallocated among the certificateholders. The trust
fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 election. In the event that a certificateholder sells its
certificates, the purchasing certificateholder may have a higher or lower basis
in the certificates than the selling certificateholder had. The tax basis of
the trust fund's assets will not be adjusted to reflect that higher or lower
basis unless the trust fund were to file an election under Section 754 of the
Internal Revenue Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as
potentially onerous information reporting requirements, the trust fund
currently does not intend to make this election. As a result,
certificateholders might be allocated a greater or lesser amount of trust fund
income than would be appropriate based on their own purchase price for
certificates.
Administrative matters. The owner trustee is required to keep or have kept
complete and accurate books of the trust fund. These books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal
year of the trust fund will be the calendar year. The trustee will file a
partnership information return (Internal Revenue Service Form 1065) with the
Internal Revenue Service for each taxable year of the trust fund and will
report each certificateholder's allocable share of items of trust fund income
and expense to holders and the Internal Revenue Service on Schedule K-1. The
trust fund will provide the Schedule K-1 information to nominees that fail to
provide the trust fund with the information statement described below and the
nominees will be required to forward the information to the beneficial owners
of the certificates. Generally, holders must file tax returns that are
consistent with the information return filed by the trust fund or be subject to
penalties unless the holder timely notifies the IRS of all inconsistencies.
Under Section 6031 of the Internal Revenue Code, any person that holds
certificates as a nominee at any time during a calendar year is required to
furnish the trust fund with a statement containing information on the nominee,
the beneficial owners and the certificates so held. This information includes:
(a) the name, address and taxpayer identification number of the nominee
and
(b) as to each beneficial owner
(1) the name, address and identification number of the person,
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(2) whether the person is a United States person, a tax-exempt
entity or a foreign government, an international organization, or any
wholly owned agency or instrumentality of either of the foregoing, and
(3) information on certificates that were held, bought or sold on
behalf of the person throughout the year.
In addition, brokers and financial institutions that hold certificates through
a nominee are required to furnish directly to the trust fund information as to
themselves and their ownership of certificates. A clearing agency registered
under Section 17A of the Securities Exchange Act of 1934 is not required to
furnish an information statement to the trust fund. The information referred to
above for any calendar year must be furnished to the trust fund on or before
the following January 31. Nominees, brokers and financial institutions that
fail to provide the trust fund with the information described above may be
subject to penalties.
The seller will be designated as the tax matters partner in the related
trust agreement and, as the tax matters partner, generally will be responsible
for representing the certificateholders in any dispute with the Internal
Revenue Service. The Internal Revenue Code provides for administrative
examination of a partnership as if the partnership were a separate and distinct
taxpayer. Generally, the statute of limitations for partnership items does not
expire before three years after the date on which the partnership information
return is filed. Any adverse determination following an audit of the return of
the trust fund by the appropriate taxing authorities could result in an
adjustment of the returns of the certificateholders, and, under some
circumstances, a certificateholder may be precluded from separately litigating
a proposed adjustment to the items of the trust fund. An adjustment could also
result in an audit of a certificateholder's returns and adjustments of items
not related to the income and losses of the trust fund.
Tax consequences to foreign certificateholders. It is not clear whether
the trust fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to
non-U.S. persons because there is no clear authority dealing with that issue
under facts substantially similar to those described in this prospectus.
Although it is not expected that the trust fund would be engaged in a trade or
business in the United States for tax withholding purposes, the trust fund may
withhold as if it were so engaged in order to protect the trust fund from
possible adverse consequences of a failure to withhold. The trust fund expects
to withhold on the portion of its taxable income that is allocable to foreign
certificateholders pursuant to Section 1446 of the Internal Revenue Code, as if
the taxable income were effectively connected to a U.S. trade or business, at a
rate of 35% for foreign holders that are taxable as corporations and 39.6% for
all other foreign holders. Subsequent adoption of Treasury regulations or the
issuance of other administrative pronouncements may require the trust fund to
change its withholding procedures.
Each foreign holder might be required to file a United States individual
or corporate income tax return, including, in the case of a corporation, the
branch profits tax, on its share of the trust fund's income. Each foreign
holder must obtain a taxpayer identification number from the Internal Revenue
Service and submit that number to the trust fund on a Form W-8 in order to
assure appropriate crediting of the taxes withheld. New Forms W-8 apply to
payments after December 31, 2000, and the old forms generally may not be used.
A foreign holder generally would be entitled to file with the Internal Revenue
Service a claim for refund with respect to taxes withheld by the trust fund
taking the position that no taxes were
74
due because the trust fund was not engaged in a United States trade or
business. However, interest payments made, or accrued, to a certificateholder
who is a foreign person may be considered guaranteed payments to the extent
these interest payments are determined without regard to the income of the
trust fund. If these interest payments are properly characterized as guaranteed
payments, then the interest probably will not be considered portfolio interest.
As a result, certificateholders will be subject to United States federal income
tax and withholding tax at a rate of 30%, unless reduced or eliminated pursuant
to an applicable treaty. In this case, a foreign holder would only be entitled
to claim a refund for that portion of the taxes, if any, in excess of the taxes
that should be withheld with respect to the guaranteed payments.
Backup withholding. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to a backup withholding tax
of 31% if, in general, the certificateholder fails to comply with
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Internal Revenue Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "Federal
Income Tax Considerations," potential investors should consider the state and
local income tax consequences of the acquisition, ownership, and disposition of
the securities. State and local income tax law may differ substantially from
the corresponding federal law, and this discussion does not purport to describe
any aspect of the income tax laws of any state or locality. Therefore, we
recommend that potential investors consult their own tax advisors with respect
to the various state and local tax consequences of an investment in the
securities.
ERISA CONSIDERATIONS
GENERAL
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA should consider the fiduciary
standards under the Employee Retirement Income Security Act of 1974, as amended
("ERISA") in the context of the plan's particular circumstances before
authorizing an investment of a portion of such plan's assets in the Securities.
Accordingly, pursuant to Section 404 of ERISA, such fiduciary should consider
among other factors (i) whether the investment is for the exclusive benefit of
plan participants and their beneficiaries; (ii) whether the investment
satisfies the applicable diversification requirements; (iii) whether the
investment is in accordance with the documents and instruments governing the
plan; and (iv) whether the investment is prudent, considering the nature of the
investment. Fiduciaries of plans also should consider ERISA's prohibition on
improper delegation of control over, or responsibility for, plan assets.
In addition, employee benefit plans or other retirement arrangements
subject to ERISA, as well as individual retirement accounts, certain types of
Keogh plans not subject to ERISA but subject to Section 4975 of the Code, or
any entity (including insurance company separate or general accounts) whose
underlying assets include plan assets by reason of such plans, arrangements or
accounts investing in the entity (each, a "Plan") are prohibited from engaging
in a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified
75
persons"). Such transactions are treated as "prohibited transactions" under
Sections 406 of ERISA and excise taxes and/or other penalties are imposed upon
such persons under ERISA and/or Section 4975 of the Code unless an exemption
applies. The seller, each master servicer or other servicer, any insurer, the
trustee, the indenture trustee and certain of their affiliates might be
considered "parties in interest" or "disqualified persons" with respect to a
Plan. If so, the acquisition, holding or disposition of Securities by or on
behalf of such Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless a statutory,
regulatory or administrative exception or exemption is available.
ERISA CONSIDERATIONS RELATING TO CERTIFICATES
Plan Assets
In 29 C.R.F Section 2510.3-101 (the "Plan Asset Regulations"), the U.S.
Department of Labor ("DOL") has defined what constitutes "plan assets" for
purposes of ERISA and Section 4975 of the Code. The Plan Asset Regulations
provide that if a Plan makes an investment in an "equity interest" in an
entity, an undivided portion of the assets of the entity will be considered the
assets of such Plan unless certain exceptions set forth in such Regulations
apply. The Certificates will be deemed an equity interest for purposes of the
Plan Asset Regulations, and the seller can give no assurance that the
Certificates will qualify for any of the exceptions under the Plan Asset
Regulations. As a result, (i) a Plan may be deemed to have acquired an interest
in the assets of the trust and not merely an interest in the Certificates, (ii)
the fiduciary investment standards of ERISA could apply to such assets and
(iii) transactions occurring in the course of managing, operating and servicing
the trust and its assets might constitute prohibited transactions, unless a
statutory, regulatory or administrative exemption applies.
Prohibited Transaction Class Exemption 83-1
The DOL has issued an administrative exemption, Prohibited Transaction
Class Exemption 83-1 ("PTCE 83-1"), which under certain conditions exempts from
the application of the prohibited transaction rules of ERISA and the excise tax
provisions of Section 4975 of the Code transactions involving a Plan in
connection with the operation of a "mortgage pool" and the purchase, sale and
holding of Certificates which are "mortgage pool pass-through certificates." A
"mortgage pool" is defined as a fixed investment pool consisting solely of
interest-bearing obligations secured by first or second mortgages or deeds of
trust on single-family residential property, property acquired in foreclosure
and undistributed cash. A "mortgage pool pass-through certificate" is defined
as a Certificate which represents a beneficial undivided interest in a mortgage
pool which entitles the holder to pass through payments of principal and
interest from the mortgage loans. PTCE 83-1 requires that: (i) the seller and
the trustee maintain a system of insurance or other protection for the mortgage
loans, the property securing such mortgage loans and for indemnifying holders
of Certificates against reductions in pass-through payments due to defaults in
loan payments or property damage in an amount at least equal to the greater of
(x) 1% of the aggregate principal balance of the mortgage loans or (y) 1% of
the principal balance of the largest covered pooled mortgage loans; (ii) the
trustee may not be an affiliate of the seller; and (iii) the payments made to,
and retained by, the seller in connection with the trust, together with all
funds inuring to its benefit for administering the trust, represent
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no more than "adequate consideration" for selling the mortgage loans, plus
reasonable compensation for services provided to the trust. In addition, PTCE
83-1 exempts the initial sale of Certificates to a Plan with respect to which
the seller, the insurer, the master servicer or other servicer or the trustee
is a party in interest if the Plan does not pay more than fair market value for
such Certificates and the rights and interests evidenced by such Certificates
are not subordinated to the rights and interests evidenced by other
Certificates of the same pool.
PTCE 83-1 also exempts from the prohibited transaction rules any
transactions in connection with the servicing and operation of the mortgage
pool, provided that any payments made to the master servicer in connection with
the servicing of the trust are made in accordance with a binding agreement,
copies of which must be made available to prospective Plan investors. In the
case of any Plan with respect to which the seller, the master servicer, the
insurer or the trustee is a fiduciary, PTCE 83-1 will only apply if, in
addition to the other requirements: (i) the initial sale, exchange or transfer
of Certificates is expressly approved by an independent fiduciary who has
authority to manage and control those Plan assets being invested in
Certificates; (ii) the Plan pays no more for the Certificates than would be
paid in an arm's-length transaction; (iii) no investment management, advisory
or underwriting fee, sales commission or similar compensation is paid to the
seller with regard to the sale, exchange or transfer of Certificates to the
Plan; (iv) the total value of the Certificates purchased by such Plan does not
exceed 25% of the amount issued and (v) at least 50% of the aggregate amount of
Certificates is acquired by persons independent of the seller, the trustee, the
master servicer and the insurer. Before purchasing Certificates, a fiduciary of
a Plan should confirm that the trust is a "mortgage pool," that the
Certificates constitute "mortgage pool pass-through certificates" and that the
conditions set forth in PTCE 83-1 would be satisfied. In addition to making its
own determination as to the availability of the exemptive relief provided in
PTCE 83-1, the Plan fiduciary should consider the availability of any other
prohibited transaction exemptions. The Plan fiduciary should also consider its
general fiduciary obligations under ERISA in determining whether to purchase
any Certificates on behalf of a Plan pursuant to PTCE 83-1.
Underwriter Exemption
The DOL has issued to each of a number of underwriters of mortgage and
asset-backed securities an individual prohibited transaction exemption, each of
which has been amended by Prohibited Transaction Exemption 97-34 ("PTE 97-34")
and was further recently amended pursuant to Prohibited Transaction Exemption
2000-58 ("PTE 2000-58") (the "Exemption"), which is applicable to Certificates
which meet its requirements whenever the underwriter or its affiliate is the
sole underwriter, manager or co-manager of an underwriting syndicate or is the
selling or placement agent. The Exemption generally exempts certain
transactions from the application of certain of the prohibited transaction
provisions of ERISA and the Code provided that the conditions set forth in the
Exemption are satisfied. These transactions include the servicing, managing and
operation of investment trusts holding fixed (generally non-revolving pools) of
enumerated categories of assets which include: single and multi-family
residential mortgage loans, home equity loans or receivables (including
cooperative housing loans), commercial mortgage loans and the purchase, sale
and holding of Certificates which represent beneficial ownership interests in
the assets of such trusts.
77
General Conditions of Exemption
The Exemption sets forth general conditions which must be satisfied for a
transaction involving the purchase, sale and holding of the Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of
Certificates by Plans must be on terms that are at least as favorable to the
Plan as they would be in an arm's-length transaction with an unrelated party.
Second, the assets held by the trust must be fully secured (other than
one-to-four family residential mortgage loans and home equity loans or
receivables backing certain types of Certificates, as described below).
(Mortgage loans, loans, obligations and receivables will be collectively
referred to herein as "loans."). Third, unless the Certificates are issued in
"designated transactions" (as described below) and are backed by fully-secured
loans, they may not be subordinated. Fourth, the Certificates at the time of
acquisition by the Plan must generally be rated in one of the three (or in the
case of designated transactions, four) highest generic rating categories by
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc., Moody's Investors Services, Inc. or Fitch, Inc. (each, a "Rating
Agency"). Fifth, the trustee and the indenture trustee generally cannot be
affiliates of any member of the "Restricted Group" which consists of any (i)
underwriter as defined in the Exemption, (ii) the seller, (iii) the master
servicer, (iv) each servicer, (v) the insurer, (vi) the counterparty of any
"interest swap" (as described below) held as an asset of the trust and (vii)
any obligor with respect to loans constituting more than 5% of the aggregate
unamortized principal balance of the loans held in the trust as of the date of
initial issuance of the Certificates. Sixth, the sum of all payments made to,
and retained by, such underwriters must represent not more than reasonable
compensation for underwriting the Certificates; the sum of all payments made
to, and retained by, the seller pursuant to the assignment of the loans to the
related trust must represent not more than the fair market value of such loans;
and the sum of all payments made to, and retained by, the master servicer and
any servicer must represent not more than reasonable compensation for such
person's services under the Agreement and reimbursement of such person's
reasonable expenses in connection therewith. Seventh, (i) the investment pool
must consist only of assets of the type enumerated in the Exemption and which
have been included in other investment pools; (ii) Certificates evidencing
interests in such other investment pools must have been rated in one of the
three (or in the case of designated transactions, four) highest generic rating
categories by one of the Rating Agencies for at least one year prior to a
Plan's acquisition of Certificates; and (iii) Certificates evidencing interests
in such other investment pools must have been purchased by investors other than
Plans for at least one year prior to a Plan's acquisition of Certificates.
Finally, the investing Plan must be an accredited investor as defined in Rule
501(a)(1) of Regulation D of the Commission under the Securities Act of 1933,
as amended. The seller assumes that only Plans which are accredited investors
under the federal securities laws will be permitted to purchase the
Certificates.
Recent Amendments to Exemption
PTE 2000-58 (the "Amendment") recently amended the Exemption to make the
acquisition of Certificates by Plans in an initial offering or in a secondary
market transaction, the holding or transfer of Certificates and the servicing,
management and operation of the trust and its assets on or after November 13,
2000 eligible for exemptive relief to a broader range of Certificates. Prior to
such amendment, the Exemption generally permitted Plans to purchase only
unsubordindated Certificates rated within the highest three generic rating
categories backed by secured collateral. Such Certificates had to be issued by
a trust which was a grantor trust, REMIC or a FASIT whose corpus could not
include certain types of assets such as interest-rate swaps.
78
Types of Trusts
The Amendment has expanded the types of permitted trusts to include
owner-trusts, as well as grantor trusts, REMICs and FASITs. Owner-trusts are
subject to certain restrictions in their governing documents to ensure that
their assets may not be reached by the creditors of the seller in the event of
bankruptcy or other insolvency and must provide certain legal opinions.
Designated Transactions
In the case where the Certificates are backed by trust assets which are
residential, home equity, multi-family or commercial loans which are described
and defined in the Exemption as designated transactions ("Designated
Transactions"), the Amendment permits the Certificates issued by the trust in
such transactions to be rated in one of the highest four generic rating
categories by a Rating Agency and/or to be subordinated. It is expected that
assets included in Trusts described by this prospectus will be of the type
which will qualify for Designated Transaction treatment under the Exemption
unless otherwise specified in the prospectus supplement. In addition, one
subset of Designated Transactions, residential (one- to-four family) and home
equity loans, may be less than fully secured, provided that the rights and
interests evidenced by Certificates issued in such Designated Transactions are:
(a) not subordinated to the rights and interests evidenced by Securities of the
same trust; (b) such Certificates acquired by the Plan have received a rating
from a Rating Agency at the time of such acquisition that is in one of the two
highest generic rating categories; and (c) any loan included in the corpus or
assets of the trust is secured by collateral whose fair market value on the
closing date of the Designated Transactions is at least equal to 80% of the sum
of: (i) the outstanding principal balance due under the loan which is held by
the trust and (ii) the outstanding principal balance(s) of any other loan(s) of
higher priority (whether or not held by the trust) which are secured by the
same collateral.
Insurance Company General Accounts
In the event that Certificates do not meet the requirements of the
Exemption solely because they are Subordinate Certificates or fail to meet a
minimum rating requirement under the Exemption, certain Plans may be eligible
to purchase Certificates pursuant to Section III of Prohibited Transaction
Class Exemption 95-60 ("PTCE 95-60") which permits insurance company general
accounts as defined in PTCE 95-60 to purchase such Certificates if they
otherwise meet all of the other requirements of the Exemption.
Permitted Assets
The Amendment permits an interest-rate swap to be an asset of a trust
which issues Certificates acquired by Plans in an initial offering or in the
secondary market on or after November 13, 2000 and clarifies the requirements
regarding yield supplement agreements. An interest-rate swap (or if purchased
by or on behalf of the trust) an interest-rate cap contract (collectively, a
"Swap" or "Swap Agreement") is a permitted trust asset if it: (a) is an
"eligible Swap;" (b) is with an "eligible counterparty;" (c) is held by a trust
whose Certificates are purchased by a "qualified plan investor;" (d) meets
certain additional specific conditions which depend on whether the Swap is a
"ratings dependent Swap" or a "non-ratings dependent Swap" and (e) permits the
trust to make termination payments to the Swap (other than currently scheduled
payments) solely from excess spread or amounts otherwise payable to the
servicer or seller.
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An "eligible Swap" is one which: (a) is denominated in U.S. dollars; (b)
pursuant to which the trust pays or receives, on or immediately prior to the
respective payment or distribution date for the class of Certificates to which
the Swap relates, a fixed rate of interest or a floating rate of interest based
on a publicly available index (e.g., LIBOR or the U.S. Federal Reserve's Cost
of Funds Index (COFI)), with the trust receiving such payments on at least a
quarterly basis and obligated to make separate payments no more frequently than
the counterparty, with all simultaneous payments being netted ("Allowable
Interest Rate"); (c) has a notional amount that does not exceed either: (i) the
principal balance of the class of Certificates to which the Swap relates, or
(ii) the portion of the principal balance of such class represented by
obligations ("Allowable Notional Amount"); (d) is not leveraged (i.e., payments
are based on the applicable notional amount, the day count fractions, the fixed
or floating rates permitted above, and the difference between the products
thereof, calculated on a one-to-one ratio and not on a multiplier of such
difference) ("Leveraged"); (e) has a final termination date that is either the
earlier of the date on which the issuer terminates or the related class of
Certificates are fully repaid and (f) does not incorporate any provision which
could cause a unilateral alteration in the requirements described in (a)
through (d) above.
An "eligible counterparty" means a bank or other financial institution
which has a rating at the date of issuance of the Certificates, which is in one
of the three highest long-term credit rating categories or one of the two
highest short-term credit rating categories, utilized by at least one of the
Rating Agencies rating the Certificates; provided that, if a counterparty is
relying on its short-term rating to establish eligibility hereunder, such
counterparty must either have a long-term rating in one of the three highest
long-term rating categories or not have a long-term rating from the applicable
Rating Agency.
A "qualified plan investor" is a Plan or Plans where the decision to buy
such class of Certificates is made on behalf of the Plan by an independent
fiduciary qualified to understand the Swap transaction and the effect the Swap
would have on the rating of the Certificates and such fiduciary is either (a) a
"qualified professional asset manager" ("QPAM") under Prohibited Transaction
Class Exemption 84-14 ("PTCE 84-14") (see below), (b) an "in-house asset
manager" under Prohibited Transaction Class Exemption 96-23 ("PTCE 96-23") (see
below) or (c) has total assets (both Plan and non-Plan) under management of at
least $100 million at the time the Certificates are acquired by the Plan.
In "ratings dependent Swaps" (where the rating of a class of Certificates
is dependent on the terms and conditions of the Swap), the Swap Agreement must
provide that if the credit rating of the counterparty is withdrawn or reduced
by any Rating Agency below a level specified by the Rating Agency, the servicer
must, within the period specified under the Pooling and Servicing Agreement:
(a) obtain a replacement Swap Agreement with an eligible counterparty which is
acceptable to the Rating Agency and the terms of which are substantially the
same as the current Swap Agreement (at which time the earlier Swap Agreement
must terminate); or (b) cause the Swap counterparty to establish any
collateralization or other arrangement satisfactory to the Rating Agency such
that the then current rating by the Rating Agency of the particular class of
Certificates will not be withdrawn or reduced (and the terms of the Swap
Agreement must specifically obligate the counterparty to perform these duties
for any class of Certificates with a term of more than one year). In the event
that the servicer fails to meet these obligations, Plan certificateholders must
be notified in the immediately following periodic report which is provided to
certificateholders but in no event later than the end of the second month
beginning after the date of such
80
failure. Sixty days after the receipt of such report, the exemptive relief
provided under the Exemption will prospectively cease to be applicable to any
class of Certificates held by a Plan which involves such ratings dependent
Swap.
"Non-ratings dependent Swaps" (those where the rating of the Certificates
does not depend on the terms and conditions of the Swap) are subject to the
following conditions. If the credit rating of the counterparty is withdrawn or
reduced below the lowest level permitted above, the servicer will, within a
specified period after such rating withdrawal or reduction: (a) obtain a
replacement Swap Agreement with an eligible counterparty, the terms of which
are substantially the same as the current Swap Agreement (at which time the
earlier Swap Agreement must terminate); (b) cause the counterparty to post
collateral with the trust in an amount equal to all payments owed by the
counterparty if the Swap transaction were terminated; or (c) terminate the Swap
Agreement in accordance with its terms.
An "eligible yield supplement agreement" is any yield supplement agreement
or similar arrangement (or if purchased by or on behalf of the trust) an
interest rate cap contract to supplement the interest rates otherwise payable
on obligations held by the trust ("EYS Agreement"). If the EYS Agreement has a
notional principal amount and/or is written on an International Swaps and
Derivatives Association, Inc. (ISDA) form, the EYS Agreement may only be held
as an asset of the trust with respect to Certificates purchased by Plans on or
after April 7, 1998 if it meets the following conditions: (a) it is denominated
in U.S. dollars; (b) it pays an Allowable Interest Rate; (c) it is not
Leveraged; (d) it does not allow any of these three preceding requirements to
be unilaterally altered without the consent of the trustee; (e) it is entered
into between the trust and an eligible counterparty and (f) it has an Allowable
Notional Amount.
Pre-Funding Accounts
The Exemption was amended by PTE 97-34 to extend exemptive relief to
Certificates issued in transactions using pre-funding accounts whereby a
portion of the loans backing the Certificates are transferred to the trust
within a specified period following the closing date ("DOL Pre-Funding Period")
(see below) instead of requiring that all such loans be either identified or
transferred on or before the closing date. The relief is effective for
transactions occurring on or after May 23, 1997 provided that the following
conditions are met. First, the ratio of the amount allocated to the Pre-Funding
Account to the total principal amount of the Certificates being offered
("Pre-Funding Limit") must not exceed twenty-five percent (25%). Second, all
loans transferred after the closing date (referred to here as "additional
loans") must meet the same terms and conditions for eligibility as the original
loans used to create the trust, which terms and conditions have been approved
by the Rating Agency. Third, the transfer of such additional loans to the trust
during the DOL Pre-Funding Period must not result in the Certificates receiving
a lower credit rating from the Rating Agency upon termination of the DOL
Pre-Funding Period than the rating that was obtained at the time of the initial
issuance of the Certificates by the trust. Fourth, solely as a result of the
use of pre-funding, the weighted average annual percentage interest rate (the
"average interest rate") for all of the loans in the trust at the end of the
DOL Pre-Funding Period must not be more than 100 basis points lower than the
average interest rate for the loans which were transferred to the trust on the
closing date. Fifth, either: (i) the characteristics of the additional loans
must be monitored by an insurer or other credit support provider which is
independent of the seller; or (ii) an independent accountant retained by the
seller
81
must provide the seller with a letter (with copies provided to the Rating
Agency, the underwriter and the trustee) stating whether or not the
characteristics of the additional loans conform to the characteristics
described in the Prospectus, Prospectus Supplement, Private Placement
Memorandum ("Offering Documents") and/or the Agreement. In preparing such
letter, the independent accountant must use the same type of procedures as were
applicable to the loans which were transferred as of the closing date. Sixth,
the DOL Pre-Funding Period must end no later than three months or 90 days after
the closing date or earlier, in certain circumstances, if the amount on deposit
in the Pre-Funding Account is reduced below the minimum level specified in the
Agreement or an event of default occurs under the Agreement. Seventh, amounts
transferred to any Pre-Funding Account and/or Capitalized Interest Account used
in connection with the pre-funding may be invested only in investments which
are permitted by the Rating Agency and (i) are direct obligations of, or
obligations fully guaranteed as to timely payment of principal and interest by,
the United States or any agency or instrumentality thereof (provided that such
obligations are backed by the full faith and credit of the United States); or
(ii) have been rated (or the obligor has been rated) in one of the three
highest generic rating categories by the Rating Agency ("Acceptable
Investments"). Eighth, certain disclosure requirements must be met.
Limitations on Scope of the Exemption
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by ERISA and the Code in
connection with the initial acquisition, transfer or holding, and the
acquisition or disposition in the secondary market, of the Certificates by
Plans. However, only limited relief is provided from the restrictions of ERISA
for the acquisition or holding of Certificates on behalf of an "Excluded Plan"
by any person who is a fiduciary with respect to the assets of such Excluded
Plan. For those purposes, an Excluded Plan is a Plan sponsored by any member of
the Restricted Group. Exemptive relief may also be provided for the
acquisition, holding and disposition of Certificates by Plans if the fiduciary
or its affiliate is the obligor with respect to 5% or less of the fair market
value of the Loans in the trust provided that: (i) the Plan is not an Excluded
Plan, (ii) each Plan's investment in each class of Certificates does not exceed
25% of the outstanding Certificates in the class, (iii) after the Plan's
acquisition of the Certificates, no more than 25% of the assets over which the
fiduciary has investment authority are invested in Certificates of a trust
containing assets which are sold or serviced by the same entity and (iv) in the
case of initial issuance (but not secondary market transactions), at least 50%
of each class of Certificates and at least 50% of the aggregate interests in
the trust are acquired by persons independent of the Restricted Group.
ERISA CONSIDERATIONS RELATING TO NOTES
Under the Plan Asset Regulations, the assets of the trust would be treated
as "plan assets" of a Plan for the purposes of ERISA and the Code only if the
Plan acquires an "equity interest" in the trust and none of the exceptions
contained in the Plan Asset Regulations is applicable. An equity interest is
defined under the Plan Asset Regulations as an interest other than an
instrument which is treated as indebtedness under applicable local law and
which has no substantial equity features. Assuming that the Notes are treated
as indebtedness without substantial equity features for purposes of the Plan
Asset Regulations, then such Notes will be eligible for purchase by Plans.
However, without regard to whether the Notes are treated as an "equity
interest" for such purposes, the acquisition or holding
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of Notes by or on behalf of a Plan could be considered to give rise to a
prohibited transaction if the trust or any of its affiliates is or becomes a
party in interest or disqualified person with respect to such Plan, or in the
event that a Note is purchased in the secondary market and such purchase
constitutes a sale or exchange between a Plan and a party in interest or
disqualified person with respect to such Plan. There can be no assurance that
the trust or any of its affiliates will not be or become a party in interest or
a disqualified person with respect to a Plan that acquires Notes.
The Amendment to the Exemption permits trusts which are grantor trusts,
owner-trusts, REMICs or FASITs to issue Notes, as well as Certificates,
provided a legal opinion is received to the effect that the noteholders have a
perfected security interest in the trust's assets. The exemptive relief
provided under the Exemption for any prohibited transactions which could be
caused as a result of the operation, management or servicing of the trust and
its assets would not be necessary with respect to Notes with no substantial
equity features which are issued as obligations of the trust. However,
effective for the acquisition, holding or transfer of Notes between a Plan and
a party in interest which occurs on or after November 13, 2000, the Exemption
would provide prohibited transaction exemptive relief, provided that the same
conditions of the Exemption described above relating to Certificates are met
with respect to the Notes. The same limitations of such exemptive relief
relating to acquisitions of Certificates by fiduciaries with respect to
Excluded Plans would also be applicable to the Notes as described herein in
"Limitations on Scope of the Exemption."
In the event that the Exemption is not applicable to the Notes, one or
more other prohibited transactions exemptions may be available to Plans
purchasing or transferring the Notes depending in part upon the type of Plan
fiduciary making the decision to acquire the Notes and the circumstances under
which such decision is made. These exemptions include, but are not limited to,
Prohibited Transaction Class Exemption 90-1 (regarding investments by insurance
company pooled separate accounts), Prohibited Transaction Class Exemption 91-38
(regarding investments by bank collective investments funds), PTCE 84-14
(regarding transactions effected by "qualified professional asset managers"),
PTCE 95-60 (regarding investments by insurance company general accounts) and
PTCE 96-23 (regarding transactions effected by "in-house asset managers")
(collectively, the "Investor-Based Exemptions"). However, even if the
conditions specified in these Investor-Based Exemptions are met, the scope of
the relief provided under such Exemptions might or might not cover all acts
which might be construed as prohibited transactions.
EACH PROSPECTUS SUPPLEMENT WILL CONTAIN INFORMATION CONCERNING
CONSIDERATIONS RELATING TO ERISA AND THE CODE THAT ARE APPLICABLE TO THE
RELATED SECURITIES. BEFORE PURCHASING SECURITIES IN RELIANCE ON PTCE 83-1, THE
EXEMPTION, THE INVESTOR-BASED EMEMPTIONS OR ANY OTHER EXEMPTION, A FIDUCIARY OF
A PLAN SHOULD ITSELF CONFIRM THAT REQUIREMENTS SET FORTH IN SUCH EXEMPTION
WOULD BE SATISFIED.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO
PURCHASE SECURITIES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL WITH
RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE CODE
OF THE ACQUISITION AND OWNERSHIP OF SUCH SECURITIES.
83
Governmental plans and church plans as defined in ERISA are not subject to
ERISA or Code Section 4975, although they may elect to be qualified under
Section 401(a) of the Code and exempt from taxation under Section 501(a) of the
Code and would then be subject to the prohibited transaction rules set forth in
Section 503 of the Code. In addition, governmental plans may be subject to
federal, state and local laws which are to a material extent similar to the
provisions of ERISA or a Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the propriety of an
investment in Securities under applicable fiduciary or other investment
standards and the need for the availability of any exemptive relief under any
Similar Law.
LEGAL INVESTMENT
Unless otherwise specified in the related prospectus supplement, the
securities will not constitute mortgage-related securities within the meaning
of The Secondary Mortgage Market Enhancement Act. Accordingly, investors whose
investment authority is subject to legal restrictions should consult their own
legal advisors to determine whether and the extent to which the securities
constitute legal investments for them.
PLAN OF DISTRIBUTION
On the terms and conditions set forth in an underwriting agreement with
respect to each trust fund, the seller will agree to sell to each of the
underwriters named in the related prospectus supplement, and each of those
underwriters will severally agree to purchase from the seller, the principal
amount of each class of securities of the related series set forth in the
related prospectus supplement.
In each underwriting agreement, the several underwriters will agree,
subject to the terms and conditions set forth in that agreement, to purchase
all of the securities which are offered by this prospectus and by the related
prospectus supplement if any of those securities are purchased. If an
underwriter defaults in its obligations, each underwriting agreement will
provide that purchase commitments of the nondefaulting underwriters may be
increased, or the underwriting agreement may be terminated.
Each prospectus supplement will either
(x) set forth the price at which each class of securities will be offered
to the public and any concessions that may be offered to dealers
participating in the offering of those securities, or
(y) specify that the related securities are to be resold by the
underwriters in negotiated transactions at varying prices to be
determined at the time of sale.
After the initial public offering of any securities, the public offering
price and concessions may be changed.
Each underwriting agreement will provide that the seller will indemnify
underwriters against particular liabilities, including liabilities under the
Securities Act of 1933, as amended.
Under each underwriting agreement, the closing of the sale of any class of
securities subject to that agreement will be conditioned on the closing of the
sale of all other classes also subject to that agreement.
The place and time of delivery for the securities in respect of which this
prospectus is delivered will be set forth in the related prospectus supplement.
84
LEGAL MATTERS
Legal matters in connection with the securities will be passed upon for
the seller by Stroock & Stroock & Lavan LLP, New York, New York or such other
counsel as may be identified in the applicable prospectus supplement.
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$150,000,000
(APPROXIMATE)
AAMES MORTGAGE TRUST 2001-1
MORTGAGE PASS-THROUGH CERTIFICATES,
SERIES 2001-1
Aames Capital Corporation
as Sponsor
Countrywide Home Loans, Inc.
as Servicer
----------------------------------------------------------
PROSPECTUS SUPPLEMENT
March 13, 2001
----------------------------------------------------------
GREENWICH CAPITAL MARKETS, INC.
COUNTRYWIDE SECURITIES CORPORATION
LEHMAN BROTHERS
MORGAN STANLEY DEAN WITTER