Filed Pursuant to Rule 424(b)(5)
Registration File No.: 333-43091
PROSPECTUS SUPPLEMENT DATED SEPTEMBER 25, 2001
(TO PROSPECTUS DATED JUNE 8, 2001)
$674,427,000
(Approximate)
HOME EQUITY LOAN-BACKED TERM NOTES,
SERIES 2001-2
IRWIN HOME EQUITY LOAN TRUST 2001-2
Issuer
IRWIN UNION BANK AND TRUST COMPANY
Originator and Master Servicer
IRWIN HOME EQUITY CORPORATION
Subservicer
BEAR STEARNS ASSET BACKED SECURITIES, INC.
Depositor
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You should consider carefully the risk factors beginning on page S-15 in this
prospectus supplement and page 4 in the prospectus.
The offered notes will represent obligations of the trust created for Series
2001-2 and will not represent ownership interests in or obligations of Bear
Stearns Asset Backed Securities, Inc., Irwin Union Bank and Trust Company or any
of their affiliates.
This prospectus supplement may be used to offer and sell the offered notes
offered hereby only if accompanied by the prospectus.
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NOTES
The Irwin Home Equity Loan Trust 2001-2 includes three groups of residential
mortgage loans consisting of fixed-rate home equity loans and adjustable-rate
home equity lines of credit. The trust will also include funds on deposit in an
account to be used to acquire home equity loans and home equity lines of credit
subsequent to the date of issuance of the notes. The trust will issue twelve
classes of offered notes, variable funding notes and certificates. Only the
twelve classes of offered notes are offered hereby. You can find a list of these
classes of notes, together with certain other characteristics, on page S-3 of
this prospectus supplement.
CREDIT ENHANCEMENT
Credit enhancement for the notes consists of:
o the portion of interest paid by the borrowers on the loans in excess of
what is necessary to pay interest earned on the notes and certain expenses
of the trust;
o overcollateralization; and
o except for the Class B-1 notes, subordination of specified classes of notes
to others
UNDERWRITING
================================== =================== ================= ===================== ====================
INITIAL PRICE TO PROCEEDS TO
NOTE BALANCE(1) NOTE RATE PUBLIC(2) DEPOSITOR(3)
---------------------------------- ------------------- ----------------- --------------------- --------------------
Class IA-1 Notes......... $ 64,930,000 Variable(4) 100.00000% 99.89500%
---------------------------------- ------------------- ----------------- --------------------- --------------------
Class IA-2 Notes......... $ 115,000,000 5.45% 99.98379% 99.73379%
---------------------------------- ------------------- ----------------- --------------------- --------------------
Class IIA-1 Notes........ $ 72,972,000 Variable(4) 100.00000% 99.89500%
---------------------------------- ------------------- ----------------- --------------------- --------------------
Class IIA-2 Notes........ $ 26,949,000 4.35% 99.99545% 99.61745%
---------------------------------- ------------------- ----------------- --------------------- --------------------
Class IIA-3 Notes........ $ 50,846,000 4.85% 99.97396% 99.54996%
---------------------------------- ------------------- ----------------- --------------------- --------------------
Class IIA-4 Notes........ $ 31,104,000 5.68% 99.97704% 99.67704%
---------------------------------- ------------------- ----------------- --------------------- --------------------
Class IIA-5 Notes........ $ 41,796,000 6.52% 99.99405% 99.59405%
---------------------------------- ------------------- ----------------- --------------------- --------------------
Class IIIA-1 Notes....... $ 130,000,000 Variable(4) 100.00000% 99.75000%
---------------------------------- ------------------- ----------------- --------------------- --------------------
Class A-IO Notes......... $ 54,112,000(5) 10.000% 22.65778% 22.43120%
---------------------------------- ------------------- ----------------- --------------------- --------------------
Class M-1 Notes.......... $ 53,022,000 Variable(4) 100.00000% 99.50000%
---------------------------------- ------------------- ----------------- --------------------- --------------------
Class M-2 Notes.......... $ 43,904,000 Variable(4) 100.00000% 98.53800%
---------------------------------- ------------------- ----------------- --------------------- --------------------
Class B-1 Notes.......... $ 43,904,000 Variable(4) 100.00000% 99.30000%
---------------------------------- ------------------- ----------------- --------------------- --------------------
Total................... $ 674,427,000 $686,644,841.60 $683,972,673.98
================================== =================== ================= ===================== ====================
(1) Subject to a permitted variance of plus or minus 5%.
(2) Plus accrued interest, if any, from September 1, 2001, except with respect
to the Class IA-1, Class IIA-1, Class IIIA-1, Class M-1, Class M-2 and
Class B-1 Notes.
(3) Before deducting expenses, estimated to be approximately $850,000.
(4) LIBOR plus a margin, subject to an interest rate cap.
(5) The Class A-IO Notes will be interest-only notes. Interest will accrue on a
notional balance generally of $54,112,000 until the payment date in March
2004 and $0 thereafter.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE OFFERED NOTES OR DETERMINED THAT
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS IS ACCURATE OR COMPLETE. IT IS
ILLEGAL FOR ANYONE TO TELL YOU OTHERWISE.
The underwriters listed below will offer the offered notes subject to
certain conditions. See "Method of Distribution" in this prospectus supplement.
Delivery of the offered notes is expected to be made in book entry form on or
about September 28, 2001. The offered notes will be offered in the United States
and Europe.
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS
We provide information to you about the offered notes 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 series of offered notes; and
o this prospectus supplement, which describes the specific terms of your
series of offered notes.
IF THE DESCRIPTION OF YOUR OFFERED NOTES IN THIS PROSPECTUS SUPPLEMENT DIFFERS
FROM THE RELATED DESCRIPTION IN THE ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
You can find a listing of the pages where capitalized terms used both in the
prospectus and prospectus supplement are defined under the caption "Glossary of
Terms" beginning on page 125 in the accompanying prospectus and under the
caption "Index of Defined Terms" beginning on page S-89 in this prospectus
supplement.
For 90 days following the date of this prospectus supplement, all dealers
selling offered notes will deliver a prospectus supplement and prospectus. This
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters of the offered notes with respect to their unsold
allotments or subscriptions. We cannot sell the offered notes to you unless you
have received both this prospectus supplement and the accompanying prospectus.
The Depositor's principal offices are located at 245 Park Avenue, New York, New
York 10167, and its phone number is (212) 272-2000.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
SUMMARY............................................S-1
RISK FACTORS.......................................S-15
INTRODUCTION.......................................S-23
DESCRIPTION OF THE MORTGAGE LOANS..................S-23
IHE FUNDING CORP. II...............................S-37
IRWIN HOME EQUITY CORPORATION......................S-37
PREPAYMENT AND YIELD CONSIDERATIONS................S-41
THE MASTER SERVICER................................S-58
SERVICING OF THE MORTGAGE LOANS....................S-58
THE ISSUER.........................................S-62
THE OWNER TRUSTEE..................................S-62
THE INDENTURE TRUSTEE..............................S-63
DESCRIPTION OF THE SECURITIES......................S-63
DESCRIPTION OF THE MORTGAGE LOAN SALE
AGREEMENT AND THE PURCHASE AND SALE AGREEMENT......S-77
DESCRIPTION OF THE SALE AND SERVICING AGREEMENT....S-80
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE...S-81
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............S-84
ERISA CONSIDERATIONS...............................S-85
LEGAL INVESTMENT...................................S-85
METHOD OF DISTRIBUTION.............................S-86
LEGAL MATTERS......................................S-88
RATINGS............................................S-88
PROSPECTUS
RISK FACTORS.........................................4
DESCRIPTION OF THE SECURITIES.......................14
THE TRUST FUNDS.....................................19
CREDIT ENHANCEMENT..................................39
SERVICING OF LOANS..................................44
THE AGREEMENTS......................................53
MATERIAL LEGAL ASPECTS OF THE LOANS.................64
THE DEPOSITOR.......................................78
USE OF PROCEEDS.....................................78
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS..........79
STATE TAX CONSIDERATIONS...........................109
FASIT SECURITIES...................................109
ERISA CONSIDERATIONS...............................115
LEGAL MATTERS......................................122
FINANCIAL INFORMATION..............................122
AVAILABLE INFORMATION..............................122
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE..122
RATINGS............................................123
LEGAL INVESTMENT CONSIDERATIONS....................124
PLAN OF DISTRIBUTION...............................124
GLOSSARY OF TERMS..................................125
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SUMMARY
The following summary is a general overview of the notes offered hereby and
does not contain all of the information that you should consider in making your
investment decision. To understand the terms of the offered notes, you should
read carefully this entire document and the accompanying prospectus.
Title of the offered notes.......................... Home Equity Loan-Backed Term Notes, Series 2001-2.
Issuer.............................................. Irwin Home Equity Loan Trust 2001-2.
Depositor........................................... Bear Stearns Asset Backed Securities, Inc.
Transferor.......................................... IHE Funding Corp. II.
Originator and master servicer...................... Irwin Union Bank and Trust Company.
Subservicer......................................... Irwin Home Equity Corporation.
Owner trustee....................................... Wilmington Trust Company.
Indenture trustee................................... Wells Fargo Bank Minnesota, National Association.
Mortgage loans...................................... Closed-end, fixed-rate home equity loans with
combined loan-to-value ratios generally up to 100%,
closed-end, fixed-rate home equity loans with
combined loan-to-value ratios generally up to 125%,
adjustable-rate home equity lines of credit with
combined loan-to-value ratios generally up to 100%
and adjustable-rate home equity lines of credit
with combined loan-to-value ratios generally up to
125%, secured, in each case, by first, second or
more junior mortgages or deeds of trust on one- to
four-family residential properties with the
characteristics specified in the tables attached
hereto will be transferred to the issuer on the
closing date. Additional fixed-rate home equity
loans, adjustable-rate home equity lines of credit
and additional draws on the initial home equity
lines of credit, acquired by the transferor prior
to the closing date will be sold to the issuer on
the closing date. Along with the initial mortgage
loans and the additional mortgage loans, the issuer
will also purchase from Irwin Union Bank and Trust
Company, mortgage loans consisting of fixed-rate
home equity loans and adjustable-rate home equity
lines of credit prior to March 31, 2002 and
additional draws on previously acquired home equity
lines of credit prior to September 30, 2005.
Statistical calculation date........................ The close of business on July 31, 2001.
S-1
Cut-off date........................................ The close of business on August 31, 2001 for the
initial mortgage loans. In the case of any
additional mortgage loan sold to the trust on the
closing date, the later of August 31, 2001 and the
origination date of such mortgage loan. For any
subsequent mortgage loan sold to the trust after
the closing date, the applicable sale date of such
mortgage loan to the trust.
Closing date........................................ On or about September 28, 2001.
Payment dates....................................... Beginning in October 2001 on the 25th day of each
month or, if the 25th day is not a business day, on
the next business day.
Form of offered notes............................... Book-entry form, same day funds through DTC,
Clearstream or Euroclear.
S-2
MATERIAL TERMS OF OFFERED NOTES
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INITIAL RATING
INITIAL NOTE (MOODY'S/ EXPECTED FINAL LEGAL FINAL
CLASS NOTE RATE BALANCE(1) S&P/FITCH) PAYMENT DATE(2) PAYMENT DATE DESIGNATIONS
------------ ---------------- ------------------ ------------------ ---------------- -------------- --------------------
IA-1 Variable(3) $64,930,000 Aaa/AAA/AAA 2/25/2003 07/25/2009 Senior/Variable Rate
------------ ---------------- ------------------ ------------------ ---------------- -------------- --------------------
IA-2 5.45%(4) $115,000,000 Aaa/AAA/AAA 11/25/2010 2/25/2027 Senior/Fixed Rate
------------ ---------------- ------------------ ------------------ ---------------- -------------- --------------------
IIA-1 Variable(5) $72,972,000 Aaa/AAA/AAA 6/25/2003 9/25/2010 Senior/Variable Rate
------------ ---------------- ------------------ ------------------ ---------------- -------------- --------------------
IIA-2 4.35% $26,949,000 Aaa/AAA/AAA 1/25/2004 5/25/2012 Senior/Fixed Rate
------------ ---------------- ------------------ ------------------ ---------------- -------------- --------------------
IIA-3 4.85% $50,846,000 Aaa/AAA/AAA 8/25/2005 12/25/2014 Senior/Fixed Rate
------------ ---------------- ------------------ ------------------ ---------------- -------------- --------------------
IIA-4 5.68% $31,104,000 Aaa/AAA/AAA 12/25/2007 2/25/2016 Senior/Fixed Rate
------------ ---------------- ------------------ ------------------ ---------------- -------------- --------------------
IIA-5 6.52%(4) $41,796,000 Aaa/AAA/AAA 2/25/2012 2/25/2027 Senior/Fixed Rate
------------ ---------------- ------------------ ------------------ ---------------- -------------- --------------------
IIIA-1 Variable(6) $130,000,000 Aaa/AAA/AAA 2/25/2012 7/25/2026 Senior/Variable Rate
------------ ---------------- ------------------ ------------------ ---------------- -------------- --------------------
Senior/Fixed Rate
A-IO 10.000%(7) $54,112,000(8) Aaa/AAA/AAA 3/25/2004 3/25/2004 Interest Only
------------ ---------------- ------------------ ------------------ ---------------- -------------- --------------------
M-1 Variable(9) $53,022,000 Aa2/AA/AA 2/25/2012 7/25/2026 Subordinate/
Variable Rate
------------ ---------------- ------------------ ------------------ ---------------- -------------- --------------------
M-2 Variable (10) $43,904,000 A2/A/A 2/25/2012 7/25/2026 Subordinate/
Variable Rate
------------ ---------------- ------------------ ------------------ ---------------- -------------- --------------------
B-1 Variable(11) $43,904,000 Baa3/BBB/BBB 2/25/2012 7/25/2026 Subordinate/
Variable Rate
------------ ---------------- ------------------ ------------------ ---------------- -------------- --------------------
Total $674,427,000
------------
(1) Subject to a permitted variance of plus or minus 5%.
(2) Based on the assumption that the master servicer has exercised its option
to repurchase all of the mortgage loans and the other assumptions described
herein. Due to losses and prepayments on the mortgage loans, the final
payment dates on each class of offered notes may be substantially earlier
or later than such dates.
(3) On any payment date, equal to the lesser of (i) LIBOR plus 0.22% per annum
and (ii) 10.00% per annum.
(4) The note rate will increase by 0.50% per annum commencing on the Step-Up
Date. The "STEP-UP DATE" is the first payment date on which the aggregate
outstanding principal balance of the mortgage loans is less than 10% of the
sum of (x) the aggregate principal balance of the mortgage loans as of the
cut-off date and (y) the amount on deposit in the pre-funding account on
the closing date.
(5) On any payment date, equal to the lesser of (i) LIBOR plus 0.22% per annum
and (ii) 10.00% per annum.
(6) On any payment date, equal to the least of (i) LIBOR plus 0.35% (or, for
any payment on or after the related Step-Up Date, LIBOR plus 0.70%) per
annum, (ii) the weighted average mortgage interest rate of the mortgage
loans in loan group III minus the rate at which the servicing fee accrues
and (iii) 12.00% per annum.
(7) The Class A-IO notes will be interest only notes. Interest will accrue on
the notional balance of the Class A-IO notes.
(8) The Class A-IO notes will have a notional balance equal to the least of (i)
$54,112,000 (10.00% of the aggregate principal balance of the initial Group
I and Group II mortgage loans as of the cut-off date and the amounts
deposited in the pre-funding account for Group I and Group II), (ii) the
aggregate outstanding principal balance of the mortgage loans in loan
groups I and II and (iii) after the payment date in March 2004, $0. The
Class A-IO notes will not have a principal balance.
(9) On any payment date, equal to the least of (i) LIBOR plus 0.875% (or, for
any payment date on or after the Step-Up Date, LIBOR plus 1.3125%) per
annum, (ii) (a) the weighted average mortgage interest rate of all of the
mortgage loans minus the rate at which the servicing fee and the interest
rate cap counterparty fee accrues, minus (b) on or prior to the payment
date in March 2004, 1.00% plus (c) a rate equal to the amount, if any,
received with respect to such payment date on the related interest rate cap
agreement divided by the notional amount of the related interest rate cap
agreement and (iii) 13.00% per annum.
S-3
(10) On any payment date, equal to the least of (i) LIBOR plus 1.25% (or, for
any payment date on or after the Step-Up Date, LIBOR plus 1.875%) per
annum, (ii) (a) the weighted average mortgage interest rate of all of the
mortgage loans minus the rate at which the servicing fee and the interest
rate cap counterparty fee accrues, minus (b) on or prior to the payment
date in March 2004, 1.00% plus (c) a rate equal to the amount, if any,
received with respect to such payment date on the related interest rate cap
agreement divided by the notional amount of the related interest rate cap
agreement and (iii) 13.00% per annum.
(11) On any payment date, equal to the least of (i) LIBOR plus 2.00% (or, for
any payment date on or after the Step-Up Date, LIBOR plus 3.00%) per annum,
(ii) (a) the weighted average net mortgage interest rate of all of the
mortgage loans minus the rate at which the servicing fee and the interest
rate cap counterparty fee accrues, minus (b) on or prior to the payment
date in March 2004, 1.00% plus (c) a rate equal to the amount, if any,
received with respect to such payment date on the related interest rate cap
agreement divided by the notional amount of the related interest rate cap
agreement and (iii) 13.00% per annum.
S-4
THE OFFERED NOTES
The Class IA-1 notes and the Class IA-2 notes are collectively referred to as
the Group I notes. The Class IIA-1 notes, Class IIA-2 notes, Class IIA-3 notes,
Class IIA-4 notes and the Class IIA-5 notes are collectively referred to as the
Group II notes. The Class IIIA-1 notes and the variable funding notes are
collectively referred to as the Group III notes. The Group I notes, the Group II
notes and the Group III notes are collectively referred to as the Class A notes.
The Class M-1 notes, the Class M-2 notes and the Class B-1 notes are
collectively referred to as the subordinate notes. The Class A notes (other than
the variable funding notes), the Class A-IO notes and the subordinate notes are
collectively referred to as the offered notes.
THE VARIABLE FUNDING NOTES
In addition to the offered notes, the trust will also issue Home Equity
Loan-Backed Variable Funding Notes, Series 2001-2. The variable funding notes
will not be offered by this prospectus supplement. The variable funding notes
will have a variable funding balance of $0 on the closing date. Any information
concerning the variable funding notes included in this prospectus supplement is
only included to provide you with a better understanding of the offered notes.
During the managed amortization period, if amounts on deposit in the funding
account and principal collections on the mortgage loans in loan group III are
insufficient to fund all of the additional balances on the home equity lines of
credit arising during the related collection period, the variable funding
balance will be increased by the shortfall.
THE CERTIFICATES
The trust will also issue Home Equity Loan-Backed Certificates, Series 2001-2,
which will not be offered by this prospectus supplement. Any information
concerning the certificates included in this prospectus supplement is only
included to provide you with a better understanding of the offered notes. The
certificates will be subordinated to the offered notes and the variable funding
notes. The certificates will be issued pursuant to the trust agreement and will
represent the beneficial ownership interests in the trust.
THE TRUST
The depositor will establish Irwin Home Equity Loan Trust 2001-2, a Delaware
business trust. The trust will be established pursuant to a trust agreement,
dated as of August 31, 2001, between the depositor and the owner trustee. The
trust will issue the notes pursuant to an indenture dated as of August 31, 2001,
between the issuer and the indenture trustee. The assets of the trust will
include:
o the unpaid principal balance of the mortgage loans as of the close of
business on the initial cut-off date;
o the unpaid principal balance as of the related cut-off date of mortgage
loans added to the property of the trust after the closing date; and
o any additions to the home equity lines of credit as a result of draws or
new advances of money made pursuant to the applicable loan agreement after
the cut-off date or related subsequent cut-off date.
The unpaid principal balance of a home equity line of credit on any day will be
equal to:
o its cut-off date balance,
o plus any additional balances relating to that home equity line of credit
sold to the issuer before that day,
o minus all collections credited against the principal balance of that home
equity line of credit in accordance with the related loan agreement since
the cut-off date or related subsequent cut-off date.
The principal balance of a liquidated home equity line of credit or a closed-end
home
S-5
equity loan after the final recovery of related liquidation proceeds will be
zero.
In addition to the mortgage loans conveyed to the trust on the closing date, the
property of the trust will include cash on deposit in the pre-funding account
and the capitalized interest account and collections on the mortgage loans.
Payments of interest and principal on the notes will be made only from payments
received in connection with the mortgage loans.
MORTGAGE LOAN GROUPS
The mortgage loans assigned and transferred to the issuer and pledged to the
indenture trustee as of the closing date will be divided into three loan groups.
The initial mortgage loans in the aggregate have the following characteristics
as of the statistical calculation date:
Aggregate principal balance $355,771,166.60
Average principal balance $41,816.08
Range of mortgage interest rates 6.650% to 21.400%
Weighted average mortgage interest rate 13.172%
Range of original terms to maturity 60 to 300 months
Weighted average original term to maturity 225 months
Range of remaining terms to maturity 52 to 300 months
Weighted average remaining term to maturity 217 months
Weighted average combined loan-to-value ratios 106.07%
Loan group I will include initial mortgage loans which consist solely of
fixed-rate, closed-end home equity loans with combined loan-to-value ratios
generally up to 100%, secured by first, second or more junior mortgages or deeds
of trust on residential properties.
The mortgage loans in loan group I have the following characteristics as of the
statistical calculation date:
Aggregate principal balance $93,751,272.20
Average principal balance $44,264.06
Range of mortgage interest rates 7.400% to 20.280%
Weighted average mortgage interest rate 11.431%
Range of original terms to maturity 60 to 300 months
Weighted average original term to maturity 217 months
Range of remaining terms to maturity 52 to 300 months
Weighted average remaining term to maturity 213 months
Weighted average combined loan-to-value ratios 91.21%
Loan group II will include initial mortgage loans which consist solely of
fixed-rate, closed-end home equity loans with combined loan-to-value ratios
generally over 100% and generally up to 125%, secured by second or more junior
mortgages or deeds of trust on residential properties.
The mortgage loans in loan group II have the following characteristics as of the
statistical calculation date:
Aggregate principal balance $163,877,369.68
Average principal balance $41,944.55
Range of mortgage interest rates 8.990% to 21.400%
Weighted average mortgage interest rate 15.048%
Range of original terms to maturity 61 to 300 months
Weighted average original term to maturity 231 months
Range of remaining terms to maturity 60 to 300 months
Weighted average remaining term to maturity 230 months
Weighted average combined loan-to-value ratios 118.11%
Loan group III will include initial mortgage loans which consist of (i)
adjustable-rate home equity lines of credit with combined loan-to-value ratios
generally up to 100% and (ii) adjustable-rate home equity lines of credit with
combined loan-to-value ratios generally over 100% and generally up to 125%,
secured in both cases by first, second or more junior
S-6
mortgages or deeds of trust on residential properties.
The mortgage loans in loan group III have the following characteristics as of
the statistical calculation date:
Aggregate principal balance $98,142,524.72
Average principal balance $39,525.79
Range of mortgage interest rates 6.650% to 18.900%
Weighted average mortgage interest rate 11.703%
Weighted average maximum mortgage interest rates 20.11%
Weighted average minimum mortgage interest rates 10.45%
Weighted average gross margin 4.71%
Range of original terms to maturity 180 to 300 months
Weighted average original term to maturity 221 months
Range of remaining terms to maturity 57 to 240 months
Weighted average remaining term to maturity 199 months
Weighted average combined loan-to-value ratios 100.16%
See "Description of the Mortgage Loans" in this prospectus supplement.
The statistical information presented in this prospectus supplement reflects the
pool of initial mortgage loans as of the statistical calculation date. Along
with the initial mortgage loans to be acquired by the trust on the closing date,
it is expected that the trust will also acquire on the closing date certain
additional mortgage loans. It is expected that the aggregate principal balance
of such additional mortgage loans will be approximately $98.6 million, $32.5
million, $49.5 million and $16.6 million of which will be allocated to loan
group I, loan group II and loan group III, respectively. The additional mortgage
loans will be selected using generally the same criteria used to select the
initial mortgage loans.
PRE-FUNDING ACCOUNT
On the closing date, an amount equal to the excess of the aggregate initial
principal balance of the offered notes plus the initial overcollateralization
amount over the aggregate principal balance of the initial mortgage loans and
the additional mortgage loans acquired by the trust on the closing date will be
deposited from the proceeds of the sale of the offered notes into a pre-funding
account. Approximately $102.7 million will be allocated to purchasing subsequent
home equity loans for loan group I, approximately $101.3 million will be
allocated to purchasing subsequent home equity loans for loan group II and
approximately $22.4 million will be allocated to purchasing subsequent home
equity lines of credit for loan group III.
The transferor will be obligated to sell mortgage loans to the trust after the
closing date and the trust will be obligated, subject to the provisions of the
sale and servicing agreement, to purchase such subsequent mortgage loans from
funds on deposit in the pre-funding account during the period from the closing
date until the earliest of (i) the date on which the amount on deposit in the
pre-funding account is less than $100,000, (ii) March 31, 2002 and (iii) the
occurrence, if any, of a servicer default under the sale and servicing agreement
or an amortization event.
Amounts on deposit in the pre-funding account will be invested in permitted
investments specified in the indenture. Any amount remaining in the pre-funding
account at the end of the pre-funding period that was allocated to purchase
subsequent mortgage loans for loan groups I or II will be treated as principal
collections for the related loan group. Any amount remaining in the pre-funding
account at the end of the pre-funding period described above that was allocated
to purchase subsequent home equity lines of credit for loan group III will
generally be used to purchase additional balances through the end of the managed
amortization period, and thereafter will be treated as principal collections for
loan group III.
We refer you to "Description of the Mortgage Loans--Conveyance of Subsequent
Mortgage Loans, the Pre-Funding Account and the Funding Account" in this
prospectus supplement for further information.
CAPITALIZED INTEREST ACCOUNT
On the closing date, the transferor will make a cash deposit from the proceeds
of the sale of the
S-7
offered notes into a capitalized interest account held by the indenture trustee,
unless a letter of credit evidencing the availability of such amount is
delivered to the indenture trustee on the closing date. Any letter of credit
must be in form and substance, and from a provider, acceptable to the rating
agencies. Amounts on deposit in the capitalized interest account will be
withdrawn, or drawings under such letter of credit will be made, on each payment
date during the pre-funding period to fund portions of the interest payments on
the notes to the extent set forth in the indenture and the sale and servicing
agreement. To the extent not needed to fund portions of the interest payments on
the notes on the current or any future payment date, amounts on deposit in the
capitalized interest account may be withdrawn by the transferor, or such letter
of credit may be reduced, on any payment date during the pre-funding period.
We refer you to "Description of the Securities -- Capitalized Interest Account"
in this prospectus supplement for further information.
FUNDING ACCOUNT
An account designated the "funding account" will be set up with the indenture
trustee on the closing date. On each payment date during the period beginning at
the end of the pre-funding period described above and terminating at the end of
the managed amortization period, the indenture trustee, first from any amounts
transferred from the pre-funding account to the funding account and second from
principal collections on the mortgage loans, will apply such amounts to buy
additional balances for loan group III, to the extent they are available.
The managed amortization period will only be in effect for the Group III notes
and will be the period beginning on the closing date and ending on the earlier
of (1) September 30, 2005 and (2) the occurrence of an amortization event. To
the extent that any amounts deposited in the funding account have not been
applied to buy additional balances at the end of the managed amortization
period, the amount left in the funding account will be paid treated as principal
collections for loan group III.
We refer you to "Description of the Mortgage Loans--Conveyance of Subsequent
Mortgage Loans, the Pre-Funding Account and the Funding Account" in this
prospectus supplement for further information.
INTEREST PAYMENTS
Interest payments on each class of the offered notes will be made monthly on
each payment date, beginning in October 2001, at the respective note rates
described above. The Class A-IO notes, which will be interest only notes, will
only receive interest payments up to and including the payment date in March
2004. Interest on the Class A notes that are offered notes (other than the Class
IA-1 notes, Class IIA-1 notes and Class IIIA-1 notes) and the Class A-IO notes
for each payment date will accrue during the calendar month preceding the month
in which such payment date occurs, on the basis of a 30-day month and a 360-day
year. Interest on the Class IA-1 notes, Class IIA-1 notes, Class IIIA-1 notes
and the subordinate notes for each payment date will accrue from the preceding
payment date (or, in the case of the first payment date, from the closing date)
through the day before that payment date, on the basis of the actual number of
days in that interest period and a 360-day year. Interest on the Class A notes
and the Class A-IO notes is paid senior in priority to interest on the
subordinate notes.
All interest payments on the notes for any payment date will be allocated to the
notes based on their respective interest accruals. Interest will accrue on the
Class A-IO notes on the notional balance thereof. The initial notional balance
of the Class A-IO notes will be $54,112,000 and will not be subject to reduction
unless the aggregate principal balance of all of the home equity loans in loan
groups I and II is reduced below $54,112,000 on or before March 1, 2004. The
interest rate on the variable funding notes for any payment date will equal the
note rate on the Class IIIA-1 notes for the related interest period.
To the extent the note rate of the Class IIIA-1 notes or any subordinate note is
limited by the applicable weighted average net mortgage interest rate, these
notes may receive interest up to the applicable LIBOR rate as an interest
carry-forward amount on subsequent payment dates.
S-8
PRINCIPAL PAYMENTS
All principal payments made to the holders of the Class A notes on each payment
date from whatever source will be distributed concurrently to (a) the Group I
notes in the aggregate, (b) the Group II notes in the aggregate and (c) the
Group III notes in the aggregate, in each case in proportion to the percentage
of the principal collections (net of principal collections from loan group III
used to purchase additional balances for loan group III) derived from the
related loan group (with respect to which any related notes are outstanding) for
that payment date, until the principal balances of the Group I notes in the
aggregate, the Group II notes in the aggregate and the Group III notes in the
aggregate have been reduced to zero.
During the managed amortization period, principal collections on the mortgage
loans in loan group III may be used to fund additional balances created during
the related collection period, which balances will be allocated to loan group
III. This will reduce the net principal collections for loan group III and the
total principal collections.
After either the Group I notes in the aggregate, the Group II notes in the
aggregate or the Group III notes in the aggregate are reduced to zero, amounts
will be distributed to the remaining class or classes of the Class A notes, as
described in the next paragraph, based on their principal collections to the
extent necessary to pay principal due on those classes.
Payments of principal that are allocated to the Group I notes and the Group II
notes will be paid sequentially within the respective group of notes, which
means that principal will not be paid on any class of notes unless the principal
balance of each class of notes within such group with a lower numerical
designation has been reduced to zero. Payments of principal that are allocated
to the Group III notes will be paid to the Class IIIA-1 notes and the variable
funding notes pro rata based on the outstanding principal balance or variable
funding balance, as applicable, thereof until paid in full.
Because principal payments on the Class A notes in respect of liquidation loss
amounts and overcollateralization increase amounts will be allocated between the
Group I notes, the Group II notes and the Group III notes in proportion to the
principal collections (net of principal collections from loan group III used to
purchase additional balances for loan group III) for the related loan group, and
not in proportion to the amount of liquidation loss amounts on mortgage loans in
the related loan group or the overcollateralization increase amount derived from
that loan group, excess interest collections from one loan group may be applied
on any payment date to make principal payments to the notes corresponding to
another loan group.
For at least thirty-six months after the closing date, no principal payments
will be distributed to the Class M-1 notes, the Class M-2 notes and the Class
B-1 notes, unless the principal balances of all of the Class A notes have been
reduced to zero. In addition, if on any payment date the loss or delinquency
tests are not satisfied, amounts otherwise payable to the Class M-1 notes, the
Class M-2 notes or the Class B-1 notes with respect to principal will be paid to
the Class A notes, and the Class M-1 notes, the Class M-2 notes and the Class
B-1 notes will receive no distributions of principal on that payment date. No
principal will be paid to the Class A-IO notes, which are interest only notes.
On the related legal final payment date, principal will be due and payable on
the notes in an amount equal to the related principal balance (or the variable
funding balance in the case of the variable funding notes) remaining outstanding
on that payment date.
The release of overcollateralization after the step-down date is subject to the
following loss and delinquency tests:
o satisfaction of a cumulative liquidation loss amount test such that the
fraction (expressed as a percentage) of cumulative liquidation loss amounts
as of the respective payment date divided by the principal balance of the
initial mortgage loans and the additional mortgage loans plus the amount on
deposit in the pre-funding account on the closing date is less than or
equal to the percentage set forth below for the related collection period
specified below:
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CUMULATIVE
LIQUIDATION
COLLECTION LOSS AMOUNT
PERIOD PERCENTAGE
------ ----------
36 - 48 9.5%
49 - 60 11.25%
61 - 84 11.75%
85+ 12.25%; and
o satisfaction of a delinquency test such that the three-month rolling
average of the principal balance of the mortgage loans that are 60 days or
more delinquent (including all mortgage loans that are in foreclosure and
mortgage loans for which the related mortgaged property constitutes REO
property but excluding liquidated mortgage loans) in the payment of
principal and interest is less than 17.75% of the senior enhancement
percentage, which percentage is computed for each payment date as the
principal balance of the mortgage loans minus the principal balance of the
Class A Notes divided by the principal balance of the mortgage loans.
We refer you to "Description of the Securities--Priority of Distributions" in
this prospectus supplement for a description of the allocation of principal
payments on the offered notes.
PRIORITY OF PAYMENTS ON THE NOTES
Payments of principal and interest on the mortgage loans will be collected each
month. After retaining its master servicing fee and amounts that reimburse the
master servicer or the subservicer for reimbursable expenses, the master
servicer will forward all collections on the mortgage loans to the indenture
trustee and on each payment date, these amounts and any interest rate cap
payments, after the indenture trustee reimburses itself for any reimbursable
expenses, will be allocated as follows:
o first, to pay any prepayment penalties collected on the mortgage loans to
the holders of the certificates;
o second, for any payment date up to and including the March 2004 payment
date, $128,900 to the interest rate cap counterparty;
o third, to pay accrued and unpaid interest due on the principal balances of
the notes at the respective note rates as follows:
o (i) first, to the Class A notes and the Class A-IO notes, on a pro
rata basis in accordance with the amount of accrued interest due
thereon;
o (ii) second, to the Class M-1 notes;
o (iii) third, to the Class M-2 notes; and
o (iv) fourth, to the Class B-1 notes;
o fourth, to pay as principal on the notes (other than the Class A-IO notes),
in an amount equal to principal collections on the mortgage loans minus any
principal collections used to purchase additional balances and any
overcollateralization release amount as follows:
o (i) first, to the Class A notes, in the order described above under
"-Principal Payments," the amount necessary to reduce the aggregate
principal balance of the Class A notes to its required principal
balance for that payment date;
o (ii) second, to the Class M-1 notes, the amount necessary to reduce
the principal balance of the Class M-1 notes to its required principal
balance for that payment date;
o (iii) third, to the Class M-2 notes, the amount necessary to reduce
the principal balance of
S-10
the Class M-2 notes to its required principal balance for that payment
date; and
o (iv) fourth, to the Class B-1 notes, the amount necessary to reduce
the principal balance of the Class B-1 notes to its required principal
balance for that payment date;
o fifth, to pay to the Class A notes, in the order described above under
"-Principal Payments," until the aggregate principal balance of the Class A
notes has been reduced to its required principal balance for that payment
date, an amount equal to any losses incurred on the mortgage loans during
the related collection period, and any losses allocated to the Class A
notes on any previous payment date and not previously paid, plus interest
on any previously unpaid amount;
o sixth, to pay to the Class M-1 notes, until the principal balance of the
Class M-1 notes has been reduced to its required principal balance for that
payment date, an amount equal to any losses incurred on the mortgage loans
during the related collection period and not paid to the holders of the
Class A notes under clause fifth above, and any losses allocated to the
Class M-1 notes on any previous payment date and not previously paid, plus
interest on any previously unpaid amount;
o seventh, to pay to the Class M-2 notes, until the principal balance of the
Class M-2 notes has been reduced to its required principal balance for that
payment date, an amount equal to any losses incurred on the mortgage loans
during the related collection period and not paid to the holders of the
Class A notes under clause fifth above or the Class M-1 notes under clause
sixth above, and any losses allocated to the Class M-2 notes on any
previous payment date and not previously paid, plus interest on any
previously unpaid amount;
o eighth, to pay to the Class B-1 notes, until the principal balance of the
Class B-1 notes has been reduced to its required principal balance for that
payment date, an amount equal to any losses incurred on the mortgage loans
during the related collection period and not paid to the holders of the
Class A notes under clause fifth above, the Class M- 1 notes under clause
sixth above or the Class M-2 notes under clause seventh above, and any
losses allocated to the Class B-1 notes on any previous payment date and
not previously paid, plus interest on any previously unpaid amount;
o ninth, to pay to the Class A notes, in the order described above under
"-Principal Payments," the amount, if any, necessary to increase the amount
of overcollateralization to the required overcollateralization level, to
reduce the aggregate principal balance of the Class A notes to its required
principal balance for that payment date;
o tenth, to pay to the Class M-1 notes, the amount, if any, necessary to
increase the amount of overcollateralization to the required
overcollateralization level, to the extent not previously distributed to
the Class A notes pursuant to clause ninth above, to reduce the principal
balance of the Class M-1 notes to its required principal balance for that
payment date;
o eleventh, to pay to the Class M-2 notes, the amount, if any, necessary to
increase the amount of overcollateralization to the required
overcollateralization level, to the extent not previously distributed to
the Class A notes pursuant to clause ninth above or the Class M-1 notes
pursuant to clause tenth above, to reduce the principal balance of the
Class M-2 notes to its required principal balance for that payment date;
o twelfth, to pay to the Class B-1 notes, the amount, if any, necessary to
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increase the amount of overcollateralization to the required
overcollateralization level, to the extent not previously distributed to
the Class A notes pursuant to clause ninth above, the Class M-1 notes
pursuant to clause tenth above or the Class M-2 notes pursuant to clause
eleventh above, to reduce the principal balance of the Class B-1 notes to
its required principal balance for that payment date;
o thirteenth, to pay the indenture trustee and the administrator any unpaid
expenses and other reimbursable amounts owed to the indenture trustee and
the administrator;
o fourteenth, to pay the holders of the Class IIIA-1 notes and the variable
funding notes, pro rata, any unpaid interest carry-forward amounts,
together with interest thereon;
o fifteenth, to pay the holders of the Class M-1 notes any unpaid interest
carry-forward amounts, together with interest thereon;
o sixteenth, to pay the holders of the Class M-2 notes any unpaid interest
carry-forward amounts, together with interest thereon;
o seventeenth, to pay the holders of the Class B-1 notes any unpaid interest
carry-forward amounts, together with interest thereon; and
o eighteenth, any remaining amounts to the holders of the certificates.
Principal payments on the offered notes will be made in the amounts and in the
order described under "Description of the Notes -- Priority of Distributions" in
this prospectus supplement.
CREDIT ENHANCEMENT
The credit enhancement provided for the benefit of the offered notes consists
of:
SUBORDINATION. To the extent no overcollateralization exists, losses on the
mortgage loans during the related collection period in excess of amounts
available to be paid on that payment date pursuant to clauses fifth through
eighth above under "-Priority of Payments on the Notes" will be allocated in
full to the first class of notes listed below with a principal balance greater
than zero:
o Class B-1 notes;
o Class M-2 notes; and
o Class M-1 notes.
When this occurs, the principal balance of the class of notes to which the loss
is allocated is reduced, without a corresponding payment of principal.
If none of the Class M-1 notes, Class M-2 notes or Class B-1 notes remain
outstanding, losses will be allocated among the Class A notes, in proportion to
their remaining principal balances.
EXCESS SPREAD. The weighted average mortgage loan rate is generally expected to
be higher than the sum of (a) the master servicing fee of 1.00%, (b) for any
payment date up to and including the March 2004 payment date, the fee of the
interest rate cap counterparty of approximately 0.23% and (c) the weighted
average note rate. On each payment date, excess spread generated during the
related collection period will be available to cover losses and build
overcollateralization.
OVERCOLLATERALIZATION. On the closing date, there will be overcollateralization
equal to $1,012,976 (or 0.15% of the aggregate principal balance of the offered
notes). In addition, excess interest that is not needed to cover losses will be
used to make additional principal payments on the notes, until the aggregate
principal balance of the mortgage loans exceeds the aggregate principal balance
of the offered notes (other than the Class A-IO notes) and the variable funding
balance of the variable funding notes by a specified amount. This excess will
represent overcollateralization, which will absorb losses on the mortgage loans,
to the extent of the overcollateralization, if they are not covered by excess
interest. If the level of overcollateralization falls below what is required,
the excess interest described above will be paid to the notes as principal,
until the required level of overcollateralization is reached.
S-12
INTEREST RATE CAP AGREEMENTS. On the closing date, the trust will enter into
three interest rate cap agreements with Bear Stearns Financial Products, Inc.,
as the interest rate cap counterparty. The interest rate cap counterparty, an
affiliate of one of the underwriters, will be required to make payments to the
trust on any payment date for which LIBOR is greater than the specified rate for
each interest rate cap agreement. The required payment for each interest rate
cap agreement will be in an amount equal to the product of (1) LIBOR minus the
applicable specified rate and (2) the notional amount of the applicable interest
rate cap agreement which will be equal to the lesser of (a) then the outstanding
principal balance of the applicable subordinate note and (b) the initial
principal balance of the applicable subordinate note reduced by any payments
that would be paid to them under the specified pricing speed and assuming that
there are no losses on the mortgage loans. The interest rate cap agreements will
terminate on February 25, 2012.
Since the note rates on the subordinate notes are based on LIBOR and under
certain prepayment and loss scenarios, payments on the subordinate notes would
be supported in whole or in part by fixed rate mortgage loans, the interest rate
cap agreements will be acquired by the trust to make it more likely that the
subordinate notes will be paid the applicable note rates based on LIBOR.
See "Description of the Securities -- Interest Rate Cap Agreements " in this
prospectus supplement.
OPTIONAL REDEMPTION
The master servicer may, at its option repurchase all, but not less than all, of
the mortgage loans on any payment date on which the aggregate outstanding
principal balance of the mortgage loans (after applying payments received in the
related collection period) is less than 10% of the sum of (x) the aggregate
principal balance of the mortgage loans as of the related cut-off date and (y)
the amount on deposit in the pre-funding account on the closing date. The
purchase price must equal an amount equal to the sum of all accrued and unpaid
interest (including interest carry-forward amounts on the Group III notes and
the subordinate notes) and the outstanding principal balance of the notes. In
addition, if the notes are redeemed prior to the payment date in March 2004, the
Class A-IO notes will be entitled to receive their adjusted issue price, which
will be approximately equal to the present value of the remaining payments on
the Class A-IO notes, using a discount rate equal to the discount rate reflected
in the price paid by the initial purchaser of the Class A-IO notes on the
closing date.
An exercise of the optional redemption will cause the aggregate outstanding note
balance of the notes to be paid in full sooner than it otherwise would have been
paid.
See "Description of the Securities -- Maturity and Optional Redemption" in this
prospectus supplement and "The Agreements -- Termination" in the prospectus.
RATINGS
When issued, the offered notes will receive the ratings indicated in the chart
above. A security rating is not a recommendation to buy, sell or hold a security
and is subject to change or withdrawal at any time by the assigning rating
agency. The ratings also do not address the rate of principal prepayments on the
mortgage loans or the likelihood of the payment of any interest carry-forward
amounts. The rate of prepayments, if different than originally anticipated,
could adversely affect the yield realized by holders of the offered notes.
See "Ratings" in this prospectus supplement.
LEGAL INVESTMENT
The offered notes will not be "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984. You should consult your legal
advisors in determining whether and to what extent the offered notes constitute
legal investments for you.
See "Legal Investment" in this prospectus supplement for important information
concerning possible restrictions on ownership of the offered notes by regulated
institutions.
ERISA CONSIDERATIONS
Subject to important considerations, the depositor expects that the offered
notes may be purchased by persons investing assets of employee benefit plans or
individual retirement
S-13
accounts. Plans should consult with their legal advisors before investing in the
offered notes.
See "ERISA Considerations" in the prospectus supplement and in the accompanying
prospectus.
TAX STATUS
For federal income tax purposes, the offered notes will be treated as debt. The
trust itself will not be subject to tax.
See "Certain Federal Income Tax Consequences" in this prospectus supplement and
"Certain Federal Income Tax Considerations" in the accompanying prospectus.
S-14
RISK FACTORS
In addition to the matters described elsewhere in this prospectus supplement and
the accompanying prospectus, you should carefully consider the following risk
factors before deciding to purchase an offered note.
UNPREDICTABILITY OF PREPAYMENTS Approximately 13.43% of mortgagors of mortgage loans in loan
AND ITS EFFECT ON YIELDS group I, 12.13% of mortgagors of mortgage loans in loan
group II, 38.65% of mortgagors of mortgage loans in loan
group III and 19.79% of all of the mortgagors may, without
penalty, prepay their mortgage loans in whole or in part at
any time. We cannot predict the rate at which borrowers will
repay their mortgage loans. Further, revolving credit loans
such as the home equity lines of credit have been originated
in significant volume only during the past few years and
neither the subservicer nor the master servicer is aware of
any publicly available studies or statistics on the rate of
prepayment thereof.
A prepayment of a mortgage loan generally will result in a
prepayment on the related Class A notes and may result in a
prepayment on the subordinate notes.
o If you purchase your offered notes at a discount and
principal is repaid slower than you anticipate, then
your yield may be lower than you anticipate.
o If you purchase your offered notes at a premium and
principal is repaid faster than you anticipate, then
your yield may be lower than you anticipate.
o The rate of prepayments on the mortgage loans will be
sensitive to prevailing interest rates. Generally, if
prevailing interest rates decline significantly below
the interest rates on the mortgage loans, those
mortgage loans are more likely to prepay than if
prevailing rates remain above the interest rates on
such mortgage loans. Conversely, if prevailing interest
rates rise significantly, the prepayments on the
mortgage loans are likely to decrease.
o If the rate of default and the amount of losses on the
mortgage loans related to your offered note or on all
the mortgage loans, is higher than you expect, then
your yield may be lower than you expect or you may
suffer a loss.
o Since payments with respect to losses on the mortgage
loans are made to each group of notes based on net
principal collections for the related loan group, they
will not necessarily be paid to the notes related to
the loan group for which there were liquidations of
defaulted mortgage loans. Consequently, as a result of
liquidations of defaulted mortgage loans in one loan
group, holders of unrelated Class A notes may receive a
prepayment and holders of related Class A notes may not
receive a prepayment and consequently, your yield may
be lower than you expect.
RISK OF INTEREST RATE CAPS The note rate on each of the Class IA-1 notes and the Class
REDUCING THE CLASS IA-1 IIA-1 notes will be a floating rate equal to the lesser of
NOTE RATE, THE CLASS IIA-1 (i) one-month LIBOR plus a fixed margin; and (ii) 10.00% per
NOTE RATE, THE CLASS IIIA-1 annum. If one-month LIBOR rises, holders of these notes
NOTE RATE, THE CLASS M-1 could receive interest at a rate that is less than one-month
NOTE RATE, THE CLASS M-2 LIBOR plus the fixed margin because of this limitation.
S-15
NOTE RATE AND THE CLASS B-1 The note rate on the Class IIIA-1 notes will be a floating
NOTE RATE rate equal to the least of (i) one-month LIBOR plus a fixed
margin; (ii) the weighted average mortgage interest rate of
the mortgage loans in loan group III minus the rate at which
the servicing fee accrues and (iii) 12.00% per annum. All of
the mortgage loans in loan group III have mortgage interest
rates that are based on the highest prime rate as published
in the "Money Rates" section of The Wall Street Journal plus
a specified margin. As a result, it is possible that
mortgage interest rates on the mortgage loans in loan group
III may decline while one-month LIBOR is stable or rising.
It is also possible that mortgage interest rates on the
mortgage loans in loan group III and one-month LIBOR may
decline or increase during the same period, but that
one-month LIBOR may decline more slowly or increase more
rapidly. Furthermore, substantially all of the mortgage
loans in loan group III have minimum and maximum limitations
on adjustments to the related mortgage interest rate. As a
result of these factors and the foregoing limitations on the
note rate for the Class IIIA-1 notes, holders of the Class
IIIA-1 notes may receive interest at a rate less than
one-month LIBOR plus the specified margin.
The note rate on each class of subordinate notes will be a
floating rate equal to the least of (i) one-month LIBOR plus
a fixed margin; (ii) (a) the weighted average mortgage
interest rate of all of the mortgage loans minus the rate at
which the servicing fee and the interest rate cap
counterparty fee accrues, minus (b) on or prior to the
payment date in March 2004, 1.00% plus (c) a rate equal to
the amount, if any, received with respect to such payment
date on the related interest rate cap agreement divided by
the notional amount of the related interest rate cap
agreement and (iii) 13.00% per annum. The subordinate notes
are supported by all of the mortgage loans. Only the
mortgage loans in loan group III have mortgage interest
rates that are floating as described in the preceding
paragraph while the remainder of the mortgage loans have
mortgage interest rates that are fixed. The interest rate
cap will be acquired by the trust to make it more likely
that the subordinate notes will be paid the applicable note
rates based on LIBOR. Because the notional amount of each
interest rate cap agreement is defined as the lesser of (i)
the scheduled outstanding balance of the applicable
subordinate note and (ii) the actual outstanding balance of
each subordinate note, the actual balance of a subordinate
note may exceed the notional amount and the interest rate
cap agreements may not fully protect the subordinate notes
from increases in LIBOR. As a result of these factors and
the foregoing limitations on the note rate for the
subordinate notes, holders of the subordinate notes may
receive interest at a rate less than one-month LIBOR plus
the specified margin.
In addition, the mortgage interest rate of the mortgage
loans in all the loan groups will change, and may decrease,
over time due to scheduled amortization of the mortgage
loans and prepayments of the mortgage loans. There can be no
assurance that the weighted average mortgage interest rate
of any loan group or all of the loan groups together will
not decrease after the closing date.
LIMITED HISTORY The subservicer of the mortgage loans, Irwin Home Equity
Corporation, was incorporated in September 1994. Because the
home equity loan program through which the IUB originated
mortgage loans were originated was instituted in January
1995, and the originator and the subservicer have developed
significant unique origination procedures for mortgage
loans, including some of the mortgage loans transferred to
the trust, they do not have historical delinquency,
bankruptcy, foreclosure or default information prior to such
time that would be helpful to you in trying to estimate the
future delinquency and loss experience of such loans.
S-16
UNDERWRITING STANDARDS The master servicer originates home equity loans and home
equity lines of credit for a target market of creditworthy
and active borrowers. These products are offered pursuant to
programs developed by the originator and the subservicer.
Such borrowers have historically been solicited primarily by
mail. More recently, loan brokers and the internet have also
been used to procure customer leads. A portion of the
mortgage loans being sold to the trust were originated by
correspondent lenders and portfolio acquisitions. Lenders
other than the originator originated a portion of the
mortgage loans being sold to the trust. In addition, because
the original combined loan-to-value ratio of the mortgage
loans may be high relative to that of other similar mortgage
loans, recoveries on defaulted mortgage loans may be lower
than the level of recoveries experienced by such other
defaulted mortgage loans. There can be no assurance as to
the level of delinquencies and defaults that may be
experienced by the mortgage loans. If the level of
delinquencies and/or defaults is higher than you expect, you
may suffer a loss.
Under the home equity program of the originator and
subservicer relating to the home equity lines of credit,
mortgagors are generally qualified based on an assumed
payment that reflects a mortgage interest rate significantly
lower than the related maximum mortgage interest rate. The
repayment of any home equity line of credit may thus be
dependent on the ability of the related mortgagor to make
larger interest payments following the adjustment of the
mortgage interest rate thereof during the life of such home
equity line of credit or following the commencement of the
amortization period.
HOME EQUITY LINES OF In general, the home equity lines of credit may be drawn
CREDIT HAVE INTEREST-ONLY upon during the related draw period. During such draw
FEATURE DURING THE DRAW period, the related mortgagor will be obligated to make
PERIOD monthly payments on the related home equity line of credit,
which minimum payment amounts will generally be equal to the
finance charge for such billing cycle plus any applicable
fees. The minimum payment due during the repayment period
will be an amount necessary to amortize the balance due,
plus interest and fees. Scheduled principal amortization
(but not necessarily principal from other sources, including
prepayments) may be de minimis during the related draw
periods such that little, if any, principal payments based
on scheduled principal amortization may be paid to the
noteholders during such draw periods. Substantially all of
the HELOCs have a 10 year draw period. Collections on the
home equity lines of credit may also vary due to seasonal
purchasing and payment habits of the related mortgagors.
GEOGRAPHIC CONCENTRATION When measured by aggregate principal balance of the related
loan group or all loan groups, as applicable, as of the
statistical calculation date, mortgaged properties located
in the following states secure the approximate percentages
(in excess of 5%) of mortgage loans in each of the indicated
loan group or all of the loan groups:
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State Loan Group I Loan Group II Loan Group III All Loan Groups
----- ------------ ------------- -------------- ---------------
California 40.36% 18.63% 22.53% 25.43%
Florida 5.57% 7.68% 6.23%
Virginia 5.55% 6.56% 5.53%
New Jersey 5.29%
Maryland 7.13%
Illinois 7.60%
New York 6.22%
Michigan 5.51%
Ohio 5.21%
Washington 5.07%
This geographic concentration might magnify the effect on
the mortgage pool of adverse economic conditions or of
special hazards in these areas and therefore might increase
the rate of delinquencies, defaults and losses on the
mortgage loans in the related loan group more than would be
the case if the mortgaged properties were more
geographically diversified. Further, mortgage loans in the
State of California are subject to "one action" and
"anti-deficiency" laws which generally means that in the
event of default on mortgage loans in that state, the
lender, in this case the master servicer, on behalf of the
trustee, must elect either (i) to seek a judicial
foreclosure of the related mortgaged property and, in the
event the loan balance exceeds the sales price at the
foreclosure sale, seek a deficiency judgment against the
borrower or (ii) to seek a non-judicial foreclosure, in
which case any such deficiency would be waived. Accordingly,
the actual rates of delinquencies and losses on the mortgage
loans could be higher than those experienced if there were
no geographical concentrations.
HIGH COMBINED LOAN-TO- Substantially all of the mortgage loans in loan group II, a
VALUE RATIOS significant percentage of the mortgage loans in loan group
III and a majority of all of the mortgage loans had combined
loan-to-value ratios at origination in excess of 100%. Based
on the appraised value, stated value or purchase price of
the related mortgaged property at the time of origination of
a mortgage loan with a combined loan-to-value ratio at
origination greater than 100%, the value or price of the
related mortgaged property was less than the sum of the
principal balance of the mortgage loan and the principal
balance of any related senior mortgage(s). Mortgage loans
with high combined loan-to-value ratios, in particular those
mortgage loans with original combined loan-to-value ratios
in excess of 100%, will be more sensitive to declining
property values than those loans with lower combined
loan-to-value ratios and may present a greater risk of loss
upon liquidation. If losses are higher than you expect, you
may incur a loss.
AMOUNT OF BORROWER'S EQUITY Substantially all of the mortgage loans had combined
loan-to-value ratios at origination that were greater than
80%. The value of the mortgaged properties may have declined
since those mortgage loans were originated or the borrowers
may have obtained additional financing on the properties. If
a borrower on one of those mortgage loans defaults, there
may not be enough value in the property to repay the
mortgage loan and the trust may suffer a loss. If losses are
higher than you expect, you may incur a loss.
SEASONING OF MORTGAGE LOANS Defaults on mortgage loans tend to occur at higher rates
during the early years of the mortgage loans. Most of the
mortgage loans were originated within twelve months prior to
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. If
S-18
defaults are higher than you expect, you may incur a loss.
SUBORDINATE LOANS Substantially all of the mortgage loans evidence a lien that
is subordinate to the rights of the mortgagee under a senior
mortgage or mortgages. The proceeds from any liquidation,
insurance or condemnation proceedings will be available to
satisfy the outstanding principal balance of such junior
loans only to the extent that the claims of such senior
mortgages have been satisfied in full, including any
foreclosure costs. In circumstances where the master
servicer determines that it would be uneconomical to
foreclose on the related mortgaged property, the master
servicer may write off the entire outstanding principal
balance of the related loan as bad debt. The foregoing
considerations will be particularly applicable to junior
loans that have high combined loan-to-value ratios because
in such cases, the master servicer is more likely to
determine that foreclosure would be uneconomical. You should
consider the risk that to the extent losses on mortgage
loans are not covered by available credit enhancement, you
may incur a loss.
POTENTIAL INADEQUACY OF CREDIT The mortgage loans and the interest rate cap agreements,
ENHANCEMENT together are expected to generate more interest than is
needed to pay interest on the notes because the weighted
average net interest rate on the mortgage loans plus a rate
equal to the amount, if any, received with respect to a
payment date on the interest rate cap agreements divided by
the notional amount of the interest rate cap agreements is
expected to be higher than the weighted average interest
rate on the notes. If the mortgage loans and the interest
rate cap agreements generate more interest than is needed to
pay interest on the notes and certain fees and expenses of
the trust, the remaining interest will be used to compensate
for losses. After these financial obligations of the trust
have been satisfied, any available excess interest will be
used to create and maintain overcollateralization until the
overcollateralization targets have been met. We cannot
assure you, however, that enough excess interest will be
generated to maintain the required level of
overcollateralization.
The excess interest available on any payment date will be
affected by the actual amount of interest received,
collected or recovered in respect of the mortgage loans
during the preceding month and payments under the interest
rate cap agreements. Such amount will be influenced by
changes in the weighted average of the mortgage interest
rates resulting from prepayments and liquidations of the
mortgage loans.
If the protection afforded by overcollateralization, excess
spread and, except in the case of the Class B-1 notes,
subordination is insufficient, then the holders of the
offered notes could experience a loss on their investment.
THE PRIORITY OF PAYMENTS Because the Class B-1 notes have a lower payment priority
AND THE ALLOCATION OF LOSSES than the Class M-2 notes, the Class M-2 notes have a lower
ON THE MORTGAGE LOANS MAY payment priority than the Class M-1 notes and the Class M-1
AFFECT THE YIELD TO MATURITY notes have a lower payment priority than the Class A notes,
ON THE SUBORDINATE NOTES the yield to maturity on the Class M-1 notes, the Class M-2
notes, and to a greater extent, the Class B-1 notes, will be
more sensitive than the Class A notes to delinquencies and
losses on the mortgage loans.
Because losses on the mortgage loans to the extent not
covered by the amount of overcollateralization and excess
interest at that time, will be allocated to the notes in
inverse order of their payment priority, the Class M-1 notes
and the Class M-2 notes will be sensitive, and the Class B-1
notes will be very sensitive, to the rate of losses on the
mortgage loans. Any allocation of a loss to a class of
subordinate notes will reduce, to the extent not reimbursed
from future excess interest, interest and principal the
applicable class of notes will receive. As a result, you may
suffer a loss.
In addition, the Class M-1 notes, the Class M-2 notes and
the Class B-1 notes will not be entitled to receive any
distributions of principal for at least thirty-six months
S-19
after the closing date, unless the principal balances of the
Class A notes have been reduced to zero or if the
delinquencies or losses on the mortgage loans exceed the
levels specified in this prospectus supplement.
ORIGINATION DISCLOSURE The seller believes that no more than 40% of the mortgage
PRACTICES FOR THE MORTGAGE loans in loan group I, 80% of the mortgage loans in loan
LOANS COULD CREATE group II, none of the mortgage loans in loan group III and
LIABILITIES THAT MAY AFFECT no more than 40% of all of the mortgage loans (in each case
YOUR NOTES as of the statistical calculation date) may be subject to
the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other
requirements on creditors with respect to these high cost
loans. These provisions can impose specified statutory
liabilities upon creditors who fail to comply with their
provisions and may affect the enforceability of the related
high cost loans. In addition, purchasers or assignees of
these high cost loans, including the trust, could be exposed
to all claims and defenses that the mortgagors could assert
against the originators of the high cost loans. Remedies
available to a mortgagor include monetary penalties, as well
as rescission rights if the appropriate disclosures were not
given as required.
Violations of certain provisions of these federal laws may
limit the ability of the master servicer to collect all or
part of the principal of or interest on the mortgage loans
and in addition, could subject the trust to damages and
administrative enforcement.
THE TRUST MAY EXPERIENCE Applicable federal and state laws generally regulate
LOSSES AS A RESULT OF interest rates and other charges, require certain
LAWSUITS UNDER STATE AND disclosure, and, in some instances, require licensing of
FEDERAL LAW loan originators. In addition, other federal and state laws,
public policy and general principles of equity relating to
the protection of consumers, unfair and deceptive practices
and debt collection practices may apply to the origination,
servicing and collection of the mortgage loans.
Numerous class action lawsuits have been filed in multiple
states by borrowers of subordinate lien residential mortgage
loans. These loans generally have high loan to value ratios
and may include high cost loans. The suits, which allege
violations of federal and state consumer protection laws and
state usury and licensing laws, seek damages, rescission and
other relief. In addition to naming the originators of
loans, the suits have named current and former holders of
interests in the loans, including securitization vehicles.
Although to the best knowledge of the Depositor no trust
sponsored by the depositor has been named in such a class
action lawsuit, there can be no assurance that this will
continue to be the case. If the trust were to be named as a
defendant in a class action lawsuit, the costs of defending
or settling that lawsuit or a judgment could reduce the
amount available for distribution to the noteholders.
A SECONDARY MARKET FOR THE There is currently no market for the notes. We cannot assure
NOTES MAY NOT DEVELOP, WHICH you that any market will develop or, if it does develop,
MEANS YOU HAVE DIFFICULTY that it will provide you with liquidity of investment or
SELLING YOUR NOTES will continue for the life of the notes. The notes will not
be listed on any securities exchange. There have been times
in the past where there have been very few buyers of
asset-backed securities (i.e., there has been a lack of
liquidity), and there may be these times in the future. In
addition, if the banking regulators change the capital
treatment of residual interests, the originator may be less
likely to securitize its loans in the future which may
result in less liquidity for the notes. As a result, you may
not be able to sell your notes when you want to do so or you
may not be able to obtain the price that you wish to
receive.
The notes will be issued in book-entry, rather than
physical, form. As a result, in some circumstances, the
liquidity of the securities in the secondary market and the
ability of the note owners to pledge them may be adversely
affected.
S-20
THE NOTES ARE NOT SUITABLE The notes, and in particular the subordinate notes, are not
INVESTMENTS FOR ALL INVESTORS a suitable investment if you require a regular or
predictable schedule of payments or payment on any specific
date. The notes 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.
THE CLASS IA-2, CLASS IIA-2, Since the Class IA-2 notes will generally not be paid any
CLASS IIA-3, CLASS IIA-4 AND principal distributions until the principal balance of the
CLASS IIA-5 NOTES BEAR RISKS Class IA-1 notes has been reduced to zero, the Class IA-1
ASSOCIATED WITH SEQUENTIAL noteholders will be most affected by a higher rate of
PAYMENT OF PRINCIPAL principal prepayment in loan group I and the application of
excess spread to increase the level of overcollateralization
to the overcollateralization target amount. Since the Class
IIA-2 notes, the Class IIA-3 notes, the Class IIA-4 notes
and Class IIA-5 notes will not be paid any principal
distributions until the principal balance of the Class IIA-1
notes has been reduced to zero, the Class IIA-1 noteholders
will be most affected by a higher rate of principal
prepayment in loan group II and the application of excess
spread to increase the level of overcollateralization to the
specified overcollateralization amount. In addition, as a
result of the sequential payment of principal, notes with a
higher numerical class designation may have a greater
percentage of their initial principal balance outstanding at
any time than notes with a lower numerical class
designation. Consequently, Class A notes with a higher class
designation will be allocated more losses than notes with a
lower class designation following a default under the
indenture as a relative percentage of their respective
initial principal balances.
Upon the occurrence of an event of default and acceleration
of the notes, principal payments will be made to all of the
Class A notes pro rata based on the amount outstanding under
each such class.
RISKS ASSOCIATED WITH THE The Class A-IO notes will have a notional balance equal to
CLASS A-IO NOTE the least of (i) $54,112,000, (ii) the aggregate outstanding
principal balance of the mortgage loans in loan groups I and
II and (iii) after the March 2004 payment date, $0.
Accordingly, if the mortgage loans in loan groups I and II
have high prepayments and losses, the notional amount of the
Class A-IO notes, and as a result the interest distributable
on the Class A-IO notes may be reduced.
SUBORDINATE NOTEHOLDERS The indenture provides that failure to pay interest when due
HAVE LIMITED RIGHTS on the outstanding subordinate class or classes of notes
(for example, for so long as any of the Class A notes are
outstanding, the Class M-1 notes, Class M-2 notes and Class
B-1 notes, or after the Class A notes have been paid in full
but the Class M-1 notes are still outstanding, the Class M-2
notes and the Class B-1 notes) will not be an event of
default under the indenture.
If there is a conflict between directions given to the
indenture trustee by the senior noteholders and the
subordinate noteholders, the indenture trustee will be
required to follow the direction of the senior noteholders.
PRIORITIES OF PAYMENTS Payment defaults, or the insolvency or dissolution of the
CHANGE FOLLOWING AN EVENT trust that results in the acceleration of the notes pursuant
OF DEFAULT UNDER INDENTURE to the indenture, will result in changes in the priority of
payments under the notes. After an event of default and an
acceleration of notes, the trust will not: (i) make payments
of interest or principal on the Class M-1 notes, Class M-2
notes or Class B-1 notes until the Class A notes have been
paid in full; (ii) make payments of interest or principal on
the Class M-2 or Class B-1 notes until the Class M-1 notes
have been paid in full; or (iii) make payments of interest
or principal on the Class B-1 notes until the Class M-2
notes have been paid
S-21
in full.
Under the circumstances described in the first paragraph of
this risk factor, payment priorities on the notes will
change. These changes in the priorities of payments may
cause payments on the notes of each class to be made at a
different rate - either earlier or later - than expected.
Classes of notes that receive payments earlier than expected
are exposed to greater reinvestment risk and classes of
notes that receive principal later than expected are exposed
to greater risk of loss. In either case, the yields on your
notes could be materially and adversely affected.
THE INDENTURE TRUSTEE MAY BE Although the trust will be obligated to sell the mortgage
UNABLE TO LIQUIDATE RECEIVABLES loans if directed to do so by the indenture trustee in
AFTER AN EVENT accordance with the indenture following an acceleration of
OF DEFAULT the notes upon an event of default, there is no assurance
that the market value of the mortgage loans will at any time
be equal to or greater than the aggregate outstanding
principal balance of the notes. Therefore, upon an event of
default, there can be no assurance that sufficient funds
will be available to repay the noteholders in full. You, and
particularly investors in the subordinate notes, will bear
the risk of loss on your investment. In addition, the amount
of principal required to be distributed to noteholders under
the indenture is generally limited to amounts available.
Therefore, the failure to pay principal on a class of notes
will not result in the occurrence of an event of default
until the legal final payment date for that class of notes.
THE RETURN ON YOUR NOTES In response to the terrorist attacks on September 11, 2001
MAY BE AFFECTED BY THE in New York City, Virginia and Pennsylvania, the subservicer
SPECIAL SERVICING has implemented special servicing procedures for borrowers
PROCEDURES THAT HAVE BEEN who have been personally or financially affected by such
ADOPTED IN RESPONSE TO THE attacks. Certain government agencies, government sponsored
TERRORIST ATTACKS ON entities and private financial institutions have implemented
SEPTEMBER 11, 2001 similar procedures. We do not know at this time how many of
the borrowers of the mortgage loans may have been affected
by the terrorist attacks. However, as a result of the
terrorist attacks and the special servicing procedures that
have been implemented, the rate of delinquencies and losses
on mortgage loans made to affected borrowers may be larger
than would otherwise be the case.
THE RETURN ON YOUR NOTES The Soldiers' and Sailors' Civil Relief Act of 1940, or
COULD BE REDUCED BY Relief Act, provides relief to borrowers who enter active
SHORTFALLS DUE TO THE military service and to borrowers in reserve status who are
SOLDIERS' AND SAILORS' CIVIL called to active duty after the origination of their
RELIEF ACT mortgage loan. The response of the United States to the
terrorist attacks on September 11, 2001 has, to date,
included rescue efforts and the activation to active duty of
persons in reserve military status and may include further
calls to active duty. The Relief Act provides generally that
a borrower who is covered by the Relief Act may not be
charged interest on a mortgage loan in excess of 6% per
annum during the period of the borrower's active duty.
Amounts in excess of the 6% are not required to be paid by
the borrower at any future time.
The Relief Act also limits the ability to foreclose on a
mortgage loan during the borrower's period of active duty
and, in some cases, during an additional three month period
thereafter. As a result, there may be delays in payment and
increased losses on the mortgage loans. Those delays and
increased losses will be borne primarily by the outstanding
class of notes with the lowest payment priority.
We do not know how many mortgage loans have been or may be
affected by the application of the Relief Act. See "Certain
Legal Aspects of the Loans--Soldiers' and Sailors' Civil
Relief Act of 1940" in the prospectus.
S-22
INTRODUCTION
The Irwin Home Equity Loan Trust 2001-2 (the "ISSUER" or the "TRUST")
will be formed pursuant to a trust agreement (the "TRUST AGREEMENT"), dated as
of August 31, 2001 between Bear Stearns Asset Backed Securities, Inc. (the
"DEPOSITOR") and Wilmington Trust Company, the Owner Trustee. The Issuer will
issue approximately $674,427,000 aggregate principal amount of Home Equity
Loan-Backed Term Notes, Series 2001-2. The Trust will also issue Home Equity
Loan-Backed Variable Funding Notes, Series 2001-2 (the "VARIABLE FUNDING
Notes"). The Class IA-1 Notes and the Class IA-2 Notes are collectively referred
to as the "GROUP I NOTES." The Class IIA-1 Notes, the Class IIA-2 Notes, the
Class IIA-3 Notes, the Class IIA-4 Notes and the Class IIA-5 Notes are
collectively referred to as the "GROUP II NOTES." The Class IIIA-1 Notes and the
Variable Funding Notes are collectively referred to as the "GROUP III NOTES."
The Group I Notes, the Group II Notes and the Group III Notes are collectively
referred to as the "CLASS A NOTES." The Class M-1 Notes, the Class M-2 Notes and
the Class B-1 Notes are collectively referred to as the "SUBORDINATE NOTES." The
Class A Notes (other than the Variable Funding Notes), the Class A-IO Notes and
the Subordinate Notes are collectively referred to as the "OFFERED Notes" and
together with the Variable Funding Notes, the "NOTES." The Notes will be issued
pursuant to an Indenture (the "INDENTURE"), to be dated as of August 31, 2001
between the Issuer and Wells Fargo Bank Minnesota, National Association as
Indenture Trustee. Pursuant to the Trust Agreement, the Issuer will issue one
class of Home Equity Loan-Backed Certificates, Series 2001-2 (the
"CERTIFICATES"). The Notes and the Certificates are collectively referred to
herein as the "SECURITIES." Only the Offered Notes are offered hereby.
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The statistical information presented in this Prospectus Supplement is
based upon the characteristics of the pool of Mortgage Loans as of the
Statistical Calculation Date (the "INITIAL MORTGAGE LOANS"). Such statistical
information is based upon the characteristics of the home equity lines of credit
(the "HELOCS") as of the Statistical Calculation Date (the "INITIAL HELOCS") and
the home equity loans (the "HELS") as of the Statistical Calculation Date (the
"INITIAL HELS"). The HELOCs and the HELs are collectively referred to herein as
the "MORTGAGE LOANS". Along with the Initial Mortgage Loans to be acquired by
the Trust on the Closing Date, it is expected that the Trust will also acquire
on the Closing Date certain additional Mortgage Loans (the "ADDITIONAL MORTGAGE
LOANS"). The Transferor expects that the aggregate Principal Balance of the
Additional Mortgage Loans will be approximately $98,708,650.83. The Additional
Mortgage Loans will be selected using generally the same criteria used to select
the Initial Mortgage Loans and the Subsequent Mortgage Loans, and generally the
same representations and warranties will be made with respect thereto. The
statistical characteristics of the entire pool of Mortgage Loans on the Closing
Date may vary from the statistical information presented in this Prospectus
Supplement upon the acquisition of Additional Mortgage Loans and Subsequent
Mortgage Loans. See "Conveyance of Subsequent Mortgage Loans, the Pre-Funding
Account and the Funding Account" herein. The Depositor will file on Form 8-K,
within 10 days of the Closing Date, information on the Initial and Additional
Mortgage Loans as of the Cut-Off Date.
INITIAL MORTGAGE LOANS
The Initial Mortgage Loans and Additional Mortgage Loans assigned and
transferred to the Issuer and pledged to the Indenture Trustee as of the Closing
Date will be divided into three groups (each, a "LOAN GROUP"). The Initial
Mortgage Loans assigned to Loan Group I (the "GROUP I MORTGAGE LOANS") are
expected to have an aggregate principal balance of approximately $93,751,272.20
as of the Statistical Calculation Date and will be fixed-rate, closed-end home
equity loans with combined loan-to-value ratios generally up to 100%, secured by
first, second or more junior mortgages or deeds of trust on residential
properties. The Initial Mortgage Loans assigned to Loan Group II (the "GROUP II
MORTGAGE LOANS") are expected to have an aggregate principal balance of
approximately $163,877,369.68 as of the Statistical Calculation Date and will be
fixed-rate, closed-end home equity loans with combined loan-to-value ratios
generally over 100% and up to 125%, secured by second or more junior mortgages
or deeds of trust on residential properties. The Initial Mortgage Loans assigned
to Loan Group III (the "GROUP III MORTGAGE LOANS") are expected to have an
aggregate principal balance of approximately
S-23
$98,142,524.72 as of the Statistical Calculation Date and will be (i)
adjustable-rate home equity lines of credit with combined loan-to-value ratios
generally up to 100%, secured by first, second or more junior mortgages or deeds
of trust on residential properties, and (ii) adjustable-rate home equity lines
of credit with combined loan-to-value ratios generally over 100% and up to 125%,
secured by first, second or more junior mortgages or deeds of trust on
residential properties.
Unless otherwise indicated, all percentages set forth in this
Prospectus Supplement are based upon the aggregate Principal Balances of the
Group I Mortgage Loans, Group II Mortgage Loans and Group III Mortgage Loans as
of the Statistical Calculation Date.
The Mortgage Loans are evidenced by Mortgage Notes (each, a "MORTGAGE
NOTE") or, in the case of HELOCs, loan agreements (each, a "LOAN AGREEMENT"),
secured by mortgages or deeds of trust (the "MORTGAGES"), substantially all of
which are second or more junior lien Mortgages on one- to four-family
residential properties (the "MORTGAGED PROPERTIES") and have the additional
characteristics described below.
As of the Statistical Calculation Date, the average principal balance
of the Mortgage Loans was approximately $41,816.08. As of the Statistical
Calculation Date, the weighted average Mortgage Interest Rate of the Mortgage
Loans was approximately 13.172%. The weighted average Combined Loan-to-Value
Ratio of the Mortgage Loans was approximately 106.07%. The weighted average
remaining term to maturity was 217 months. Based on information supplied by the
Mortgagors in connection with their loan applications at origination, 8,484 of
the Mortgaged Properties securing the Mortgage Loans, which secure approximately
99.75% of the outstanding principal balance of the Mortgage Loans, will be owner
occupied primary residences and 24 of the Mortgaged Properties securing the
Mortgage Loans, which secure approximately 0.25% of the outstanding principal
balance of the Mortgage Loans, will be non-owner occupied or second homes.
Each Group I Mortgage Loan for which information is presented in this
Prospectus Supplement has an original term to stated maturity of up to 25 years
and was selected for inclusion in the Trust from among those that met the
following additional criteria as of the Statistical Calculation Date: (i) a
current principal balance of no less than $1,298.62 and (ii) not more than 59
days past due. The Group I Mortgage Loans were selected by IHE from the mortgage
loans in IUB's portfolio that met the above criteria using a selection process
believed by IHE not to be adverse to the holders of Notes. As of the Statistical
Calculation Date, the average principal balance of the Group I Mortgage Loans
was approximately $44,264.06. As of the Statistical Calculation Date, the
weighted average Mortgage Interest Rate of the Group I Mortgage Loans was
approximately 11.43%. The weighted average Combined Loan-to-Value Ratio of the
Group I Mortgage Loans was approximately 91.21%. The weighted average remaining
term to maturity was 213 months and the latest scheduled maturity of any Group I
Mortgage Loan is August 15, 2026, however the actual date on which any Mortgage
Loan is paid in full may be earlier than the stated maturity date due to
unscheduled payments of principal.
Based on information supplied by the Mortgagors in connection with
their loan applications at origination, 2,107 of the Mortgaged Properties
securing the Group I Mortgage Loans, which secure approximately 99.62% of the
outstanding principal balance of the Group I Mortgage Loans, will be owner
occupied primary residences and 11 of the Mortgaged Properties securing the
Group I Mortgage Loans, which secure approximately 0.38% of the outstanding
principal balance of the Group I Mortgage Loans, will be non-owner occupied or
second homes.
Each Group II Mortgage Loan for which information is presented in this
Prospectus Supplement has an original term to stated maturity of up to 25 years
and was selected for inclusion in the Trust from among those that met the
following criteria of the Statistical Calculation Date: (i) a current principal
balance of no less than $1,193.01 and (ii) not more than 59 days past due. The
Group II Mortgage Loans were selected by IHE from the mortgage loans in IUB's
portfolio that met the above criteria using a selection process believed by IHE
not to be adverse to the holders of Notes. As of the Statistical Calculation
Date, the average principal balance of the Group II Mortgage Loans was
approximately $41,944.55. As of the Statistical Calculation Date, the weighted
average Mortgage Interest Rate of the Group II Mortgage Loans was approximately
15.048%. The weighted average Combined Loan-to-Value Ratio of the Group II
Mortgage Loans was approximately 118.11%. The weighted average remaining term to
stated maturity was approximately 230 months and the latest scheduled maturity
of any Group II Mortgage Loan
S-24
is August 15, 2026, however the actual date on which any Mortgage Loan is paid
in full may be earlier than the stated maturity date due to unscheduled payments
of principal.
Based on information supplied by the Mortgagors in connection with
their loan applications at origination, 3,905 of the Mortgaged Properties
securing the Group II Mortgage Loans, which secure approximately 99.95% of the
outstanding principal balance of the Group II Mortgage Loans, will be owner
occupied primary residences and 2 of the Mortgaged Properties securing the Group
II Mortgage Loans, which secure approximately 0.05% of the outstanding principal
balance of the Group II Mortgage Loans, will be non-owner occupied or second
homes.
The monthly payment on each Mortgage Loan, with the exception of
substantially all of the HELOCs that are still in their draw period (each a
"MONTHLY PAYMENT") includes interest plus an amount that will amortize the
outstanding principal balance of the Mortgage Loan over its remaining term.
The Mortgage Loans assigned to Loan Group III are evidenced by Loan
Agreements secured by Mortgages, of which approximately 97.20% are junior
Mortgages on the related Mortgaged Properties, and have the additional
characteristics described below.
As of the Statistical Calculation Date, the average principal balance
of the Initial Mortgage Loans in Loan Group III is approximately $39,525.79, the
weighted average Gross Margin of the Initial Mortgage Loans in Loan Group III is
approximately 4.71%, and the weighted average Mortgage Interest Rate of the
Initial Mortgage Loans in Loan Group III is approximately 11.703%. The weighted
average Combined Loan-to-Value Ratio of the Initial Mortgage Loans in Loan Group
III is approximately 100.16%. The weighted average credit limit utilization rate
(computed by dividing the aggregate principal balance of the Initial Mortgage
Loans in Loan Group III as of the Statistical Calculation Date by the aggregate
credit limit thereof) is approximately 96.24%. The weighted average remaining
term to maturity is 199 months and the latest scheduled maturity of any Initial
Mortgage Loan in Loan Group III is August 25, 2021; however, the actual date on
which any Initial Mortgage Loan in Loan Group III is paid in full may be earlier
than the stated maturity date thereof due to unscheduled payments of principal.
Effective with the first payment due on a HELOC after the tenth
anniversary date of the date of origination thereof in the case of substantially
all HELOCs, on each related Interest Adjustment Date the Monthly Payment will be
adjusted to an amount that will amortize the then-outstanding Principal Balance
of such HELOC over its remaining term plus interest thereon. The weighted
average number of months from the Statistical Calculation Date to the first
adjustment of the Monthly Payment such that the resulting amount will amortize
the outstanding Principal Balance of the Initial HELOCs over their remaining
term is approximately 79 months (approximately 9 months for the Initial HELOCs
acquired from Providian Home Equity Trust 1999-1 (the "PNB TRUST") and
approximately 115 months for the other Initial HELOCs).
Interest on each HELOC other than HELOCs purchased from the PNB Trust
is and will be calculated based on the average daily Principal Balance thereof
outstanding during the related Billing Cycle. Interest on substantially all
HELOCs purchased from the PNB Trust compounds daily. For HELOCs originated by
IUB, the "DUE DATE" is generally the 15th day of each calendar month. The
"BILLING CYCLE" for any HELOC originated by IUB is generally the period from on
or about the 23rd or 28th day of the calendar month second preceding such Due
Date to the 22nd or 27th, as applicable, day of the calendar month immediately
preceding such Due Date. For HELOCs not originated by IUB, due dates vary
throughout a month and Billing Cycles correspond accordingly.
The Mortgage Interest Rates on the HELOCs will adjust monthly on each
applicable Interest Adjustment Date to a rate equal to the sum of (i) the
highest prime rate as published in the "Money Rates" section of The Wall Street
Journal on the last Business Day of the month immediately preceding the related
Interest Adjustment Date plus (ii) a fixed percentage (the "GROSS MARGIN"),
which total is generally subject to specified maximum and minimum lifetime
Mortgage Interest Rates ("LIFETIME RATE CAPS" and "LIFETIME RATE FLOORS",
respectively), as specified in the related Mortgage documents. Due to the
application of the Lifetime Rate Caps and Lifetime Rate Floors, the Mortgage
Interest Rate on any HELOC, as adjusted on any Interest Adjustment Date, may not
equal the sum of the related prime rate and Gross Margin. Each HELOC requires
the related Mortgagor to make current interest payments during the life of such
HELOC.
S-25
Substantially all of the Initial HELOCs purchased from the PNB Trust
have a term to maturity from the date of origination of approximately 15 years.
Each other Initial HELOC has a term to maturity from the date of origination of
approximately 20 years.
A Mortgagor may make a draw at any time during the period stated in the
related Loan Agreement (the "DRAW PERIOD"). In addition, the Mortgagor will not
be permitted to make any draw during the period stated in the related Loan
Agreement (the "REPAYMENT PERIOD"). The Draw Period and the Repayment Period for
any HELOC may vary based on such HELOC's state of origination and the entity
originating the HELOC.
The maximum amount of each draw with respect to any HELOC is equal to
the excess, if any, of the credit limit thereof over the outstanding Principal
Balance thereof at the time of such draw. Approximately 38.65% of the Initial
Mortgage Loans that are HELOCs may be prepaid in whole and the account closed at
any time after origination thereof without a corresponding penalty. However,
Mortgagors will have the right during the related Draw Period to make a draw in
the amount of any prepayment theretofore made with respect to such HELOC.
A Mortgagor's right to make draws during the Draw Period may be
suspended, or the credit limit of the related HELOC may be reduced, for cause
under a number of circumstances, including, but not limited to, (i) a material
and adverse change in such Mortgagor's financial circumstances; (ii) a decline
in the value of the related Mortgaged Property significantly below the Appraised
Value thereof at origination of such HELOC; or (iii) a payment default by such
Mortgagor. However, such suspension or reduction generally will not affect the
payment terms for previously drawn amounts. Neither the Master Servicer nor any
subservicer will have any obligation to investigate whether any such
circumstances have transpired, and may have no knowledge thereof. As such, there
can be no assurance that any Mortgagor's ability to make Draws will be suspended
or reduced in the event that any of the foregoing circumstances occur. In the
event of a default under a HELOC, such HELOC may be terminated and declared
immediately due and payable in full. For such purpose, a default includes, but
is not limited to, (i) the related Mortgagor's failure to make any payment as
required; (ii) any action or inaction by such Mortgagor that adversely affects
the related Mortgaged Property or the mortgagee's rights therein; or (iii) fraud
or material misrepresentation by such Mortgagor in connection with such HELOC.
During the Draw Period, the Mortgagor will be obligated to make Monthly
Payments on the related HELOC, which amounts will generally be equal to the
Finance Charge and Additional Charges for such Billing Cycle. During the
Repayment Period, the Mortgagor will be obligated to make Monthly Payments
consisting of principal installments that would substantially amortize the
Principal Balance of the related Mortgage Loan by the maturity date thereof,
plus current Finance Charges and Additional Charges.
With respect to each HELOC other than HELOCs purchased from the PNB
Trust, (i) the "FINANCE CHARGE" for any Billing Cycle will be an amount equal to
the aggregate of, as calculated for each day in such Billing Cycle, the
then-applicable Mortgage Interest Rate divided by 365, and multiplied by the
average daily Principal Balance of such HELOC and (ii) the "ACCOUNT BALANCE" on
any day generally will be the aggregate unpaid Principal Balance outstanding at
the beginning of such day, plus the sum of any unpaid fees, insurance premiums
and other charges, if any (collectively, "ADDITIONAL CHARGES"), and any unpaid
Finance Charges due, plus the aggregate of all draws funded on such day, minus
the aggregate of all payments and credits applied to the repayment of any such
draws on such day. Payments made by or on behalf of the Mortgagor will be
applied to any unpaid Finance Charges due thereon, prior to application to any
unpaid Principal Balance outstanding. With respect to substantially all of the
HELOCs purchased from the PNB Trust, interest is compounded daily after adding
all debits and subtracting all credits for the day.
Based upon a review of the Initial Mortgage Loans, IUB believes that no
more than 40% of the Group I Mortgage Loans and 80% of the Group II Mortgage
Loans, in each case as of the Statistical Calculation Date, may be subject to
the Home Ownership and Equity Protection Act of 1994 (the "HOMEOWNERSHIP ACT")
or comparable state law. IUB will represent in the Mortgage Loan Sale Agreement
that no Initial Mortgage Loan or Additional Mortgage Loan was originated in
violation of the Homeownership Act or any comparable state law (to the extent
applicable). IUB has taken steps to ensure that the relevant Mortgage Loans were
originated in compliance with the requirements of the Homeownership Act or
comparable state law for relevant Mortgage Loans.
S-26
No proceeds from any Mortgage Loan were used to finance single-premium
credit insurance policies.
The "MORTGAGE INTEREST RATE" of each Mortgage Loan is the per annum
interest rate required to be paid by the mortgagor (each a "MORTGAGOR") under
the terms of the related note and, in the case of the HELOCs, the related Loan
Agreement. The Mortgage Interest Rate borne by each Mortgage Loan is (i) in the
case of a HELOC, adjustable on the date (each such date, an "INTEREST ADJUSTMENT
DATE") specified in the related Loan Agreement to a rate equal to the sum of (A)
the highest prime rate as published in the "Money Rates" section of The Wall
Street Journal on the last Business Day of the related calendar month and (B)
the margin specified in the related Loan Agreement and (ii) in the case of a
HEL, fixed as of the date of origination of such HEL.
The "COMBINED LOAN-TO-VALUE RATIO" generally will be, with respect to
each HELOC, the ratio, expressed as a percentage, of the sum of (i) the credit
limit of such HELOC and (ii) the outstanding Principal Balance at origination of
such HELOC of all other mortgage loans, if any, secured by senior liens on the
related Mortgaged Property, to the Appraised Value. With respect to each HEL,
the "Combined Loan-to-Value Ratio" generally will be the ratio, expressed as a
percentage, of the sum of (i) the Principal Balance of such HEL as of the
related Cut-Off Date and (ii) any outstanding Principal Balance at origination
of such HEL of all other mortgage loans, if any, secured by senior liens on the
related Mortgaged Property, to the Appraised Value. The "APPRAISED VALUE" for
any Mortgaged Property will be the appraised value thereof, determined in the
appraisal or property valuation used in the origination of the related Mortgage
Loan (which may have been obtained at an earlier time). See "Description of the
Mortgage Loans--Underwriting Standards" herein.
Approximately 80.21% of all the Mortgage Loans, 86.57% of the Group I
Mortgage Loans, 87.87% of the Group II Mortgage Loans and 61.35% of the Group
III Mortgage Loans provide for penalties upon full prepayment during the first
two, three, four or five years after origination thereof. Each of the Mortgage
Loans is subject to a due-on-sale clause. See "Certain Legal Aspects of the
Mortgage Loans - Due-on-Sale Clauses in Mortgage Loans" in the Prospectus.
SOLICITATION PROCESS
Since January 1995, the home equity program has processed responses
from a geographic mailing base that includes areas within 31 states. More
recently, IUB also began to procure customer leads obtained through loan brokers
and the internet. A portion of the Mortgage Loans being sold to the trust were
originated by correspondent lenders or acquired through portfolio acquisitions,
including loans in states where IUB does not originate its own loans. IUB
expects to originate its mortgage loan product line through a variety of
origination channels in other states.
IHE uses pre-screening and list processing (response modeling)
techniques in connection with direct-mail methods to assist IUB in contacting
creditworthy and profitable customer segments within a targeted mail base. IHE
also assists IUB in using direct-mail to contact individuals identified in
public records as having a second mortgage and IUB uses the internet to accept
applications from aggregator sites, banner ad respondents and direct mail
recipients.
UNDERWRITING STANDARDS
The Mortgage Loans (other than those originated by correspondent
lenders or acquired by means of portfolio acquisition) were underwritten by IUB
in accordance with its underwriting standards. The following is a brief
description of the various underwriting standards and procedures applicable to
the Mortgage Loans. However, there can be no assurance that the quality or
performance of all Mortgage Loans will be equivalent in every respect under all
circumstances.
Each prospective mortgagor completes a mortgage loan application that
includes information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. At least one credit report
on each applicant from national credit reporting companies is required. The
report typically contains information relating to such matters as credit history
with local and national merchants and lenders, installment debt
S-27
payments and record of any defaults, bankruptcies, repossessions or judgments.
Appraisals and property valuations range from full appraisals to the use of
prior purchase price adjusted to reflect market appropriate appreciation to
stated value. Title searches and insurance range from full ALTA policies to
property profiles. The appraisal and title requirements obtained in connection
with each loan vary based on loan amount, lien position and property type and
location.
The underwriting requirements for certain types of home loans may
change from time to time, which in certain instances may result in less
stringent underwriting requirements. Depending on the dates on which Mortgage
Loans are originated, such Mortgage Loans may have been originated by IUB
pursuant to different underwriting requirements, and accordingly, certain
Mortgage Loans included in the Trust may be of a different credit quality and
have different loan characteristics than other Mortgage Loans. To the extent
that certain Mortgage Loans were originated using less stringent underwriting
requirements, such Mortgage Loans may be more likely to experience higher rates
of delinquencies, defaults and losses than those Mortgage Loans originated
pursuant to more stringent underwriting requirements.
The Mortgage Loans originated by correspondent lenders were originated
in accordance with the underwriting criteria of IUB and applied by the
originating institution at the time of origination of the related Mortgage Loan.
IHE selected the mortgage loans to be acquired by IUB from among the mortgage
loans offered to it by approved originators. All acquired loans were reviewed
and approved by IUB both at underwriting and at post-closing to ensure that
underwriting and documentation guidelines were satisfied. The acquisition
requirements for certain types of mortgage loans may change from time to time,
which in certain instances may result in less stringent requirements.
The Mortgage Loans originated by lenders other than IUB or
correspondent lenders were originated in accordance with various underwriting
criteria being applied by the originating institutions at the time of
origination of the related Mortgage Loan. IHE selected the Mortgage Loans to be
acquired by the Master Servicer from among the mortgage loans offered to it by
various originators through the analysis of borrower credit information.
A significant portion of the HELOCs were purchased by IUB from the PNB
Trust. IUB has been advised that information regarding these mortgage loans may
be found in the prospectus supplement dated April 16, 1999 with respect to PNB
Trust (filed with the Edgar System under registration number 333-39127). The
Master Servicer did not verify any of the information in this prospectus
supplement but it did follow its standard procedures described in the following
paragraph in acquiring mortgage loans from the PNB Trust.
IUB does not fully reunderwrite the acquired loans to its own lending
criteria but does evaluate acquired loans (including the HELOCs acquired from
PNB Trust) in light of experience with mortgage loans originated by IUB pursuant
to its lending criteria. Relevant factors used in evaluating the acquired loans
include but are not limited to: (i) borrower credit scores; (ii) payment history
of the borrower on the particular loan; (iii) general credit history of the
borrower; and (iv) combined loan-to-value ratios. Similar evaluation criteria
are applied with respect to mortgage loans originated by IUB pursuant to the
underwriting standards developed by IHE at the direction of IUB. However, there
can be no assurance that the quality or performance of the acquired Mortgage
Loans will be equivalent in every respect under all circumstances to the quality
or performance of mortgage loans originated by IUB pursuant to the underwriting
standards developed by IHE at the direction of IUB or to the quality or
performance of other mortgage loans originated by the various originators of the
Mortgage Loans.
The underwriting standards of each of the originators of the Mortgage
Loans vary. Generally, however, each prospective mortgagor was required to
complete a mortgage loan application that included information with respect to
the applicant's liabilities, income, credit history, employment history and
personal information. IHE does not require a full and current credit report from
national credit reporting companies with respect to each borrower in the case of
acquired mortgage loans. IHE does, however, obtain some current credit
information with respect to each such borrower and obtains a full credit report
with respect to a sample of the mortgage loans in any acquired portfolio as part
of the diligence process. Full credit reports typically contain information
relating to such matters as credit history with local and national merchants and
lenders, installment debt payments and record of any defaults, bankruptcies,
repossessions or judgments. The originators required appraisals and property
valuations ranging from
S-28
full appraisals to use of stated value. The originators required title searches
and insurance ranging from full ALTA policies to property profiles. The
appraisal and title requirements obtained in connection with each loan vary
based on originator, loan amount, lien position and property type and location.
IHE reviews a sample of the loan files relating to the mortgage loans
being purchased by IUB in any acquisition. Depending upon the results of the
initial review, additional reviews may follow. Generally, IHE's review of the
loan files includes (i) a compliance review to assure that all necessary
disclosures have been made and that the file contains an original note, mortgage
and assignment each naming the same borrower and (ii) a credit review that is
designed to assure that the related mortgage loan was originated as required by
the originator's underwriting guidelines and that the data files received with
respect to such mortgage loan are accurate.
IUB's acquisition requirements for certain types of mortgage loans may
change from time to time, which in certain instances may result in less
stringent requirements. None of the acquired Mortgage Loans was directly subject
to the underwriting criteria of IUB at the time of origination since a lender
other than IUB originated each acquired Mortgage Loan. Depending on the dates on
which the acquired Mortgage Loans were originated and the lender that originated
each of the acquired Mortgage Loans, the acquired Mortgage Loans may have been
originated pursuant to different underwriting requirements and, accordingly,
certain acquired Mortgage Loans may be of a different credit quality and have
different loan characteristics than other Mortgage Loans or than mortgage loans
historically originated by IUB. To the extent that certain acquired Mortgage
Loans were originated using less stringent underwriting requirements, such
acquired Mortgage Loans may be more likely to experience higher rates of
delinquencies, defaults and losses than those Mortgage Loans originated pursuant
to more stringent underwriting requirements.
MORTGAGE LOAN CLOSING PROCEDURES FOR LOANS FUNDED BY IUB
The Mortgage Loans funded by IUB originated via direct mail and
internet channels are closed and the loan files are reviewed, verified and
completed in accordance with procedures developed by IHE and IUB. Closing
procedures may vary based upon loan amount and the state in which the property
is located. Following the customer's acceptance of the loan offer, the loan
processing officer or the account executive responsible for the loan delivers
the loan file to the closing area. The loan documents are drafted after
verifying that the file contains a "signing confirmation request" from the
applicable title company; for loans qualifying for limited title and appraisal,
the "signing confirmation request" is not required. All files are audited for
completeness. Once the loan documents are prepared, the loan file is reviewed
for quality by a loan processor. Following quality review approval, the loan
documents are delivered by overnight delivery to the closing agent or borrower.
For loans qualifying for limited title and appraisal, the documents are
forwarded directly to the borrower with detailed signing and notary
instructions. If a closing agent closes the loan, the closing agent reviews each
loan file for completeness using a funding audit checklist. Prior to funding,
the complete loan file is delivered to the Pre-Funding Audit Department which
reviews the file for completeness, legal compliance and proper lien position.
Once this review is completed, the Pre-Funding Audit Department releases the
loan for funding. Every loan funded is audited for completeness using
post-closing procedures of IUB developed with the assistance of IHE.
The Mortgage Loans funded by IUB originated via broker applications are
closed and the loan files are reviewed, verified and completed in accordance
with procedures developed by IHE and IUB. Closing procedures may vary based upon
loan amount and the state in which the property is located. Following final
approval of the loan, a document request is sent to the originating broker by
the junior underwriter. The broker verifies the loan terms and costs and send
the verified request back to the junior underwriter. The loan documents are
drafted after verifying that the document request is complete and accurate. Once
the loan documents are prepared, they are audited by another closer or the team
supervisor. Following the reviewer's approval, the loan documents are delivered
via overnight delivery to the independent closing agent designated by the
broker. The closing agent reviews each loan file for completeness. Prior to
funding, the complete loan file is reviewed for completeness, legal compliance
and proper lien position by the funder. Once this review is completed, the loan
is funded. Every loan funded is audited for completeness using post-closing
procedures of IUB developed with the assistance of IHE.
S-29
STATISTICAL INFORMATION
Set forth below is a description of certain additional characteristics
of the Mortgage Loans as of the Statistical Calculation Date (except as
otherwise indicated). Dollar amounts and percentages may not add up to totals
due to rounding. Annex II attached hereto contains additional characteristics of
the Mortgage Loans separated by Loan Group.
LIEN POSITION OF INITIAL MORTGAGE LOANS
PERCENTAGE OF STATISTICAL
CALCULATION DATE
UNPAID PRINCIPAL PRINCIPAL
NUMBER OF INITIAL BALANCE OF INITIAL BALANCE OF INITIAL
LIEN POSITION MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
----------------------------------------------------------------------------------------------------------
First Lien $ 4,529,884.04 1.27%
92
Second Lien 343,127,227.88 96.45
8,203
Third Lien 8,114,054.68 2.28
213
----------------------------------------------------------------------------------------------------------
Total $355,771,166.60 100.00%
8,508
----------------------------------------------------------------------------------------------------------
MORTGAGE INTEREST RATES OF INITIAL MORTGAGE LOANS
PERCENTAGE OF STATISTICAL
UNPAID PRINCIPAL CALCULATION DATE PRINCIPAL
NUMBER OF INITIAL BALANCE OF INITIAL BALANCE OF INITIAL
MORTGAGE INTEREST RATES (%) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
6.000 to 6.999 10 $ 575,928.61 0.16%
7.000 to 7.999 136 8,155,977.29 2.29
8.000 to 8.999 296 14,295,150.70 4.02
9.000 to 9.999 605 29,611,278.95 8.32
10.000 to 10.999 820 38,371,142.38 10.79
11.000 to 11.999 1,100 46,413,693.82 13.05
12.000 to 12.999 1,077 43,013,714.01 12.09
13.000 to 13.999 1,152 48,892,392.89 13.74
14.000 to 14.999 989 40,978,744.92 11.52
15.000 to 15.999 752 28,271,832.04 7.95
16.000 to 16.999 575 22,213,510.08 6.24
17.000 to 17.999 444 16,542,078.39 4.65
18.000 to 18.999 284 9,692,689.87 2.72
19.000 to 19.999 203 6,910,054.73 1.94
20.000 + 65 1,832,977.92 0.52
-----------------------------------------------------------------------------------------------------------
Total 8,508 $355,771,166.60 100.00%
-----------------------------------------------------------------------------------------------------------
The weighted average mortgage interest rate of the Initial Mortgage
Loans as of the Statistical Calculation Date is approximately 13.172% per
annum.
S-30
COMBINED LOAN-TO-VALUE RATIOS OF INITIAL MORTGAGE LOANS
PERCENTAGE OF STATISTICAL
UNPAID PRINCIPAL CALCULATION DATE PRINCIPAL
NUMBER OF INITIAL BALANCE OF INITIAL BALANCE OF INITIAL
COMBINED LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
0.001 to 40.000 31 $ 1,182,974.17 0.33%
40.001 to 50.000 23 893,127.00 0.25
50.001 to 60.000 56 3,619,852.27 1.02
60.001 to 70.000 127 6,247,578.93 1.76
70.001 to 80.000 352 14,601,026.71 4.10
80.001 to 90.000 820 34,649,055.26 9.74
90.001 to 100.000 2,204 91,250,885.59 25.65
100.001 to 110.000 838 30,860,783.63 8.67
110.001 to 120.000 1,805 73,446,834.54 20.64
120.001 to 130.000 2,252 99,019,048.50 27.83
-----------------------------------------------------------------------------------------------------------
Total 8,508 $355,771,166.60 100.00%
-----------------------------------------------------------------------------------------------------------
The minimum and maximum Combined Loan-to-Value Ratios of the initial
Mortgage Loans as of the Statistical Calculation Date are approximately 8.86%
and 125.00%, respectively, and the weighted average Combined Loan-to-Value
Ratio as of the Statistical Calculation Date of the Initial Mortgages Loans
is approximately 106.07%.
PRINCIPAL BALANCES OF INITIAL MORTGAGE LOANS
PERCENTAGE OF STATISTICAL
UNPAID PRINCIPAL CALCULATION DATE PRINCIPAL
NUMBER OF INITIAL BALANCE OF INITIAL BALANCE OF INITIAL
PRINCIPAL BALANCES MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
$0.01 to $25,000.00 2,103 $ 42,176,140.47 11.85%
$25,000.01 to $50,000.00 4,407 162,735,908.66 45.74
$50,000.01 to $75,000.00 1,386 85,215,058.12 23.95
$75,000.01 to $100,000.00 430 38,062,149.31 10.70
$100,000.01 to $125,000.00 86 9,762,296.23 2.74
$125,000.01 to $150,000.00 42 5,839,929.73 1.64
$150,000.01 to $175,000.00 16 2,600,355.04 0.73
$175,000.01 to $200,000.00 17 3,231,080.32 0.91
$200,000.01 to $300,000.00 16 4,049,248.72 1.14
$300,000.01 to $400,000.00 2 765,000.00 0.22
$400,000.01 to $500,000.00 3 1,334,000.00 0.37
-----------------------------------------------------------------------------------------------------------
Total 8,508 $355,771,166.60 100.00%
-----------------------------------------------------------------------------------------------------------
The average unpaid principal balance of the Initial Mortgage Loans as
of the Statistical Calculation Date is approximately $41,816.08.
S-31
MORTGAGED PROPERTIES SECURING INITIAL MORTGAGE LOANS
PERCENTAGE OF STATISTICAL
UNPAID PRINCIPAL CALCULATION DATE PRINCIPAL
NUMBER OF INITIAL BALANCE OF INITIAL BALANCE OF INITIAL
PROPERTY TYPE MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
Single-Family Dwelling 7,380 $305,812,696.83 85.96%
Planned Unit Development 600 30,179,495.22 8.48
Condominium 427 16,347,046.82 4.59
Leasehold 80 2,647,919.49 0.74
Multi-Family 21 784,008.24 0.22
-----------------------------------------------------------------------------------------------------------
Total 8,508 $355,771,166.60 100.00%
-----------------------------------------------------------------------------------------------------------
ORIGINAL TERM TO MATURITY OF INITIAL MORTGAGE LOANS
PERCENTAGE OF STATISTICAL
UNPAID PRINCIPAL CALCULATION DATE PRINCIPAL
ORIGINAL TERM TO MATURITY NUMBER OF INITIAL BALANCE OF INITIAL BALANCE OF INITIAL
(MONTHS) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
------------------------------------------------------------------------------------------------------------
0 To 60 1 $ 17,966.98 0.01%
61 To 120 446 12,270,537.77 3.45
121 To 180 4,076 156,301,851.42 43.93
181 To 240 2,162 97,234,510.00 27.33
241 To 300 1,823 89,946,300.43 25.28
------------------------------------------------------------------------------------------------------------
Total 8,508 $355,771,166.60 100.00%
------------------------------------------------------------------------------------------------------------
The weighted average original term to maturity of the Initial
Mortgage Loans as of the Statistical Calculation Date is approximately 225
months.
REMAINING TERM TO MATURITY OF INITIAL MORTGAGE LOANS
PERCENTAGE OF STATISTICAL
UNPAID PRINCIPAL CALCULATION DATE PRINCIPAL
REMAINING TERM TO MATURITY NUMBER OF INITIAL BALANCE OF INITIAL BALANCE OF INITIAL
(MONTHS) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
0 to 60 113 $ 2,253,314.72 0.63%
61 to 120 624 18,710,756.50 5.26
121 to 180 3,930 152,721,009.70 42.93
181 to 240 2,032 92,810,046.74 26.09
241 to 300 1,809 89,276,038.94 25.09
-----------------------------------------------------------------------------------------------------------
Total 8,508 $355,771,166.60 100.00%
-----------------------------------------------------------------------------------------------------------
The weighted average remaining term to maturity of the Initial
Mortgage Loans as of the Statistical Calculation Date is approximately 217
months.
S-32
YEAR OF ORIGINATION OF INITIAL MORTGAGE LOANS
PERCENTAGE OF STATISTICAL
CALCULATION DATE
UNPAID PRINCIPAL PRINCIPAL
NUMBER OF INITIAL BALANCE OF INITIAL BALANCE OF INITIAL
YEAR OF ORIGINATION MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
2001 7,014 $309,336,420.43 86.95%
2000 169 5,945,497.41 1.67
1999 62 2,256,389.46 0.63
1998 300 10,154,549.96 2.85
1997 253 8,438,527.71 2.37
1996 347 7,942,276.74 2.23
1995 232 7,347,058.47 2.07
1994 62 1,786,786.06 0.50
1993 27 890,735.30 0.25
1992 24 945,915.36 0.27
1991 7 262,671.51 0.07
1990 8 297,425.10 0.08
1989 2 114,275.73 0.03
1988 1 52,637.36 0.01
-----------------------------------------------------------------------------------------------------------
Total 8,508 $355,771,166.60 100.00%
-----------------------------------------------------------------------------------------------------------
The earliest month and year of origination of any Initial Mortgage
Loan as of the Statistical Calculation Date is November 1988 and the latest
month and year of origination of any Initial Mortgage Loan as of the
Statistical Calculation Date is July 2001.
OCCUPANCY TYPE OF INITIAL MORTGAGE LOANS
PERCENTAGE OF STATISTICAL
CALCULATION DATE
UNPAID PRINCIPAL PRINCIPAL
NUMBER OF INITIAL BALANCE OF INITIAL BALANCE OF INITIAL
OCCUPANCY TYPE MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
Owner Occupied 8,484 $354,879,029.29 99.75%
Non-Owner Occupied 24 892,137.31 0.25
-----------------------------------------------------------------------------------------------------------
Total 8,508 $355,771,166.60 100.00%
-----------------------------------------------------------------------------------------------------------
CREDIT QUALITY OF INITIAL MORTGAGE LOANS
PERCENTAGE OF STATISTICAL
CALCULATION DATE
UNPAID PRINCIPAL PRINCIPAL
NUMBER OF INITIAL BALANCE OF INITIAL BALANCE OF INITIAL
CREDIT QUALITY MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
Excellent 6,026 $266,178,383.45 74.82%
Superior 1,498 56,691,654.61 15.93
Good 801 27,277,788.08 7.67
Fair 58 2,034,091.19 0.57
Non-Prime 125 3,589,249.27 1.01
-----------------------------------------------------------------------------------------------------------
Total 8,508 $355,771,166.60 100.00%
-----------------------------------------------------------------------------------------------------------
Credit Grades run from Excellent to Superior to Good to Fair to
Non-Prime in descending order.
S-33
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES SECURING
INITIAL MORTGAGE LOANS
PERCENTAGE OF STATISTICAL
CALCULATION DATE
UNPAID PRINCIPAL PRINCIPAL
NUMBER OF INITIAL BALANCE OF INITIAL BALANCE OF INITIAL
STATE MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
----------------------------------------------------------------------------------------------------------
California 1,745 $ 90,485,074.34 25.43%
Florida 628 22,178,179.02 6.23
Virginia 476 19,663,004.30 5.53
Maryland 403 17,518,061.51 4.92
Illinois 427 17,349,016.25 4.88
Ohio 417 14,997,765.40 4.22
Washington 340 14,770,055.92 4.15
New Jersey 317 14,346,561.26 4.03
Michigan 375 13,626,747.93 3.83
Arizona 367 13,601,102.04 3.82
Pennsylvania 327 13,189,127.84 3.71
Georgia 351 12,610,171.37 3.54
Colorado 240 11,232,206.21 3.16
Oregon 208 8,559,125.76 2.41
Nevada 221 7,659,720.24 2.15
Missouri 209 7,588,336.02 2.13
Other (<2%) 1,457 56,396,911.19 15.85
----------------------------------------------------------------------------------------------------------
Total 8,508 $355,771,166.60 100.00%
----------------------------------------------------------------------------------------------------------
No more than approximately 0.32% of the Initial Mortgage Loans as of
the Statistical Calculation Date are secured by mortgaged properties located
in any one zip code.
DEBT-TO-INCOME RATIOS OF INITIAL MORTGAGE LOANS
PERCENTAGE OF STATISTICAL
UNPAID PRINCIPAL CALCULATION DATE PRINCIPAL
NUMBER OF INITIAL BALANCE OF INITIAL BALANCE OF INITIAL
DEBT-TO-INCOME RATIOS (%) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
----------------------------------------------------------------------------------------------------------
5.001 to 10.000 1 $ 31,302.72 0.01%
10.001 to 15.000 11 478,846.53 0.13
15.001 to 20.000 64 2,721,761.18 0.77
20.001 to 25.000 233 8,882,603.07 2.50
25.001 to 30.000 582 21,869,234.23 6.15
30.001 to 35.000 1,072 42,307,413.25 11.89
35.001 to 40.000 1,489 60,379,579.14 16.97
40.001 to 45.000 1,750 70,590,765.62 19.84
45.001 to 50.000 2,172 92,481,877.03 25.99
50.001 to 55.000 1,134 56,027,783.83 15.75
----------------------------------------------------------------------------------------------------------
Total 8,508 $355,771,166.60 100.00%
----------------------------------------------------------------------------------------------------------
The weighted average debt-to-income ratio of the Initial Mortgage
Loans as of the Statistical Calculation Date is approximately 41.89%.
S-34
PREPAYMENT PENALTY FOR INITIAL MORTGAGE LOANS
PERCENTAGE OF STATISTICAL
UNPAID PRINCIPAL CALCULATION DATE PRINCIPAL
NUMBER OF INITIAL BALANCE OF INITIAL BALANCE OF INITIAL
MONTHS APPLICABLE MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
No Prepayment Penalty 1,992 $ 70,396,636.43 19.79%
6 1 37,721.33 0.01
12 2 70,444.55 0.02
24 36 2,013,576.02 0.57
36 2,661 119,610,375.40 33.62
42 3 86,174.11 0.02
48 16 845,840.51 0.24
60 3,797 162,710,398.25 45.73
-----------------------------------------------------------------------------------------------------------
Total 8,508 $355,771,166.60 100.00%
-----------------------------------------------------------------------------------------------------------
ORIGINATION CHANNEL FOR INITIAL MORTGAGE LOANS
PERCENTAGE OF STATISTICAL
CALCULATION DATE
UNPAID PRINCIPAL PRINCIPAL
NUMBER OF INITIAL BALANCE OF INITIAL BALANCE OF INITIAL
ORIGINATION CHANNEL MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
Direct Mail 3,793 $156,622,413.36 44.02%
Correspondent 2,009 83,619,367.49 23.50
Broker 1,695 82,994,608.10 23.33
Acquisition 1,011 32,534,777.65 9.14
-----------------------------------------------------------------------------------------------------------
8,508 $355,771,166.60 100.00%
Total
-----------------------------------------------------------------------------------------------------------
MANDATORY REPURCHASE OR SUBSTITUTION OF MORTGAGE LOANS
The Transferor is required, with respect to Mortgage Loans that are
found by the Trustee to have defective documentation, or in respect of which the
Transferor has breached a representation or warranty, to repurchase such
Mortgage Loans or substitute such Mortgage Loan with a Qualified Substitute
Mortgage Loan. See "Prepayment and Yield Considerations" and "Description of the
Mortgage Loan Sale Agreement and the Purchase and Sale Agreement -- Assignment
of Mortgage Loans" herein.
CONVEYANCE OF SUBSEQUENT MORTGAGE LOANS, THE PRE-FUNDING ACCOUNT AND THE FUNDING
ACCOUNT
The Sale and Servicing Agreement permits the Trust to acquire certain
Mortgage Loans (the "SUBSEQUENT MORTGAGE LOANS") after the Closing Date and
prior to March 31, 2002. Accordingly, the statistical characteristics of the
Mortgage Loans will vary as of any Cut-Off Date subsequent to the Closing Date
upon the acquisition of Subsequent Mortgage Loans. Each Subsequent Mortgage Loan
will be purchased by the Trust at a purchase price equal to the Principal
Balance thereof as of the related Cut-Off Date. The date of transfer of a
Subsequent Mortgage Loan to the Trust is the "SUBSEQUENT TRANSFER DATE."
The obligation of the Trust to purchase Subsequent Mortgage Loans on a
Subsequent Transfer Date is subject to the requirements set forth in the Sale
and Servicing Agreement. Any conveyance of Additional Mortgage Loans on the
Closing Date or Subsequent Mortgage Loans on a Subsequent Transfer Date is
subject to the following conditions: (a) each such Mortgage Loan must satisfy
the representations and warranties specified in the related subsequent transfer
agreement and the Sale and Servicing Agreement; (b) the Transferor will not
select Mortgage Loans in a manner that it believes to be adverse to the
interests of the Noteholders; (c) the Transferor will deliver opinions of
counsel with respect to the validity of the conveyance of the Mortgage Loans and
(d) as of the applicable Cut-off Date, each such Mortgage Loan will satisfy the
following criteria: (i) the Mortgage Loan may not be 60 or more days delinquent
as of the related Cut-off Date; (ii) the original term to stated maturity of the
Mortgage Loan will not be less than 60 months and will not exceed 360 months;
(iii) the Mortgage Loan may not provide for
S-35
negative amortization; (iv) any Mortgage Loan to be allocated to Loan Group I
will not have a combined loan-to-value ratio greater than 100.00%; (v) the
Mortgage Loans will have, as of the Cut-off Date, a weighted average term since
origination not in excess of 12 months; (vi) the Mortgage Loan shall have been
serviced by the Master Servicer or Subservicer since origination or purchase by
the Master Servicer; (vii) the Mortgage Loan must have a first payment date
occurring on or before May 31, 2002; (viii) any Mortgage Loan to be allocated to
Loan Group III will have a Gross Margin not less than minus 1.00%; (ix) any
Mortgage Loan to be allocated to Loan Group III will have a maximum Mortgage
Rate pursuant to the lifetime rate cap of not less than 9.00%; (x) any Mortgage
Loan to be allocated to Loan Group III will have a minimum Mortgage Interest
Rate not less than 4.00% and (xi) the Mortgage Loan shall have been underwritten
or acquired in accordance with the criteria set forth under "Description of the
Mortgage Loans - Underwriting Standards" above.
In addition, following the purchase of any Additional Mortgage Loans or
Subsequent Mortgage Loans by the Trust, the Mortgage Loans will as of the
applicable Cut-off Date: (i) have a weighted average original term to stated
maturity of not more than 300 months; (ii) have a weighted average Mortgage
Interest Rate of not less than 10.00% and not more than 15.00%; (iii) have a
weighted average combined loan-to-value ratio of not more than 125% and (iv)
have no Mortgage Loan with a Principal Balance in excess of $500,000, in each
case, as applicable, by aggregate Principal Balance of the Mortgage Loans as of
the applicable Cut-off-Date. In addition, the Mortgage Loans in Loan Group III
will as of the applicable Cut-off-Date, have a weighted average Gross Margin not
less than 4.00%, by aggregate Principal Balance of the Mortgage Loans in Loan
Group III as of the applicable Cut-off Date. Notwithstanding the foregoing, any
Additional Mortgage Loan or Subsequent Mortgage Loan may be rejected by any of
Fitch, S&P or Moody's if the inclusion of such Additional Mortgage Loan or
Subsequent Mortgage Loan would adversely affect the ratings on any class of
Offered Notes.
The Pre-Funding Account. The Master Servicer will cause an account (the
"PRE-FUNDING ACCOUNT") to be established in the name of the Indenture Trustee,
and will deposit the Pre-Funded Amount therein on the Closing Date from the net
proceeds of the sale of the Offered Notes. The "PRE-FUNDED AMOUNT" will be an
amount equal to the excess of the initial Offered Note Balance plus the initial
Overcollateralization Amount, over the sum of the aggregate Principal Balance of
the Initial Mortgage Loans and the Additional Mortgage Loans acquired by the
Trust on the Closing Date. Monies in the Pre-Funding Account will be applied
during the Pre-Funding Period to purchase Subsequent Mortgage Loans from the
Transferor. Approximately $102.9 million, $101.3 million and $22.4 million will
be allocated to purchasing Subsequent Mortgage Loans for Loan Group I, Loan
Group II and Loan Group III, respectively. The "PRE-FUNDING PERIOD" with respect
to any Loan Group will be the period from the Closing Date until the earliest of
(i) the date on which the amount on deposit in the Pre-Funding Account allocated
to such Loan Group is less than $100,000, (ii) March 31, 2002 and (iii) the
occurrence, if any, of a servicer default under the Sale and Servicing Agreement
or an Amortization Event. The Pre-Funding Account will be part of the Trust, but
monies on deposit therein will not be available to cover losses on or in respect
of the Mortgage Loans. Any portion of the Pre-Funded Amount remaining on deposit
in the Pre-Funding Account at the end of the Pre-Funding Period for Loan Group I
and Loan Group II, will count as Principal Collections for the related Loan
Group and may be paid to the Noteholders (other than the Class A-IO Offered
Notes) as a payment of principal. Any portion of the Pre-Funded Amount remaining
on deposit in the Pre-Funding Account at the end of the Pre-Funding Period for
Loan Group III, will be applied first to acquire any additional draws under the
HELOCs during the period from the Closing Date to the end of the Managed
Amortization Period for Loan Group III (the "ADDITIONAL BALANCES") and
thereafter will count as Principal Collections for Loan Group III and may be
paid to holders of the Group III Notes as a payment of principal. Monies on
deposit in the Pre-Funding Account may be invested in Permitted Investments as
provided in the Indenture. Net income on investment of funds in the Pre-Funding
Account will be deposited into or credited to an account held by the Indenture
Trustee designated the capitalized interest account (the "CAPITALIZED INTEREST
ACCOUNT"). There can be no assurance that a sufficient number of Subsequent
Mortgage Loans for any Loan Group will be available for application of the
entire Pre-Funded Amount.
The Funding Account. On each Payment Date during the period beginning
at the end of the Pre-Funding Period and terminating at the end of the Managed
Amortization Period for Loan Group III, the Indenture Trustee, from any amounts
transferred from the Pre-Funding Account to the Funding Account at the end of
the Pre-Funding Period that had been allocated to purchase subsequent home
equity lines of credit, will apply such amounts to buy Additional Balances for
Loan Group III, to the extent they are available.
S-36
IHE FUNDING CORP. II
IHE Funding Corp. II (the "TRANSFEROR"), a Delaware corporation
headquartered in Columbus, Indiana, is a wholly-owned subsidiary of IHE,
incorporated in the State of Delaware on September 17, 2001. IHE Funding Corp.
II was organized for limited purposes, which include purchasing mortgage loans
from IUB and its affiliates, selling and transferring such mortgage loans to
third parties and any activities incidental to and necessary or convenient for
the accomplishment of such purposes. The principal executive offices of IHE
Funding Corp. II are located at 500 Washington Street, Columbus, Indiana 47201.
The telephone number of such offices is (812) 376-1909.
IUB, in accordance with its underwriting standards, underwrote or
reunderwrote all the Mortgage Loans which IUB originated and which it will sell
to the Transferor pursuant to a mortgage loan sale agreement and the Transferor
will sell to the Depositor pursuant to a purchase and sale agreement between the
Transferor and the Depositor (together, the "MORTGAGE SALE AGREEMENTS"). On the
Closing Date, the Depositor will acquire the Mortgage Loans from the Transferor
and simultaneously therewith transfer the Mortgage Loans to the Trust.
IRWIN HOME EQUITY CORPORATION
GENERAL
Irwin Home Equity Corporation ("IHE" or the "SUBSERVICER") is an
Indiana corporation with a single origination and servicing facility in San
Ramon, California. IHE will initially be the sole subservicer of the Mortgage
Loans. IHE is a substantially wholly-owned subsidiary of IUB, which is a direct
wholly-owned subsidiary of Irwin Financial Corporation ("IFC"), a specialized
financial services company headquartered in Columbus, Indiana. IHE assists IUB
in identifying mortgage loans that are appropriate for origination or
acquisition by IUB in selected markets nationwide using a combination of direct
mail, broker channels, internet site, correspondent lenders, telemarketing and
portfolio acquisition. IHE services these loans on behalf of IUB. IUB's home
equity line of credit and closed-end, fixed rate products are marketed primarily
as debt consolidation loans for a target market of creditworthy and active
borrowers. Similar borrowers are targeted for the IUB's first mortgage refinance
and portfolio acquisition program. As of June 30, 2001, the IHE's and IUB's home
equity line of business had over $662 million in assets, had originated in
aggregate over $2.9 billion in mortgage loans, and IHE was a Freddie Mac
approved seller-servicer. The home equity program underwrites first, second and
more junior lien mortgage loans secured by one- to four-family residences
located primarily in selected metropolitan markets in the United States.
AS SUBSERVICER
The Trust will appoint Irwin Union Bank and Trust Company as Master
Servicer pursuant to the Sale and Servicing Agreement. However, the Subservicer
will service the Mortgage Loans pursuant to a Subservicing Agreement between
Irwin Home Equity Corporation and Irwin Union Bank and Trust Company.
Notwithstanding such subservicing arrangement, Irwin Union Bank and Trust
Company shall remain responsible to the Trust for the servicing of the Mortgage
Loans.
The Subservicer engages in mortgage loan servicing, including servicing
of previously securitized loans, which involves, among other things, the
processing and administration of mortgage loan payments in return for a
servicing fee. At June 30, 2001, the Subservicer serviced 60,121 mortgage loans
with an outstanding principal balance of approximately $1.986 billion.
As of June 30, 2001, IHE and IUB together had approximately 713
employees involved in the home equity program. The Subservicer's offices are
located at 12677 Alcosta Boulevard, Suite 500, San Ramon, California, 94583 and
its telephone number is (925) 277-2001.
The following table sets forth certain information regarding the
principal balance of one- to four-family residential mortgage loans included in
the Subservicer's servicing portfolio. The Subservicer's servicing portfolio
S-37
includes mortgage loans held for sale and mortgage loans held for investment
that were originated by the Master Servicer's mortgage banking operations.
THE SUBSERVICER'S SERVICING PORTFOLIO
(DOLLARS IN THOUSANDS)
Year Ended Year Ended Year Ended Year Ended Six Months Ended
December 31, 1997 December 31, 1998 December 31, 1999 December 31, 2000 June 30, 2001
----------------- ----------------- ----------------- ----------------- -------------
Loans acquired & originated: $214,518 $389,673 $439,507 $1,225,955 $ 452,115
Loan Volume:
Lines of Credit $115,274 $ 98,855 $ 93,185 $ 235,066 $ 77,430
Loans $ 99,244 $290,818 $346,322 $ 990,889 $ 372,028
Total Servicing Portfolio $358,166 $581,241 $842,403 $1,822,856 $ 1,985,946
Loans Securitized $210,100 $294,300 $430,700 $ 774,600 $ 401,975
Securitized loan balance $249,142 $336,767 $553,886 $1,285,500 $ 1,687,475
(cumulative)
----------------------
Note: A significant portion of the increase in the Subservicer's servicing
portfolio during 2000 resulted from the acquisition of a seasoned pool
of previously securitized loans now serviced by the Subservicer. Those
loans were not originated by IUB.
DELINQUENCY AND LOSS EXPERIENCE OF THE SUBSERVICER'S SERVICING PORTFOLIO
The following tables summarize the delinquency and loss experience for
closed-end, fixed-rate first and second mortgage loans and adjustable-rate, home
equity lines of credit originated or acquired by the Master Servicer and
serviced by the Subservicer. The data presented in the following tables is for
illustrative purposes only, and there is no assurance that the delinquency and
loss experience of the Mortgage Loans will be similar to that set forth below.
S-38
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-----------------------------------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Number Number Number Number Number
of Dollar of Dollar of Dollar of Dollar of Dollar
Accounts Managed Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount
-----------------------------------------------------------------------------------------------------------------------------
Principal
Balance of 10,800 $358,166 14,578 $581,241 22,524 $842,403 57,544 $1,822,856 60,121 $1,985,946
Mortgage Loans:
30-59 Days Past 80 $ 2,516 108 $ 3,590 262 $ 7,327 1,454 $ 38,857 1,277 $ 31,197
Due (1).......
60-89 Days Past 12 $ 372 13 $ 352 70 $ 2,053 547 $ 13,033 671 $ 17,014
Due (1).......
90+ Days Past 28 $ 905 31 $ 991 67 $ 2,445 929 $ 27,378 1,798 $ 41,149
Due (1).......
Foreclosures.. 38 $ 1,546 62 $ 2,151 139 $ 4,618 86 $ 4,178 94 $ 4,725
REO Properties 3 $ 150 8 $ 277 10 $ 300 20 $ 1,204 34 $ 1,952
(2)...........
----------------------
Note: A significant portion of the increase in the Subservicer's servicing
portfolio during 2000 resulted from the acquisition of a seasoned pool
of previously securitized loans now serviced by the Subservicer. Those
loans were not originated by IUB.
(1) Contractually past due excluding mortgage loans in the process of
foreclosure.
(2) "REAL ESTATE OWNED" properties - properties relating to mortgages
foreclosed or for which deeds in lieu of foreclosure have been
accepted, and held by the Master Servicer pending disposition.
S-39
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Aggregate Principal Balance
Outstanding................. $358,166 $581,241 $842,403 $1,822,856 $1,985,946
Net Charge-offs (1)......... $ 1,026 $ 2,141 $ 3,186 $ 10,041 $ 14,531
Total Loans in Foreclosure.. $ 1,696 $ 2,428 $ 4,918 $ 5,382 $ 6,911
-------------------------------------------------------------------------------------------------------------
Net Charge-offs as a
Percentage of Aggregate
Amount Outstanding at
period-end.................. 0.29% 0.37% 0.38% 0.55% 0.7%
----------------------
Note: A significant portion of the increase in the Subservicer's servicing
portfolio during 2000 resulted from the acquisition of a seasoned pool
of previously securitized loans now serviced by the Subservicer. Those
loans were not originated by IUB.
(1) Net Charge-offs refers to writedowns on properties prior to liquidation
and the actual liquidated loss incurred on a mortgaged property when
sold net of recoveries.
(2) Annualized.
The home equity program commenced receiving applications for mortgage
loans under its lending programs in 1995, and IUB funded its first loan under
the home equity program in March 1995. Accordingly, neither the Master Servicer
nor the Subservicer has historical delinquency, bankruptcy, foreclosure or
default experience prior to such time that may be referred to for purposes of
estimating the future delinquency and loss experience of mortgage loans similar
to the Mortgage Loans being sold to the Trust.
LEGAL PROCEEDINGS
On May 9, 2001, IUB and IHE received notice that they were named as
defendants in Thompson v. Irwin Union Bank and Trust Company and Irwin Home
Equity Corporation, a lawsuit filed in the U.S. District Court for the District
of Rhode Island. The suit alleges that IUB's and IHE's disclosures and closing
procedure for certain home equity loans did not comply with certain provisions
of the Truth in Lending Act. The suit also requests that the court certify a
plaintiff class in this action. On June 18, 2001, IUB and IHE filed a motion
with the court to compel arbitration pursuant to the provisions in the home
equity loan agreement. On July 19, 2001, IHE was served with notice that it was
named as the defendant in McIntosh v Irwin Home Equity Corporation, a lawsuit
filed in the U.S. District Court for the District of Massachusetts. The suit
relates to a loan serviced by IHE, although the loan in question was not
originated by either IHE or IUB. The plaintiff alleges that the related loan
documents did not comply with certain provisions of the Truth in Lending Act
relating to high rate loans. The suit also requests that the court certify a
plaintiff class in this action. IHE filed an answer on August 31, 2001. No
motions have been filed, and discovery has not yet been initiated. The court has
scheduled a scheduling conference for October 22, 2001. See "Risk
Factors-Origination Disclosure Practices for the Mortgage Loans could create
Liabilities that affect your Notes" and "--The Trust may experience Losses as a
result of Lawsuits under State Law."
The information set forth in this section concerning the Subservicer
has been provided by Irwin Home Equity Corporation. None of the Depositor or the
Trustee make any representation as to the accuracy or completeness of such
information.
S-40
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The yield to maturity and the aggregate amount of payments on the
Offered Notes will depend on the price paid by the related Offered Noteholder
for such Offered Note, the related Note Rate and the rate and timing of
principal payments (including payments in excess of the monthly payment,
prepayments in full or terminations, liquidations and repurchases) on the
Mortgage Loans in the aggregate and for the Class A Notes, to a large extent on
the Mortgage Loans in the related Loan Group and, in the case of the HELOCs, the
rate and timing of draws and the allocations thereof. As described above a
majority of the Mortgage Loans provide for the payment of a penalty in
connection with prepayment in full during the first two, three, four or five
years after origination thereof.
The rate of principal prepayments on the Mortgage Loans will be
influenced by a variety of economic, tax, geographic, demographic, social, legal
and other factors, and has fluctuated considerably in recent years. In addition,
the rate of principal prepayments may differ among Mortgage Loans at any time
because of specific factors relating to such Mortgage Loans, such as the age of
the Mortgage Loans, the geographic location of the related Mortgaged Properties
and the extent of the related Mortgagors' equity in such Mortgaged Properties,
and changes in the Mortgagors' housing needs, job transfers and employment. In
general, if prevailing interest rates fall significantly below the interest
rates at the time of origination, mortgage loans may be subject to higher
prepayment rates than if prevailing interest rates remain at or above those at
the time such mortgage loans were originated. Conversely, if prevailing interest
rates rise appreciably above the interest rates at the time of origination,
mortgage loans may experience a lower prepayment rate than if prevailing
interest rates remained at or below those existing at the time such mortgage
loans were originated. Further, the rate of prepayments may vary as among Group
I Mortgage Loans, Group II Mortgage Loans, and Group III Mortgage Loans, as
between HELOCs and HELs, and as between HELOCs with Additional Balances and
those without Additional Balances. There can be no assurance as to the
prepayment rate of the Mortgage Loans in the related Loan Group, or that the
Mortgage Loans will conform to the prepayment experience of other mortgage loans
or to any past prepayment experience or any published prepayment forecast.
In general, if an Offered Note is purchased at a premium over its face
amount and payments of principal of such Offered Note occur at a rate faster
than that assumed at the time of purchase, the purchaser's actual yield to
maturity will be lower than that anticipated at the time of purchase.
Conversely, if an Offered Note is purchased at a discount from its face amount
and payments of principal of such Offered Note occur at a rate that is slower
than that assumed at the time of purchase, the purchaser's actual yield to
maturity will be lower than originally anticipated.
The rate and timing of defaults on the Mortgage Loans will also affect
the rate and timing of principal payments on the Mortgage Loans and thus the
yield on the Offered Notes. There can be no assurance as to the rate of losses
or delinquencies on any of the Mortgage Loans. To the extent that any losses are
incurred on any of the Mortgage Loans that are not covered by Excess Spread or
the Overcollateralization Amount, the Offered Noteholders will bear the risk of
losses resulting from default by Mortgagors. See "Risk Factors" herein and in
the Prospectus.
For at least thirty-six months after the Closing Date, no principal
payments will be distributed to the Class M-1 Notes, Class M-2 Notes and the
Class B-1 Notes, unless the Note Balances and Variable Funding Balance of all of
the Class A Notes have been reduced to zero. In addition, if the Loss and
Delinquency Tests are not satisfied, the Class M-1 Notes, Class M-2 Notes and
the Class B-1 Notes will not receive any distributions of principal until the
Class A Notes are paid in full.
The priority in which distributions are made on the Notes provides
additional credit enhancement for certain classes of Notes. This priority in
distribution ensures that any shortfalls in amounts payable on the Notes will be
allocated first to the Class B-1 Notes, then to the Class M-2 Notes, then to
Class M-1 Notes and then to the Class A Notes. In addition, losses allocated to
the Notes not covered by Excess Spread or the Overcollateralization Amount, will
be allocated first to the Class B-1 Notes, then to the Class M-2 Notes, then to
the Class M-1 Notes and then to the Class A Notes.
S-41
Because the Note Rates on the Offered Notes that are Class A Notes
other than the Class IA-1 Notes, Class IIA-1 Notes and Class IIIA-1 Notes are
fixed, these rates will not change in response to changes in market interest
rates. Accordingly, if market interest rates or market yields for securities
similar to the Notes were to rise, the market value of these Notes may decline.
The Note Rate on the Class IA-1 Notes, Class IIA-1 Notes, Class IIIA-1 Notes and
the Subordinate Notes are variable and will change in response to changes in the
LIBOR rate, subject to a maximum rate. Investors in these Notes should be aware
that LIBOR may not change consistently with other market indices. A number of
factors affect the performance of an index and may cause an index and may cause
an index to move in a manner different from other indices. To the extent LIBOR
may reflect changes in the general level of interest rates less quickly than
other indices, in a period of rising interest rates, increases in the yield to
the holders of the these Notes due to the rising interest rates may occur later
than those which would be produced by other indices, and in a period of
declining rates, LIBOR may decline more quickly than other market interest rates
which may adversely affect the yield.
Although the Mortgage Interest Rates on the HELOCs are subject to
periodic adjustments, the adjustments generally:
o will not increase or decrease the Mortgage Interest Rates over a fixed
maximum rate or fixed minimum rate during the life of any HELOC; and
o will be based on an index, which may not rise and fall consistently
with prevailing market interest rates, plus the related note margin,
which may vary under certain circumstances, and which may be different
from margins being used at the time for newly originated adjustable
rate mortgage loans.
As a result, the Mortgage Interest Rates on the HELOCs at any time may
not equal the prevailing rates for similar, newly originated adjustable rate
mortgage loans and accordingly the rate of principal payments, if any, may be
lower or higher than would otherwise be anticipated. There can be no certainty
as to the rate of principal payments on the Mortgage Loans during any period or
over the life of the Notes.
With respect to the indices used in determining the Note Rates for the
Notes or the Mortgage Interest Rates of the Mortgage Loans, a number of factors
affect the performance of each index and may cause an index to move in a manner
different from other indices. To the extent that an index may reflect changes in
the general level of interest rates less quickly than other indices, in a period
of rising interest rates, increases in the yield to the holders of the Notes due
to the rising interest rates may occur later than those which would be produces
by other indices, and in a period of declining rates, an index may remain higher
than other market interest rates which may result in a higher level of
prepayments of the Mortgage Loans, which, in the case of the HELOCs, adjust in
accordance with that index, than of mortgage loans which adjust in accordance
with other indices.
Since payments with respect to Liquidation Loss Amounts on the Mortgage
Loans are made to each Group of Notes based on Net Principal Collections for the
related Loan Group, they will not necessarily be paid to the Notes related to
the Loan Group for which there were liquidations of defaulted Mortgage Loans.
Consequently, as a result of liquidations of defaulted Mortgage Loans in one
Loan Group, holders of unrelated Class A Notes may receive a prepayment and
holders of related Class A Notes may not receive a prepayment and consequently,
your yield may be lower than you expect.
The Class A-IO Notes will have a Notional Balance equal to the least of
(i) $54,112,000, (ii) the aggregate Principal Balance of the Mortgage Loans in
Loan Groups I and II and (iii) after the March 2004 Payment Date $0.
Accordingly, if the Mortgage Loans in Loan Groups I and II have high prepayments
and losses, the Notional Amount of the Class A-IO Notes, and as a result the
interest distributable on the Class A-IO Notes may be reduced. In addition, no
amounts are payable on the Class A-IO Notes after the March 2004 Payment Date.
"WEIGHTED AVERAGE LIFE" refers to the average amount of time that will
elapse from the date of issuance of a security to the date of distribution to
the investor thereof of each dollar distributed in reduction of principal of
such security (assuming no losses). The weighted average life of the Notes
(other than the Class A-IO Offered Notes) will be influenced by, among other
factors, the rate of principal payments (and, with respect to the HELOCs, the
rate
S-42
of draws) on the Mortgage Loans in the aggregate and also for the Class A
Notes, on the Mortgage Loans in the related Loan Group.
The primary source of information available to investors concerning the
Offered Notes will be the monthly statements discussed herein under "Description
of the Trust Agreement and Indenture-- Reports to Offered Noteholders" and in
the Prospectus under "Description of the Securities-Reports to Holders", which
will include information as to the outstanding Offered Note Balance. There can
be no assurance that any additional information regarding the Offered Notes will
be available through any other source. In addition, the Depositor is not aware
of any source through which price information about the Offered Notes will be
generally available on an ongoing basis. The limited nature of such information
regarding the Offered Notes may adversely affect the liquidity of the Offered
Notes, even if a secondary market for the Offered Notes becomes available.
HELOCs. There can be no assurance as to the rate of principal payments
or the rate of draws on the HELOCs. The rate of principal payments and/or draws
may fluctuate substantially from time to time. Generally, revolving credit loans
such as the HELOCs are not viewed by mortgagors as permanent financing. Due to
the unpredictable nature of both principal payments and draws, the rates of
principal payments net of draws may be much more volatile than that for typical
first lien mortgage loans. In addition, the repayment of any HELOC may be
dependent on the ability of the related Mortgagor to make larger interest
payments following the adjustment of the Mortgage Interest Rate during the life
of such HELOC. The rate of such losses and delinquencies is likely to be higher
than that of traditional first lien mortgage loans. To the extent that any
losses are incurred on any of the Mortgage Loans that are not covered by Excess
Spread or the Overcollateralization Amount, the holders of Offered Notes will
bear the risk of losses resulting from default by Mortgagors. See "Risk Factors"
herein and in the Prospectus.
Pre-Funding Account and Funding Account. Any portion of the Pre-Funded
Amount remaining on deposit in the Pre-Funding Account at the end of the
Pre-Funding Period for Loan Group I and Loan Group II, will count as Principal
Collections for the related Loan Group and may be paid to the Noteholders (other
than the Class A-IO Offered Notes) as a payment of principal. Any portion of the
Pre-Funded Amount remaining on deposit in the Pre-Funding Account at the end of
the Pre-Funding Period for Loan Group III, will be applied first to acquire any
Additional Balances and thereafter will count as Principal Collection for Loan
Group III and may be paid to holders of the Notes as a payment of principal.
TABLES
The tables set forth below for the Group I Notes and Group II Notes are
based on the prepayment model ("PREPAYMENT ASSUMPTION") which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of a pool of home equity loans. In the case of the Group I Notes, a 100%
prepayment assumption assumes a constant prepayment rate of 4% per annum of the
then outstanding principal balance of the Group I Mortgage Loans in the first
month of the life of such home equity loans and an additional 1.4545% per annum
in each month thereafter until the twelfth month. Beginning in the twelfth month
and in each month thereafter during the life of the Group I Mortgage Loans, a
100% prepayment assumption assumes a constant prepayment rate of 20% per annum
each month. In the case of the Group II Notes, a 100% prepayment assumption
assumes a constant prepayment rate of 2% per annum of the then outstanding
principal balance of the Group II Mortgage Loans in the first month of the life
of such home equity loans and an additional 0.9286% per annum in each month
thereafter until the fifteenth month. Beginning in the fifteenth month and in
each month thereafter during the life of the Group II Mortgage Loans, a 100%
prepayment assumption assumes a constant prepayment rate of 15% per annum each
month. As used in the tables below, a 50% prepayment assumption assumes
prepayment rates equal to 50% of the prepayment assumption. Correspondingly, a
150% prepayment assumption assumes prepayment rates equal to 150% of the
prepayment assumption, and so forth. 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 pool of home equity loans, including the
home equity loans.
The tables set forth below for the Class IIIA-1 Notes are based on the
constant prepayment rate ("CPR", which is the assumed rate of prepayment each
month as an annualized percentage of the then outstanding principal
S-43
balance of a pool of mortgage loans), constant draw rate (in the case of the
HELOCs, and which, for purposes of the assumptions, is the amount of Additional
Balances drawn each month as an annualized percentage of the principal balance
of the Group III Mortgage Loans outstanding at the beginning of such month) and
optional termination assumptions as indicated in the tables below.
The tables set forth below for the Class A-IO Notes are based on the
Prepayment Assumptions for Loan Groups I and II. The tables set forth below for
the Subordinate Notes are based on the Prepayment Assumptions for Loan Groups I
and II and CPR and constant draw rate for Loan Group III.
The Mortgage Loans are assumed to consist of sub-pools of Mortgage
Loans with the characteristics set forth below in the table captioned "Assumed
Mortgage Loan Characteristics".
In addition, it was assumed that (i) payments are made in accordance
with the description set forth under "Description of the Securities -- Priority
of Distributions", (ii) no extension past the scheduled maturity date of a
Mortgage Loan is made, (iii) no delinquencies or defaults occur, (iv) in the
case of the HELOCs, a 2% per annum draw rate is assumed for 48 months and is
calculated before giving affect to prepayments, (v) the Mortgage Loans pay on
the basis of a 30-day month and a 360-day year, (vi) there is no restriction on
the Maximum Variable Funding Balance, (vii) no Amortization Event occurs, (viii)
the scheduled due date for each Mortgage Loan is the first day of each calendar
month, (ix) the Closing Date is September 28, 2001, (x) one month LIBOR remains
constant at 2.6400% per annum, (xi) the prime rate remains constant at 6.50% per
annum; (xii) the initial Offered Note Balances are as set forth on the cover
page hereof, (xiii) unless otherwise noted, the Master Servicer has not
exercised the optional termination as set forth in "Description of the
Securities - Maturity and Optional Redemption" and (xiv) there are no monies
remaining in the Pre-Funding Account at the end of the Pre-Funding Period.
The actual characteristics and performance of the Mortgage Loans will
likely differ from the assumptions used in constructing the tables set forth
below, which are hypothetical in nature and are provided only to give a general
sense of how the principal cash flows might behave under varying prepayment and
(in the case of the HELOCs) draw scenarios. For example, it is very unlikely
that the Mortgage Loans will prepay and/or experience draws at a constant rate
until maturity or that all Mortgage Loans will prepay and/or experience draws at
the same rate. Moreover, the diverse remaining terms to stated maturity of the
Mortgage Loans could produce slower or faster principal distributions than
indicated in the tables at the various assumptions specified, even if the
weighted average remaining term to stated maturity of the Mortgage Loans is as
assumed. Any difference between such assumptions and the actual characteristics
and performance of the Mortgage Loans, or actual prepayment experience, will
affect the percentages of initial Offered Note Balances outstanding over time
and the weighted average life of the Offered Notes. Neither the Prepayment
Assumption, the CPR model nor any other prepayment model or assumption purports
to be an historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans. Variations in the actual prepayment experience and the Principal
Balances of the Mortgage Loans that prepay may increase or decrease each
weighted average life shown in the following tables. Such variations may occur
even if the average prepayment experience of all Mortgage Loans equals the
indicated percentage of the Prepayment Assumption or CPR.
S-44
ASSUMED MORTGAGE LOAN CHARACTERISTICS
LOAN GROUP I
-----------------------------------------------------------------------------------------------------
REMAINING TERM
INITIAL GROSS ORIGINAL TERM TO TO STATED
OUTSTANDING MORTGAGE STATED MATURITY MATURITY
SUB-POOL PRINCIPAL BALANCE INTEREST RATE (MONTHS) (MONTHS)
-------- ----------------- ------------- -------- --------
1 $ 15,852,073.89 12.636% 120 87
2 $120,598,751.78 11.008% 180 179
3 $ 27,080,626.23 11.282% 240 239
4 $ 64,228,230.41 11.991% 300 298
----------------
TOTAL $227,759,682.31
===============
LOAN GROUP II
-----------------------------------------------------------------------------------------------------
REMAINING TERM
INITIAL GROSS ORIGINAL TERM TO TO STATED
OUTSTANDING MORTGAGE STATED MATURITY MATURITY
SUB-POOL PRINCIPAL BALANCE INTEREST RATE (MONTHS) (MONTHS)
-------- ----------------- ------------- -------- --------
1 $ 11,030,537.37 15.000% 120 118
2 $142,644,903.66 14.410% 180 178
3 $ 39,139,605.59 15.282% 240 238
4 $120,522,492.17 15.731% 300 298
---------------
TOTAL $313,367,538.79
===============
LOAN GROUP III
----------------------------------------------------------------------------------------------------------------------
REMAINING TERM
INITIAL GROSS ORIGINAL TERM TO TO STATED MINIMUM MAXIMUM
OUTSTANDING MORTGAGE STATED MATURITY MATURITY MORTGAGE MORTGAGE GROSS
PRINCIPAL BALANCE INTEREST RATE (MONTHS) (MONTHS) INTEREST RATE INTEREST RATE MARGIN
----------------- ------------- -------- -------- ------------- ------------- -------
$134,312,754.74 11.453% 221 199 10.446% 20.108% 4.707%
Subject to the foregoing discussion and assumptions, the following
tables sets forth the percentage of the initial Offered Note Balance of the
Offered Notes that would be outstanding after each of the Payment Dates shown at
various percentages of the Prepayment Assumption and CPR, as applicable, and
indicate the weighted average life of each class of Offered Notes.
S-45
PERCENTAGE OF NOTE BALANCE (1)(2)
CLASS IA-1
PAYMENT DATE PERCENTAGE OF BALANCE
-------------------------------------------------------------------------------------------------------------------------
% of Prepayment Assumption 0% 50% 75% 100% 125% 150%
Ramp to CPR 0.00% 10.00% 15.00% 20.00% 25.00% 30.00%
-------------------------------------------------------------------------------------------------------------------------
Initial................................... 100 100 100 100 100 100
September 2002............................ 65 49 38 26 14 2
September 2003............................ 56 9 0 0 0 0
September 2004............................ 45 0 0 0 0 0
September 2005............................ 32 0 0 0 0 0
September 2006............................ 18 0 0 0 0 0
September 2007............................ 3 0 0 0 0 0
September 2008............................ 0 0 0 0 0 0
September 2009............................ 0 0 0 0 0 0
September 2010............................ 0 0 0 0 0 0
September 2011............................ 0 0 0 0 0 0
September 2012............................ 0 0 0 0 0 0
September 2013............................ 0 0 0 0 0 0
September 2014............................ 0 0 0 0 0 0
September 2015............................ 0 0 0 0 0 0
September 2016............................ 0 0 0 0 0 0
September 2017............................ 0 0 0 0 0 0
September 2018............................ 0 0 0 0 0 0
September 2019............................ 0 0 0 0 0 0
September 2020............................ 0 0 0 0 0 0
September 2021............................ 0 0 0 0 0 0
September 2022............................ 0 0 0 0 0 0
September 2023............................ 0 0 0 0 0 0
September 2024............................ 0 0 0 0 0 0
September 2025............................ 0 0 0 0 0 0
September 2026............................ 0 0 0 0 0 0
Weighted Average Life to maturity
(years) (2) .............................. 2.67 1.07 0.85 0.72 0.64 0.57
Weighted Average Life to 10% call
(years) (3)............................... 2.67 1.07 0.85 0.72 0.64 0.57
(1) All percentages are rounded to the nearest 1%.
(2) Assumes the Class IA-1 Notes pay to maturity.
(3) Assumes that an optional termination is exercised on the first Payment
Date on which the aggregate outstanding Principal Balance of the
Mortgage Loans (after applying payments received in the related
collection period) is less than 10% of the sum of (x) the aggregate
Principal Balance of the Mortgage Loans as of the initial Cut-Off Date
and (y) the amount on deposit in the Pre-Funding Account on the Closing
Date.
* indicates a number less than 0.5% but greater than 0%.
S-46
PERCENTAGE OF NOTE BALANCE (1)(2)
CLASS IA-2
PAYMENT DATE PERCENTAGE OF BALANCE
-------------------------------------------------------------------------------------------------------------------------
% of Prepayment Assumption 0% 50% 75% 100% 125% 150%
Ramp to CPR 0.00% 10.00% 15.00% 20.00% 25.00% 30.00%
-------------------------------------------------------------------------------------------------------------------------
Initial................................... 100 100 100 100 100 100
September 2002............................ 100 100 100 100 100 100
September 2003............................ 100 100 91 78 65 52
September 2004............................ 100 85 66 48 32 18
September 2005............................ 100 66 44 30 23 16
September 2006............................ 100 49 30 21 14 8
September 2007............................ 100 34 22 14 7 3
September 2008............................ 92 25 15 8 3 0
September 2009............................ 83 19 10 4 0 0
September 2010............................ 74 14 6 * 0 0
September 2011............................ 64 10 2 0 0 0
September 2012............................ 52 6 0 0 0 0
September 2013............................ 40 2 0 0 0 0
September 2014............................ 26 0 0 0 0 0
September 2015............................ 10 0 0 0 0 0
September 2016............................ 0 0 0 0 0 0
September 2017............................ 0 0 0 0 0 0
September 2018............................ 0 0 0 0 0 0
September 2019............................ 0 0 0 0 0 0
September 2020............................ 0 0 0 0 0 0
September 2021............................ 0 0 0 0 0 0
September 2022............................ 0 0 0 0 0 0
September 2023............................ 0 0 0 0 0 0
September 2024............................ 0 0 0 0 0 0
September 2025............................ 0 0 0 0 0 0
September 2026............................ 0 0 0 0 0 0
Weighted Average Life to maturity
(years) (2) .............................. 10.93 5.64 4.39 3.57 2.98 2.48
Weighted Average Life to 10% call
(years) (3)............................... 10.93 5.64 4.39 3.57 2.98 2.48
(1) All percentages are rounded to the nearest 1%.
(2) Assumes the Class IA-2 Notes pay to maturity.
(3) Assumes that an optional termination is exercised on the first Payment
Date on which the aggregate outstanding Principal Balance of the
Mortgage Loans (after applying payments received in the related
collection period) is less than 10% of the sum of (x) the aggregate
Principal Balance of the Mortgage Loans as of the initial Cut-Off Date
and (y) the amount on deposit in the Pre-Funding Account on the Closing
Date.
* indicates a number less than 0.5% but greater than 0%.
S-47
PERCENTAGE OF NOTE BALANCE (1)(2)
CLASS IIA-1
PAYMENT DATE PERCENTAGE OF BALANCE
-------------------------------------------------------------------------------------------------------------------------
% of Prepayment Assumption 0% 50% 75% 100% 125% 150%
Ramp to CPR 0.00% 7.50% 11.25% 15.00% 18.75% 22.50%
-------------------------------------------------------------------------------------------------------------------------
Initial................................... 100 100 100 100 100 100
September 2002............................ 77 62 53 44 34 25
September 2003............................ 70 26 3 0 0 0
September 2004............................ 62 0 0 0 0 0
September 2005............................ 53 0 0 0 0 0
September 2006............................ 43 0 0 0 0 0
September 2007............................ 31 0 0 0 0 0
September 2008............................ 16 0 0 0 0 0
September 2009............................ 0 0 0 0 0 0
September 2010............................ 0 0 0 0 0 0
September 2011............................ 0 0 0 0 0 0
September 2012............................ 0 0 0 0 0 0
September 2013............................ 0 0 0 0 0 0
September 2014............................ 0 0 0 0 0 0
September 2015............................ 0 0 0 0 0 0
September 2016............................ 0 0 0 0 0 0
September 2017............................ 0 0 0 0 0 0
September 2018............................ 0 0 0 0 0 0
September 2019............................ 0 0 0 0 0 0
September 2020............................ 0 0 0 0 0 0
September 2021............................ 0 0 0 0 0 0
September 2022............................ 0 0 0 0 0 0
September 2023............................ 0 0 0 0 0 0
September 2024............................ 0 0 0 0 0 0
September 2025............................ 0 0 0 0 0 0
September 2026............................ 0 0 0 0 0 0
Weighted Average Life to maturity
(years) (2) .............................. 4.04 1.38 1.09 0.92 0.81 0.73
Weighted Average Life to 10% call
(years) (3)............................... 4.04 1.38 1.09 0.92 0.81 0.73
(1) All percentages are rounded to the nearest 1%.
(2) Assumes the Class IIA-1 Notes pay to maturity.
(3) Assumes that an optional termination is exercised on the first Payment
Date on which the aggregate outstanding Principal Balance of the
Mortgage Loans (after applying payments received in the related
collection period) is less than 10% of the sum of (x) the aggregate
Principal Balance of the Mortgage Loans as of the initial Cut-Off Date
and (y) the amount on deposit in the Pre-Funding Account on the Closing
Date.
* indicates a number less than 0.5% but greater than 0%.
S-48
PERCENTAGE OF NOTE BALANCE (1)(2)
CLASS IIA-2
PAYMENT DATE PERCENTAGE OF BALANCE
-------------------------------------------------------------------------------------------------------------------------
% of Prepayment Assumption 0% 50% 75% 100% 125% 150%
Ramp to CPR 0.00% 7.50% 11.25% 15.00% 18.75% 22.50%
-------------------------------------------------------------------------------------------------------------------------
Initial................................... 100 100 100 100 100 100
September 2002............................ 100 100 100 100 100 100
September 2003............................ 100 100 100 47 0 0
September 2004............................ 100 77 0 0 0 0
September 2005............................ 100 0 0 0 0 0
September 2006............................ 100 0 0 0 0 0
September 2007............................ 100 0 0 0 0 0
September 2008............................ 100 0 0 0 0 0
September 2009............................ 100 0 0 0 0 0
September 2010............................ 48 0 0 0 0 0
September 2011............................ 0 0 0 0 0 0
September 2012............................ 0 0 0 0 0 0
September 2013............................ 0 0 0 0 0 0
September 2014............................ 0 0 0 0 0 0
September 2015............................ 0 0 0 0 0 0
September 2016............................ 0 0 0 0 0 0
September 2017............................ 0 0 0 0 0 0
September 2018............................ 0 0 0 0 0 0
September 2019............................ 0 0 0 0 0 0
September 2020............................ 0 0 0 0 0 0
September 2021............................ 0 0 0 0 0 0
September 2022............................ 0 0 0 0 0 0
September 2023............................ 0 0 0 0 0 0
September 2024............................ 0 0 0 0 0 0
September 2025............................ 0 0 0 0 0 0
September 2026............................ 0 0 0 0 0 0
Weighted Average Life to maturity
(years) (2) .............................. 8.97 3.34 2.50 2.02 1.71 1.50
Weighted Average Life to 10% call
(years) (3)............................... 8.97 3.34 2.50 2.02 1.71 1.50
(1) All percentages are rounded to the nearest 1%.
(2) Assumes the Class IIA-2 Notes pay to maturity.
(3) Assumes that an optional termination is exercised on the first Payment
Date on which the aggregate outstanding Principal Balance of the
Mortgage Loans (after applying payments received in the related
collection period) is less than 10% of the sum of (x) the aggregate
Principal Balance of the Mortgage Loans as of the initial Cut-Off Date
and (y) the amount on deposit in the Pre-Funding Account on the Closing
Date.
* indicates a number less than 0.5% but greater than 0%.
S-49
PERCENTAGE OF NOTE BALANCE (1)(2)
CLASS IIA-3
PAYMENT DATE PERCENTAGE OF BALANCE
-------------------------------------------------------------------------------------------------------------------------
% of Prepayment Assumption 0% 50% 75% 100% 125% 150%
Ramp to CPR 0.00% 7.50% 11.25% 15.00% 18.75% 22.50%
-------------------------------------------------------------------------------------------------------------------------
Initial................................... 100 100 100 100 100 100
September 2002............................ 100 100 100 100 100 100
September 2003............................ 100 100 100 100 93 63
September 2004............................ 100 100 92 47 5 0
September 2005............................ 100 94 35 0 0 0
September 2006............................ 100 50 0 0 0 0
September 2007............................ 100 9 0 0 0 0
September 2008............................ 100 0 0 0 0 0
September 2009............................ 100 0 0 0 0 0
September 2010............................ 100 0 0 0 0 0
September 2011............................ 94 0 0 0 0 0
September 2012............................ 62 0 0 0 0 0
September 2013............................ 25 0 0 0 0 0
September 2014............................ 0 0 0 0 0 0
September 2015............................ 0 0 0 0 0 0
September 2016............................ 0 0 0 0 0 0
September 2017............................ 0 0 0 0 0 0
September 2018............................ 0 0 0 0 0 0
September 2019............................ 0 0 0 0 0 0
September 2020............................ 0 0 0 0 0 0
September 2021............................ 0 0 0 0 0 0
September 2022............................ 0 0 0 0 0 0
September 2023............................ 0 0 0 0 0 0
September 2024............................ 0 0 0 0 0 0
September 2025............................ 0 0 0 0 0 0
September 2026............................ 0 0 0 0 0 0
Weighted Average Life to maturity
(years) (2) .............................. 11.33 5.06 3.77 3.02 2.52 2.16
Weighted Average Life to 10% call
(years) (3)............................... 11.33 5.06 3.77 3.02 2.52 2.16
(1) All percentages are rounded to the nearest 1%.
(2) Assumes the Class IIA-3 Notes pay to maturity.
(3) Assumes that an optional termination is exercised on the first Payment
Date on which the aggregate outstanding Principal Balance of the
Mortgage Loans (after applying payments received in the related
collection period) is less than 10% of the sum of (x) the aggregate
Principal Balance of the Mortgage Loans as of the initial Cut-Off Date
and (y) the amount on deposit in the Pre-Funding Account on the Closing
Date.
* indicates a number less than 0.5% but greater than 0%.
S-50
PERCENTAGE OF NOTE BALANCE (1)(2)
CLASS IIA-4
PAYMENT DATE PERCENTAGE OF BALANCE
-------------------------------------------------------------------------------------------------------------------------
% of Prepayment Assumption 0% 50% 75% 100% 125% 150%
Ramp to CPR 0.00% 7.50% 11.25% 15.00% 18.75% 22.50%
-------------------------------------------------------------------------------------------------------------------------
Initial................................... 100 100 100 100 100 100
September 2002............................ 100 100 100 100 100 100
September 2003............................ 100 100 100 100 100 100
September 2004............................ 100 100 100 100 100 45
September 2005............................ 100 100 100 94 59 30
September 2006............................ 100 100 91 48 12 0
September 2007............................ 100 100 53 9 0 0
September 2008............................ 100 74 18 0 0 0
September 2009............................ 100 43 0 0 0 0
September 2010............................ 100 13 0 0 0 0
September 2011............................ 100 0 0 0 0 0
September 2012............................ 100 0 0 0 0 0
September 2013............................ 100 0 0 0 0 0
September 2014............................ 71 0 0 0 0 0
September 2015............................ 0 0 0 0 0 0
September 2016............................ 0 0 0 0 0 0
September 2017............................ 0 0 0 0 0 0
September 2018............................ 0 0 0 0 0 0
September 2019............................ 0 0 0 0 0 0
September 2020............................ 0 0 0 0 0 0
September 2021............................ 0 0 0 0 0 0
September 2022............................ 0 0 0 0 0 0
September 2023............................ 0 0 0 0 0 0
September 2024............................ 0 0 0 0 0 0
September 2025............................ 0 0 0 0 0 0
September 2026............................ 0 0 0 0 0 0
Weighted Average Life to maturity
(years) (2) .............................. 13.30 7.83 6.14 5.02 4.24 3.44
Weighted Average Life to 10% call
(years) (3)............................... 13.30 7.83 6.14 5.02 4.24 3.44
(1) All percentages are rounded to the nearest 1%.
(2) Assumes the Class IIA-4 Notes pay to maturity.
(3) Assumes that an optional termination is exercised on the first Payment
Date on which the aggregate outstanding Principal Balance of the
Mortgage Loans (after applying payments received in the related
collection period) is less than 10% of the sum of (x) the aggregate
Principal Balance of the Mortgage Loans as of the initial Cut-Off Date
and (y) the amount on deposit in the Pre-Funding Account on the Closing
Date.
* indicates a number less than 0.5% but greater than 0%.
S-51
PERCENTAGE OF NOTE BALANCE (1)(2)
CLASS IIA-5
PAYMENT DATE PERCENTAGE OF BALANCE
-------------------------------------------------------------------------------------------------------------------------
% of Prepayment Assumption 0% 50% 75% 100% 125% 150%
Ramp to CPR 0.00% 7.50% 11.25% 15.00% 18.75% 22.50%
-------------------------------------------------------------------------------------------------------------------------
Initial................................... 100 100 100 100 100 100
September 2002............................ 100 100 100 100 100 100
September 2003............................ 100 100 100 100 100 100
September 2004............................ 100 100 100 100 100 100
September 2005............................ 100 100 100 100 100 100
September 2006............................ 100 100 100 100 100 87
September 2007............................ 100 100 100 100 80 61
September 2008............................ 100 100 100 82 57 39
September 2009............................ 100 100 91 60 38 21
September 2010............................ 100 100 70 43 21 8
September 2011............................ 100 89 52 26 8 0
September 2012............................ 100 70 36 12 0 0
September 2013............................ 100 52 20 1 0 0
September 2014............................ 100 34 7 0 0 0
September 2015............................ 92 15 0 0 0 0
September 2016............................ 48 0 0 0 0 0
September 2017............................ 36 0 0 0 0 0
September 2018............................ 23 0 0 0 0 0
September 2019............................ 10 0 0 0 0 0
September 2020............................ 0 0 0 0 0 0
September 2021............................ 0 0 0 0 0 0
September 2022............................ 0 0 0 0 0 0
September 2023............................ 0 0 0 0 0 0
September 2024............................ 0 0 0 0 0 0
September 2025............................ 0 0 0 0 0 0
September 2026............................ 0 0 0 0 0 0
Weighted Average Life to maturity
(years) (2) .............................. 15.59 12.15 10.30 8.78 7.58 6.70
Weighted Average Life to 10% call
(years) (3)............................... 15.59 12.15 10.25 8.61 7.32 6.34
(1) All percentages are rounded to the nearest 1%.
(2) Assumes the Class IIA-5 Notes pay to maturity.
(3) Assumes that an optional termination is exercised on the first Payment
Date on which the aggregate outstanding Principal Balance of the
Mortgage Loans (after applying payments received in the related
collection period) is less than 10% of the sum of (x) the aggregate
Principal Balance of the Mortgage Loans as of the initial Cut-Off Date
and (y) the amount on deposit in the Pre-Funding Account on the Closing
Date.
* indicates a number less than 0.5% but greater than 0%.
S-52
PERCENTAGE OF OFFERED NOTE BALANCE (1)(2)
CLASS IIIA-1
PAYMENT DATE PERCENTAGE OF BALANCE
----------------------------------------- -----------------------------------------------------------------------
% of Prepayment Assumption Ramp 0% 50% 75% 100% 125% 150%
to CPR(3) 2.00% 12.00% 17.00% 22.00% 27.00% 32.00%
----------------------------------------- ----------- ---------- ----------- ----------- ----------- ------------
Initial................................. 100 100 100 100 100 100
September 2002.......................... 100 83 77 71 66 61
September 2003.......................... 100 74 64 55 47 39
September 2004.......................... 100 66 53 42 33 25
September 2005.......................... 100 58 44 35 29 24
September 2006.......................... 98 51 38 30 25 20
September 2007.......................... 96 44 34 27 22 18
September 2008.......................... 95 41 31 25 20 16
September 2009.......................... 93 38 29 23 18 13
September 2010.......................... 91 36 27 21 16 12
September 2011.......................... 90 35 26 19 14 10
September 2012.......................... 88 33 24 17 12 7
September 2013.......................... 87 32 22 15 9 5
September 2014.......................... 85 29 19 11 6 3
September 2015.......................... 84 27 16 8 4 2
September 2016.......................... 82 24 12 6 3 *
September 2017.......................... 80 20 10 5 2 0
September 2018.......................... 38 11 5 3 * 0
September 2019.......................... 37 9 4 2 0 0
September 2020.......................... 34 7 3 1 0 0
September 2021.......................... 28 5 2 0 0 0
September 2022.......................... 23 4 1 0 0 0
September 2023.......................... 19 3 * 0 0 0
September 2024.......................... 13 2 0 0 0 0
September 2025.......................... 6 0 0 0 0 0
September 2026.......................... 0 0 0 0 0 0
Weighted Average Life to maturity
(years) (2) ............................ 17.22 7.83 5.93 4.65 3.74 3.02
Weighted Average Life to 10% call
(years) (4)............................. 16.90 7.16 5.22 3.96 3.11 2.48
(1) All percentages are rounded to the nearest 1%.
(2) Assumes the Class IIIA-1 Notes pay to maturity.
(3) Assumes a constant draw rate of 2% per annum.
(4) Assumes that an optional termination is exercised on the first Payment
Date on which the aggregate outstanding Principal Balance of the
Mortgage Loans (after applying payments received in the related
collection period) is less than 10% of the sum of (x) the aggregate
Principal Balance of the Mortgage Loans as of the initial Cut-Off Date
and (y) the amount on deposit in the Pre-Funding Account on the Closing
Date.
* indicates a number less than 0.5% but greater than 0%.
S-53
PERCENTAGE OF NOTIONAL BALANCE (1)(2)
CLASS A-IO
PAYMENT DATE PERCENTAGE OF BALANCE
------------------------------------------ -----------------------------------------------------------------------------
CPR 25% 30% 35% 40% 45% 50%
------------------------------------------ -------------- ------------- ---------- ------------ ------------ -----------
Initial.................................. 100 100 100 100 100 100
September 2002........................... 100 100 100 100 100 100
September 2003........................... 100 100 100 100 100 100
September 2004........................... 0 0 0 0 0 0
September 2005........................... 0 0 0 0 0 0
September 2006........................... 0 0 0 0 0 0
September 2007........................... 0 0 0 0 0 0
September 2008........................... 0 0 0 0 0 0
September 2009........................... 0 0 0 0 0 0
September 2010........................... 0 0 0 0 0 0
September 2011........................... 0 0 0 0 0 0
September 2012........................... 0 0 0 0 0 0
September 2013........................... 0 0 0 0 0 0
September 2014........................... 0 0 0 0 0 0
September 2015........................... 0 0 0 0 0 0
September 2016........................... 0 0 0 0 0 0
September 2017........................... 0 0 0 0 0 0
September 2018........................... 0 0 0 0 0 0
September 2019........................... 0 0 0 0 0 0
September 2020........................... 0 0 0 0 0 0
September 2021........................... 0 0 0 0 0 0
September 2022........................... 0 0 0 0 0 0
September 2023........................... 0 0 0 0 0 0
September 2024........................... 0 0 0 0 0 0
September 2025........................... 0 0 0 0 0 0
September 2026........................... 0 0 0 0 0 0
Weighted Average Life to maturity
(years) (2) ............................. 2.49 2.49 2.49 2.49 2.49 2.49
Weighted Average Life to 10% call
(years) (3).............................. 2.49 2.49 2.49 2.49 2.49 2.49
(1) All percentages are rounded to the nearest 1%.
(2) Assumes the Class A-IO Notes pay to maturity.
(3) Assumes that an optional termination is exercised on the first Payment
Date on which the aggregate outstanding Principal Balance of the
Mortgage Loans (after applying payments received in the related
collection period) is less than 10% of the sum of (x) the aggregate
Principal Balance of the Mortgage Loans as of the initial Cut-Off Date
and (y) the amount on deposit in the Pre-Funding Account on the Closing
Date.
S-54
PERCENTAGE OF NOTE BALANCE (1)(2)
CLASS M-1
PAYMENT DATE PERCENTAGE OF BALANCE
--------------------------------------------------- ---------------------------------------------------------------------
% of Prepayment Assumption 0% 50% 75% 100% 125% 150%
--------------------------------------------------- ------------ ----------- ---------- ---------- ---------- -----------
Initial................................... 100 100 100 100 100 100
September 2002............................ 100 100 100 100 100 100
September 2003............................ 100 100 100 100 100 100
September 2004............................ 100 100 100 100 100 100
September 2005............................ 100 100 100 90 74 60
September 2006............................ 100 100 93 73 56 43
September 2007............................ 100 100 78 58 43 31
September 2008............................ 100 91 65 46 33 22
September 2009............................ 100 79 55 37 25 16
September 2010............................ 100 69 45 29 18 11
September 2011............................ 100 60 37 23 14 8
September 2012............................ 100 51 30 18 10 6
September 2013............................ 100 43 24 14 7 4
September 2014............................ 100 36 19 10 5 2
September 2015............................ 100 29 15 7 4 0
September 2016............................ 92 23 11 5 1 0
September 2017............................ 89 20 9 4 0 0
September 2018............................ 45 11 5 1 0 0
September 2019............................ 40 9 4 0 0 0
September 2020............................ 34 7 3 0 0 0
September 2021............................ 28 5 1 0 0 0
September 2022............................ 24 4 0 0 0 0
September 2023............................ 19 3 0 0 0 0
September 2024............................ 13 0 0 0 0 0
September 2025............................ 6 0 0 0 0 0
September 2026............................ 0 0 0 0 0 0
Weighted Average Life to maturity
(years) (2) .............................. 18.45 11.94 9.49 7.70 6.41 5.60
Weighted Average Life to 10% call
(years) (3)............................... 18.13 11.30 8.84 7.08 5.83 5.08
(1) All percentages are rounded to the nearest 1%.
(2) Assumes the Class M-1 Notes pay to maturity.
(3) Assumes that an optional termination is exercised on the first Payment
Date on which the aggregate outstanding Principal Balance of the
Mortgage Loans (after applying payments received in the related
collection period) is less than 10% of the sum of (x) the aggregate
Principal Balance of the Mortgage Loans as of the initial Cut-Off Date
and (y) the amount on deposit in the Pre-Funding Account on the Closing
Date.
* indicates a number less than 0.5% but greater than 0%.
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PERCENTAGE OF NOTE BALANCE (1)(2)
CLASS M-2
PAYMENT DATE PERCENTAGE OF BALANCE
--------------------------------------------------- ---------------------------------------------------------------------
% of Prepayment Assumption 0% 50% 75% 100% 125% 150%
--------------------------------------------------- ------------ ----------- ---------- ---------- ---------- -----------
Initial................................... 100 100 100 100 100 100
September 2002............................ 100 100 100 100 100 100
September 2003............................ 100 100 100 100 100 100
September 2004............................ 100 100 100 100 100 100
September 2005............................ 100 100 100 90 74 60
September 2006............................ 100 100 93 73 56 43
September 2007............................ 100 100 78 58 43 31
September 2008............................ 100 91 65 46 33 22
September 2009............................ 100 79 55 37 25 16
September 2010............................ 100 69 45 29 18 11
September 2011............................ 100 60 37 23 14 8
September 2012............................ 100 51 30 18 10 6
September 2013............................ 100 43 24 14 7 3
September 2014............................ 100 36 19 10 5 0
September 2015............................ 100 29 15 7 2 0
September 2016............................ 92 23 11 5 0 0
September 2017............................ 89 20 9 3 0 0
September 2018............................ 45 11 5 0 0 0
September 2019............................ 40 9 3 0 0 0
September 2020............................ 34 7 1 0 0 0
September 2021............................ 28 5 0 0 0 0
September 2022............................ 24 3 0 0 0 0
September 2023............................ 19 * 0 0 0 0
September 2024............................ 13 0 0 0 0 0
September 2025............................ 6 0 0 0 0 0
September 2026............................ 0 0 0 0 0 0
Weighted Average Life to maturity
(years) (2) .............................. 18.45 11.91 9.45 7.68 6.37 5.50
Weighted Average Life to 10% call
(years) (3)............................... 18.13 11.30 8.84 7.08 5.83 5.01
(1) All percentages are rounded to the nearest 1%.
(2) Assumes the Class IIA-3 Notes pay to maturity.
(3) Assumes that an optional termination is exercised on the first Payment
Date on which the aggregate outstanding Principal Balance of the
Mortgage Loans (after applying payments received in the related
collection period) is less than 10% of the sum of (x) the aggregate
Principal Balance of the Mortgage Loans as of the initial Cut-Off Date
and (y) the amount on deposit in the Pre-Funding Account on the Closing
Date.
* indicates a number less than 0.5% but greater than 0%.
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PERCENTAGE OF NOTE BALANCE (1)(2)
CLASS B-1
PAYMENT DATE PERCENTAGE OF BALANCE
--------------------------------------------------- ---------------------------------------------------------------------
% of Prepayment Assumption 0% 50% 75% 100% 125% 150%
--------------------------------------------------- ------------ ----------- ---------- ---------- ---------- -----------
Initial................................... 100 100 100 100 100 100
September 2002............................ 100 100 100 100 100 100
September 2003............................ 100 100 100 100 100 100
September 2004............................ 100 100 100 100 100 100
September 2005............................ 100 100 100 90 74 60
September 2006............................ 100 100 93 73 56 43
September 2007............................ 100 100 78 58 43 31
September 2008............................ 100 91 65 46 33 22
September 2009............................ 100 79 55 37 25 16
September 2010............................ 100 69 45 29 18 11
September 2011............................ 100 60 37 23 14 6
September 2012............................ 100 51 30 18 9 2
September 2013............................ 100 43 24 14 5 0
September 2014............................ 100 36 19 10 1 0
September 2015............................ 100 29 15 5 0 0
September 2016............................ 92 23 11 1 0 0
September 2017............................ 89 20 8 0 0 0
September 2018............................ 45 11 1 0 0 0
September 2019............................ 40 7 0 0 0 0
September 2020............................ 34 4 0 0 0 0
September 2021............................ 28 1 0 0 0 0
September 2022............................ 24 0 0 0 0 0
September 2023............................ 19 0 0 0 0 0
September 2024............................ 13 0 0 0 0 0
September 2025............................ 3 0 0 0 0 0
September 2026............................ 0 0 0 0 0 0
Weighted Average Life to maturity
(years) (2) .............................. 18.42 11.78 9.35 7.57 6.28 5.37
Weighted Average Life to 10% call
(years) (3)............................... 18.13 11.30 8.84 7.08 5.83 4.98
(1) All percentages are rounded to the nearest 1%.
(2) Assumes the Class B-1 Notes pay to maturity.
(3) Assumes that an optional termination is exercised on the first Payment
Date on which the aggregate outstanding Principal Balance of the
Mortgage Loans (after applying payments received in the related
collection period) is less than 10% of the sum of (x) the aggregate
Principal Balance of the Mortgage Loans as of the initial Cut-Off Date
and (y) the amount on deposit in the Pre-Funding Account on the Closing
Date.
* indicates a number less than 0.5% but greater than 0%.
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There is no assurance that prepayments will occur or, if they do occur,
that they will occur at any percentage of CPR or Prepayment Assumption, as
applicable.
None of the Trust, the Indenture Trustee, the Owner Trustee, the
Depositor, the Subservicer or the Master Servicer will be liable to any Offered
Noteholder for any loss or damage incurred by such Offered Noteholder as a
result of a reduced rate of return experienced by such Offered Noteholder
relative to the Note Rate, upon reinvestment of the funds received in connection
with any premature repayment of principal on the Offered Notes, including,
without limitation, any such repayment resulting from prepayments, liquidations,
or repurchases of, or substitutions for, any Mortgage Loan.
THE MASTER SERVICER
SERVICING PROVISIONS
The Master Servicer will be responsible for servicing the Mortgage
Loans directly or through one or more subservicers in accordance with the terms
of the Sale and Servicing Agreement. Initially, the Subservicer will be the sole
subservicer with respect to the Mortgage Loans, and will perform all of the
duties of the Master Servicer under the Sale and Servicing Agreement. As such,
all discussion herein of the Master Servicer's obligations initially apply to
the Subservicer, as subservicer of the Mortgage Loans on behalf of the Master
Servicer. See "Servicing of Loans" in the Prospectus and "Servicing of the
Mortgage Loans" and "Description of the Sale and Servicing Agreement" herein.
Billing statements will be mailed to Mortgagors monthly by the Master
Servicer. Such statements will detail the monthly activity on the related
Mortgage Loan and specify the monthly payment due thereon.
The Master Servicer will accurately and fully report any experience
with the borrowers on the Mortgage Loans to all three credit reporting bureaus
in a timely manner.
For information regarding foreclosure procedures, see "Servicing of
Loans--Realization Upon Defaulted Loans" in the Prospectus and "Servicing of the
Mortgage Loans" herein. The Master Servicer's servicing and charge-off policies
and collection practices may change over time in accordance with the Master
Servicer's business judgment, changes in applicable laws and regulations and
other considerations.
SERVICING COMPENSATION
The Servicing Fee will be, with respect to any Collection Period, the
sum for all outstanding Mortgage Loans of the product of (i) the applicable
Servicing Fee Rate multiplied by a fraction, the numerator of which is the
actual number of days in the related Interest Period and the denominator of
which is 360 and (ii) the Principal Balance of the Mortgage Loan as of the first
day of such Collection Period. The Servicing Fee Rate shall equal 1.00%. The
Servicing Fee will serve as compensation to the Master Servicer (or any
applicable subservicer) in respect of its servicing activities. In addition to
the Servicing Fee, the Master Servicer will be entitled under the Sale and
Servicing Agreement to retain additional servicing compensation in the form of
assumption and other administrative fees, release fees, bad check charges and
certain other servicing-related fees. The Master Servicer will be obligated to
pay certain ongoing expenses incurred by it in connection with its servicing
activities and other responsibilities under the Sale and Servicing Agreement.
SERVICING OF THE MORTGAGE LOANS
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer will be obligated under the Sale and Servicing
Agreement to service and administer the Mortgage Loans on behalf of the Trust,
and will have full power and authority, subject to the provisions of the
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Sale and Servicing Agreement, to do any and all things in connection with such
servicing and administration that it may deem necessary. The Master Servicer may
perform any of its obligations under the Sale and Servicing Agreement through
one or more subservicers. Initially, the Subservicer will be the sole
subservicer of the Mortgage Loans. Notwithstanding any such subservicing
arrangement, the Master Servicer will remain liable for its servicing duties and
obligations under the Sale and Servicing Agreement as if it alone were servicing
the Mortgage Loans. The Master Servicer will be obligated under the Sale and
Servicing Agreement to make reasonable efforts to collect all payments due under
the terms and provisions of the related mortgage documents and will be
obligated, subject to the terms of the Sale and Servicing Agreement, to follow
such collection procedures as it would normally follow with respect to mortgage
loans serviced by it for its own account, and that generally conform to the
mortgage servicing practices of prudent mortgage lending institutions that
service mortgage loans of the same type as the Mortgage Loans for their own
accounts in the jurisdictions in which the related Mortgaged Properties are
located. Consistent with the foregoing, the Master Servicer will be permitted,
in its discretion, to, among other things, (i) waive any late payment charge,
prepayment penalty or other charge in connection with any Mortgage Loan, (ii)
arrange a schedule, running for no more than 180 days after the due date of any
payment due under the related mortgage documents, for the liquidation of
delinquent items and (iii) subject to certain restrictions, modify the Mortgage
Interest Rate of a Mortgage Loan.
REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS
Except as described below, the Master Servicer will be required to
foreclose upon or otherwise comparably convert the ownership of properties
securing such of the Mortgage Loans as come into and continue in default and as
to which no satisfactory arrangements can be made for collection of delinquent
payments thereon if in its judgment there is sufficient equity in the property.
In connection with such foreclosure or other conversion, the Master Servicer
will be required to follow such procedures as it follows with respect to similar
mortgage loans held in its own portfolio. However, the Master Servicer will not
be required to expend its own funds in connection with any foreclosure or to
restore any damaged property relating to any Mortgage Loan unless it shall
determine that such foreclosure and/or restoration will increase Liquidation
Proceeds.
The Master Servicer will be permitted to foreclose against the
Mortgaged Property securing a defaulted Mortgage Loan either by foreclosure,
sale or strict foreclosure, and in the event a deficiency judgment is available
against the related Mortgagor or any other person, may proceed for the
deficiency.
In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
will be required to be issued to the Owner Trustee, or to the Master Servicer on
behalf of the Owner Trustee. Notwithstanding any such acquisition of title and
cancellation of the related Mortgage Loan, such Mortgage Loan will be required
to be considered to be a Mortgage Loan held by the Trust until such time as the
related Mortgaged Property is sold and such Mortgage Loan becomes a Liquidated
Mortgage Loan.
In lieu of foreclosing upon any defaulted Mortgage Loan, the Master
Servicer may, in its discretion, permit the assumption of such Mortgage Loan if,
in the Master Servicer's judgment, such default is unlikely to be cured and if
the assuming borrower satisfies the Master Servicer's underwriting guidelines
with respect to mortgage loans owned by the Master Servicer. Any fee collected
by the Master Servicer for entering into an assumption agreement will be
retained by the Master Servicer as servicing compensation. Alternatively, the
Master Servicer may encourage the refinancing of any defaulted Mortgage Loan by
the related Mortgagor.
Notwithstanding the foregoing, prior to the institution of foreclosure
proceedings or the acceptance of a deed-in-lieu of foreclosure with respect to
any Mortgaged Property, the Master Servicer will make, or cause to be made,
inspection of such Mortgaged Property in accordance with accepted servicing
procedures. The Master Servicer will be entitled to rely upon the results of any
such inspection made by others. In cases where such inspection reveals that such
Mortgaged Property is potentially contaminated with or affected by hazardous
wastes or hazardous substances, the Master Servicer will promptly give written
notice of such fact to the Owner Trustee.
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ENFORCEMENT OF DUE-ON-SALE CLAUSES
When a Mortgaged Property has been or is about to be conveyed by the
related Mortgagor, the Master Servicer will, to the extent that it has knowledge
of such conveyance or prospective conveyance, exercise its right to accelerate
the maturity of the related Mortgage Loan under any due-on-sale clause contained
in the related mortgage documents. The Master Servicer may not, however,
exercise any such right if such due-on-sale clause, in the reasonable judgment
of the Master Servicer, is not enforceable under applicable law. In such event,
the Master Servicer may enter into an assumption and modification agreement with
the person to which such property has been or is about to be conveyed, pursuant
to which such person will become liable under the related mortgage documents
and, unless prohibited by applicable law or such mortgage documents, the related
Mortgagor will remain liable thereon. The Master Servicer is also authorized to
enter into a substitution of liability agreement with such person, pursuant to
which the original Mortgagor will be released from liability and such person
will be substituted as Mortgagor and become liable under the related mortgage
documents.
MAINTENANCE OF INSURANCE POLICIES
Generally, the underwriting requirements of the Originator require
mortgagors to obtain fire and casualty insurance as a condition to approving the
related mortgage loan, but the existence and/or maintenance of such fire and
casualty insurance is not in all cases monitored by the Master Servicer or the
Subservicer. Title insurance is not required on all mortgage loans. The Master
Servicer will follow such practices with respect to the Mortgage Loans.
Accordingly, if a Mortgaged Property suffers any hazard or casualty losses, or
if the Mortgagor thereunder is found not to have clear title to such Mortgaged
Property, Offered Noteholders may bear the risk of loss resulting from a default
by the related Mortgagor to the extent such losses are not covered by
foreclosure or liquidation proceeds on such defaulted Mortgage Loan or by the
applicable credit enhancement. To the extent that the related mortgage documents
require the Mortgagor under a Mortgage Loan to maintain a fire and hazard
insurance policy with extended coverage on the related Mortgaged Property in an
amount not less than the least of the full insurable value of such Mortgaged
Property, the replacement value of the improvements on such Mortgaged Property
or the unpaid Principal Balance of such Mortgage Loan and any senior liens, the
Master Servicer will monitor the status of such insurance in varying degrees
based upon certain characteristics of the related Mortgage Loans, and will cause
such insurance to be maintained on a case-by-case basis. Further, with respect
to each property acquired by the Trust by foreclosure or by deed in lieu of
foreclosure, the Master Servicer will maintain or cause to be maintained fire
and hazard insurance thereon with extended coverage in an amount at least equal
to the lesser of (i) the full insurable value of the improvements that are a
part of such property and (ii) the Principal Balance owing on the related
Mortgage Loan at the time of such foreclosure or deed in lieu of foreclosure.
Such insurance on property acquired by foreclosure or deed in lieu of
foreclosure may not, however, be less than the minimum amount required to fully
compensate for any loss or damage on a replacement cost basis.
Any cost incurred by the Master Servicer in maintaining any insurance
will not, for the purpose of calculating distributions to the Offered
Noteholders, be added to the unpaid Principal Balance of the related Mortgage
Loan, notwithstanding that the terms of such Mortgage Loan may so permit. No
earthquake or other additional insurance other than flood insurance will be,
under the Sale and Servicing Agreement, required to be maintained by any
Mortgagor or the Master Servicer, other than pursuant to the terms of the
related mortgage documents and such applicable laws and regulations as shall at
any time be in force and as shall require such additional insurance.
The Master Servicer will also be required under the Sale and Servicing
Agreement to maintain in force a fidelity bond or policy or policies of
insurance covering dishonest acts in the performance of its obligations as
Servicer.
No pool insurance policy, title insurance policy, blanket hazard
insurance policy, special hazard insurance policy, bankruptcy bond or repurchase
bond will be required to be maintained with respect to the Mortgage Loans, nor
will any Mortgage Loan be insured by any government or government agency.
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MASTER SERVICER REPORTS
The Master Servicer is required to deliver to the Issuer, the Indenture
Trustee and each Rating Agency, not later than May 31 of each year, beginning
with 2003, an officer's certificate stating as to each signer thereof that (i) a
review of the activities of the Master Servicer during the preceding calendar
year and of its performance under the Sale and Servicing Agreement has been made
under such officer's supervision and (ii) to the best of such officer's
knowledge, based on such review, the Master Servicer has fulfilled all of its
obligations under the Sale and Servicing Agreement throughout such year, or if
there has been a default in the fulfillment of any such obligation, specifying
each such default known to such officer and the nature and status thereof.
Not later than May 31 of each year, beginning with 2003, the Master
Servicer, at its expense, will cause a firm of nationally recognized independent
public accountants to furnish a statement to the Issuer, the Indenture Trustee
and each Rating Agency to the effect that, on the basis of an examination of
certain documents and records relating to the servicing of mortgage loans then
being serviced by the Master Servicer under servicing agreements similar to the
Sale and Servicing Agreement, which agreements will be described in a schedule
to such statement, such firm is of the opinion that such servicing has been
conducted in compliance with the Uniform Single Attestation Program for Mortgage
Bankers and that such examination has disclosed no exceptions or errors relating
to the servicing activities of the Master Servicer, including the servicing of
the Mortgage Loans, that in the opinion of such firm are material, except for
such exceptions as shall be set forth in such statement.
REMOVAL OF THE MASTER SERVICER
The Issuer or the Indenture Trustee, by notice given in writing to the
Master Servicer, may terminate all rights and obligations of the Master Servicer
under the Sale and Servicing Agreement, other than the Master Servicer's right
to receive servicing compensation and reimbursement of expenses thereunder
during any period prior to the date of such termination, upon the occurrence and
continuation beyond the applicable cure period of an event described below
(each, a "SERVICER DEFAULT"):
(a) any failure by the Master Servicer to deposit into the
Collection Account or the Trustee Collection Account any deposit required to be
made under the terms of the Sale and Servicing Agreement that continues
unremedied for a period of five (5) Business Days after the date upon which
written notice of such failure shall have been given to the Master Servicer by
the Issuer or the Indenture Trustee;
(b) any failure on the part of the Master Servicer to duly observe
or perform in any material respect any other covenants or agreements of the
Master Servicer set forth in the Sale and Servicing Agreement, which failure
materially and adversely affects the interests of any Securityholder, and which
failure continues unremedied for a period of 45 days after the date on which
written notice of such failure, requiring the same to be remedied, shall have
been given to the Master Servicer by the Issuer or the Indenture Trustee;
(c) the entry against the Master Servicer of a decree or order by
a court, agency or supervisory authority having jurisdiction in the premises for
the appointment of a trustee, conservator, receiver or liquidator in any
insolvency, conservatorship, receivership, readjustment of debt, marshalling of
assets and liabilities or similar proceedings, or for the winding up or
liquidation of its affairs; and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days; or
(d) the Master Servicer shall voluntarily go into liquidation or
consent to the appointment of a conservator, receiver, liquidator or similar
person in any insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceeding of or relating to the Master Servicer or all
or substantially all of its property, or a decree or order of a court, agency or
supervisory authority having jurisdiction in the premises for the appointment of
a conservator, receiver, liquidator or similar person in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceeding, or for the winding-up or liquidation of the Master Servicer's
affairs, shall have been entered against the Master Servicer, and such decree or
order shall have remained in force undischarged,
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unbonded and unstayed for a period of 60 days, or the Master Servicer shall
admit in writing its inability to pay its debts generally as they become due,
file a petition to take advantage of any applicable insolvency or reorganization
statute, make an assignment for the benefit of its creditors or voluntarily
suspend payment of its obligations.
The Master Servicer may not assign the Sale and Servicing Agreement nor
resign from the obligations and duties imposed on it thereby except by mutual
written consent of the parties thereto or upon the Master Servicer's
determination that its duties thereunder are no longer permissible under
applicable law and that such incapacity cannot be cured without the incurrence
of unreasonable expense. Any such determination that the Master Servicer's
duties under the Sale and Servicing Agreement are no longer permissible under
applicable law will be evidenced by a written Opinion of Counsel, who may be
counsel for the Master Servicer, to such effect delivered to the Issuer and the
Indenture Trustee. No such resignation will become effective until the Indenture
Trustee or a successor appointed in accordance with the terms of the Sale and
Servicing Agreement has assumed the Master Servicer's responsibilities and
obligations in accordance with the Sale and Servicing Agreement. The Master
Servicer will provide the Issuer, the Indenture Trustee and each Rating Agency
with 30 days prior written notice of its intention to resign.
Within 90 days of such termination, the Indenture Trustee will be the
successor in all respects to the Master Servicer in its capacity as Master
Servicer under the Sale and Servicing Agreement and with respect to the
transactions set forth therein, and shall be subject to all responsibilities,
duties and liabilities relating thereto placed on the Master Servicer by the
terms thereof. As compensation therefor, the Indenture Trustee will be entitled
to such compensation as the Master Servicer would have been entitled to under
the Sale and Servicing Agreement if there had been no such termination. If the
Indenture Trustee is unwilling to act as successor Master Servicer or is legally
unable so to act, then it will be required to appoint or petition a court of
competent jurisdiction to appoint any established mortgage loan servicing
institution having a net worth of not less than $10,000,000 as the successor to
the Master Servicer under the Sale and Servicing Agreement with respect to all
or any part of the Master Servicer's responsibilities, duties or liabilities
thereunder; provided, that no Rating Agency, after prior notice thereto, shall
have notified the Indenture Trustee in writing that such appointment would
result in a qualification, reduction or withdrawal of its then-current rating of
the Offered Notes. See "The Master Servicer--Servicing Compensation" herein.
Any successor Master Servicer, including the Indenture Trustee, (i)
will be bound by the terms of the Insurance Agreement and (ii) will not be
deemed to be in default or to have breached its duties under the Sale and
Servicing Agreement if the predecessor Master Servicer fails to make any
required deposit into the Collection Account or the Trustee Collection Account
or otherwise cooperate with any required servicing transfer or succession
thereunder.
THE ISSUER
The Issuer is a business trust formed under the laws of the State of
Delaware pursuant to the Trust Agreement for the purposes described in this
Prospectus Supplement. The Trust Agreement constitutes the "GOVERNING
INSTRUMENT" under the laws of the State of Delaware relating to business trusts.
After its formation, the Issuer will not engage in any activity other than (i)
acquiring and holding the Mortgage Loans and the other assets of the Issuer (the
"TRUST ESTATE") and proceeds therefrom, (ii) issuing the Notes and the
Certificates, (iii) making payments on the Notes and the Certificates and (iv)
engaging in other activities that are necessary, suitable or convenient to
accomplish the foregoing or are incidental thereto or connected therewith.
The Issuer's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company, as Owner Trustee, at Rodney Square North, 1100 North
Market Street, Wilmington, Delaware 19890-0001.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust
Agreement. The Owner Trustee is a Delaware banking corporation and its principal
offices are located at Rodney Square North, 1100 North Market Street, in
Wilmington, Delaware 19890-0001.
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Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Securityholders
for any action taken or for refraining from the taking of any action in good
faith pursuant to the Trust Agreement or for errors in judgment; provided,
however, that none of the Owner Trustee and any director, officer or employee
thereof will be protected against any liability which would otherwise be imposed
by reason of willful malfeasance, bad faith or gross negligence in the
performance of duties or by reason of reckless disregard of obligations and
duties under the Trust Agreement. All persons into which the Owner Trustee may
be merged or with which it may be consolidated or any person resulting from such
merger or consolidation shall be the successor of the Owner Trustee under the
Trust Agreement.
THE INDENTURE TRUSTEE
Wells Fargo Bank Minnesota, National Association, a national banking
association, is the Indenture Trustee under the Indenture. The principal offices
of the Indenture Trustee are located at the Wells Fargo Center, Sixth and
Marquette, Minneapolis, Minnesota 55479.
DESCRIPTION OF THE SECURITIES
GENERAL
The Notes will be issued pursuant to the Indenture. The Certificates
will be issued pursuant to the Trust Agreement. The following summaries describe
certain provisions of the Securities, the Indenture and the Trust Agreement. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the applicable agreement. Only
the Offered Notes are being offered hereby.
The Notes will be secured by the assets of the Trust pledged by the
Issuer to the Indenture Trustee pursuant to the Indenture which will consist of:
(i) the Mortgage Loans (including all Additional Balances and any Subsequent
Mortgage Loans); (ii) all funds on deposit from time to time in the Note Payment
Account, the Certificate Distribution Account, the Pre-Funding Account, the
Funding Account, the Collection Account, the Trustee Collection Account and the
Capitalized Interest Account (each as defined herein) and all proceeds thereof,
(iii) the Trust's rights under the Interest Rate Cap Agreements and (iv) all
proceeds of the foregoing.
The Variable Funding Notes will be issued to Irwin Union Bank and Trust
Company. The Variable Funding Balance will be increased from time to time until
the end of the Managed Amortization Period for Loan Group III in consideration
for Additional Balances sold to the Issuer, if Principal Collections from Loan
Group III in respect of the related Collection Period are insufficient or
unavailable to cover the full consideration therefor. The consideration for any
such sale will be, after the application of amounts, if any, on deposit in the
Funding Account, an increase in the Variable Funding Balance. Notwithstanding
any of the foregoing, the Variable Funding Balance may not exceed $25,000,000
(the "MAXIMUM VARIABLE FUNDING BALANCE"). Initially, the Variable Funding
Balance will be zero.
BOOK-ENTRY NOTES
The Offered Notes will initially be issued as Book-Entry Notes (the
"BOOK-ENTRY NOTES"). Persons acquiring beneficial ownership interests in the
Offered Notes ("OFFERED NOTE OWNERS") may elect to hold their Offered Notes
through DTC in the United States, or Clearstream, Luxembourg or Euroclear, in
Europe if they are Participants of such systems, or indirectly through
organizations which are Participants in such systems. The Book-Entry Notes will
be issued in one or more securities which equal the aggregate principal balance
of the Offered Notes and will initially be registered in the name of Cede & Co.,
as nominee of DTC ("CEDE"). Clearstream, Luxembourg and Euroclear will hold
omnibus positions on behalf of their Participants through customers' securities
accounts in Clearstream's, Luxembourg's and Euroclear's names on the books of
their respective depositaries (in such capacities, individually the "RELEVANT
DEPOSITARY" and collectively the "EUROPEAN DEPOSITARIES") which in turn will
hold such positions in customers' securities accounts in the depositaries' names
on the books of DTC. Investors may hold such beneficial interests in the
Book-Entry Notes in minimum denominations of $1,000 and in integral multiples of
$1 in excess thereof. Except as described below, no Beneficial Owner will be
entitled to receive
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a physical certificate representing such security (a "DEFINITIVE NOTE"). Unless
and until Definitive Notes are issued, it is anticipated that the only "Holder"
of the Offered Notes will be Cede, as nominee of DTC. Offered Note Owners will
not be Holders as that term is used in the Indenture.
A Beneficial Owner's ownership of a Book-Entry Note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "FINANCIAL INTERMEDIARY") that maintains the Beneficial
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Notes 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).
Offered Note Owners will receive all payments of principal and interest
on the Offered Notes from the Indenture Trustee through DTC and DTC
Participants. While the Offered Notes are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "RULES"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Offered Notes and is required to receive and transmit payments of
principal and interest on the Offered Notes.
Participants and Indirect Participants with whom Offered Note Owners
have accounts with respect to Offered Notes are similarly required to make
book-entry transfers and receive and transmit such payments on behalf of their
respective Offered Note Owners. Accordingly, although Offered Note Owners will
not possess physical certificates, the Rules provide a mechanism by which
Offered Note Owners will receive payments and will be able to transfer their
interest.
Offered Note Owners will not receive or be entitled to receive
Definitive Notes representing their respective interests in the Offered Notes,
except under the limited circumstances described below. Unless and until
Definitive Notes are issued, Offered Note Owners who are not Participants may
transfer ownership of Offered Notes only through Participants and Indirect
Participants by instructing such Participants and Indirect Participants to
transfer the Offered Notes, by book-entry transfer, through DTC for the account
of the purchasers of such Offered Notes, which account is maintained with their
respective Participants. Under the Rules and in accordance with DTC's normal
procedures, transfers of ownership of Offered Notes 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 Offered Note Owners.
Under a book-entry format, Beneficial Owners of the Book-Entry Notes
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Indenture Trustee to Cede Payments with respect to Offered
Notes held through Clearstream, Luxembourg or Euroclear will be credited to the
cash accounts of Clearstream, Luxembourg Participants or Euroclear Participants
in accordance with the relevant system's rules and procedures, to the extent
received by the Relevant Depositary. Such payments will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
Because DTC can only act on behalf of Financial Intermediaries, the ability of a
Beneficial Owner to pledge Book-Entry Notes to persons or entities that do not
participate in the Depositary system, or otherwise take actions in respect of
such Book-Entry Notes, may be limited due to the lack of physical certificates
for such Book-Entry Notes. In addition, issuance of the Book-Entry Notes in
book-entry form may reduce the liquidity of such Offered Notes in the secondary
market since certain potential investors may be unwilling to purchase securities
for which they cannot obtain physical certificates.
DTC has advised the Indenture Trustee that, unless and until Definitive
Notes are issued, DTC will take any action permitted to be taken by the holders
of the Book-Entry Notes under the Indenture only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Notes are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Notes. Clearstream,
Luxembourg or the Euroclear Operator, as the case may be, will take any other
action permitted to be taken by Offered Noteholders under the Indenture 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
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Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Offered Notes which conflict with actions taken with respect to other Offered
Notes.
Definitive Notes will be issued to Beneficial Owners of the Book-Entry
Notes, or their nominees, rather than to DTC, if (a) the Indenture Trustee
determines that DTC is no longer willing, qualified or able to discharge
properly its responsibilities as nominee and depository with respect to the
Book-Entry Notes and the Indenture Trustee is unable to locate a qualified
successor, (b) the Indenture Trustee elects to terminate a book-entry system
through DTC or (c) after the occurrence of an Event of Default, pursuant to the
Indenture, Beneficial Owners having Percentage Interests aggregating at least a
majority of the Offered Note Balance of the Offered Notes advise DTC through the
Financial Intermediaries and the DTC Participants in writing that the
continuation of a book-entry system through DTC (or a successor thereto) is no
longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Indenture Trustee will be required to notify all
Beneficial Owners of the occurrence of such event and the availability through
DTC of Definitive Notes. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Notes and instructions for
re-registration, the Indenture Trustee will issue and authenticate Definitive
Notes, and thereafter the Indenture Trustee will recognize the holders of such
Definitive Offered Notes as Holders under the Indenture.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the
foregoing procedures in order to facilitate transfers of Offered Notes among
Participants of DTC, Clearstream, Luxembourg and Euroclear, they are under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time. See "Risk Factors--Book-Entry Registration",
"Description of the Securities--Book-Entry Securities" and "The
Agreements--Book-Entry Securities" in the Prospectus and Annex I hereto.
None of the Depositor, the Master Servicer or the Indenture Trustee
will have any liability for any actions taken by DTC or its nominee, including,
without limitation, actions for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Offered Notes
held by Cede, as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
PAYMENTS
Payments on the Notes will be made by the Indenture Trustee or the
Paying Agent on the 25th day of each month or, if such day is not a Business
Day, then the next succeeding Business Day, commencing in October 2001 (each, a
"PAYMENT DATE"). Payments on the Class IA-1 Notes, Class IIA-2 Notes,
Class IIIA-3, Class M-1 Notes, Class M-2 Notes and the Class B-1 Notes will be
made to the persons in whose names such Notes are registered at the
close of business on the day prior to each Payment Date, and payments on each
other Class of Offered Notes will be made to the persons in whose names such
Notes are registered at the close of business on October 4, 2001 in the case of
the initial Payment Date, and the last day of the preceding calendar month in
the case of each other Payment Date. Payments will be made by check or money
order mailed (or upon the request of a Holder owning Notes having denominations
aggregating at least $1,000,000, by wire transfer or otherwise) to the address
of the person entitled thereto (which, in the case of Book-Entry Notes, will be
DTC or its nominee) as it appears on the Note Register in amounts calculated as
described herein on the Determination Date. However, the final payment in
respect of the Notes will be made only upon presentation and surrender thereof
at the office or the agency of the Indenture Trustee specified in the notice to
Holders of such final payment. A "BUSINESS DAY" is any day other than (i) a
Saturday or Sunday or (ii) a day on which banking institutions in the State of
California, Minnesota, Maryland, New York, Indiana or Delaware are required or
authorized by law to be closed.
INTEREST PAYMENTS ON THE NOTES
The "NOTE RATE" for the Notes will be the per annum rate as set forth
under "Summary" of this Prospectus Supplement. Interest payments will accrue on
each class of Notes on each Payment Date at the related Note Rate, subject to
the limitations set forth below, which may result in Interest Carry-Forward
Amounts.
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On any Payment Date for which the Note Rate for the Class IIIA-1 Notes
or any of the Subordinate Notes has been determined pursuant to clause (ii) of
footnotes (6), (9), (10) or (11) to the table under "Summary--Material Terms of
Offered Notes" the excess of (a) the amount of interest that would have accrued
on the related Note during the related Interest Period had such amount been
determined pursuant to clause (i) above over (b) the interest actually accrued
on the related Note during such Interest Period (such excess, an "INTEREST
CARRY-FORWARD AMOUNT") will accrue interest at the related Note Rate (as
adjusted from time to time) and will be paid on subsequent Payment Dates to the
extent funds are available therefor.
The Class A-IO Notes will be interest only notes. Except as set forth
in the second succeeding sentence, interest on the Class A-IO Notes will accrue
on a notional balance of $54,112,000. The Class A-IO Offered Notes will not have
a Note Balance. The notional balance of the Class A-IO Notes will not be subject
to reduction unless the aggregate Principal Balance of the Mortgage Loans in
Loan Groups I and II is reduced below $54,112,000 on or before March 1, 2004 and
will be $0 on any Payment Date after the March 2004 Payment Date.
Interest on each class of Offered Notes in respect of any Payment Date
will accrue for the related Interest Period on the related Note Balance. The
"INTEREST PERIOD" with respect to any Payment Date and the Offered Notes other
than the Class IA-1, Class IIA-1, Class IIIA-1 and the Subordinate Notes will be
the calendar month preceding the month in which such Payment Date occurs and
interest on these Notes will be calculated on the basis of a 30-day month and a
360-day year. The Interest Period with respect to the Class IA-1, Class IIA-1,
Class IIIA-1, Variable Funding Notes and the Subordinate Notes will be (i) with
respect to the Payment Date in October 2001, the period commencing on the
Closing Date and ending on the day preceding the Payment Date in October 2001,
and (ii) with respect to any Payment Date after the Payment Date in October
2001, the period commencing on the Payment Date in the month immediately
preceding the month in which such Payment Date occurs and ending on the day
preceding such Payment Date and interest on these Notes will be calculated on
the basis of the actual number of days in the related Interest Period and a
360-day year.
The interest rate on the Variable Funding Notes for any Payment Date
will equal the Note Rate on the Class IIIA-1 Notes for the related Interest
Period.
DETERMINATION OF LIBOR
On each Payment Date, LIBOR will be established by the Indenture
Trustee. As to any Interest Period, LIBOR will equal, for any Interest Period
other than the first Interest Period, the rate for United States dollar deposits
for one month that appears on the Telerate Screen Page 3750 as of 11:00 a.m.,
London, England time, on the second LIBOR Business Day prior to the first day of
such Interest Period. With respect to the first Interest Period, LIBOR will
equal the rate for United States dollar deposits for one month that appears on
the Telerate Screen Page 3750 as of 11:00 a.m., London, England time, two LIBOR
Business Days prior to the Closing Date. If such rate does not appear on such
page (or such other page as may replace such page on such service, or if such
service is no longer offered, such other service for displaying LIBOR or
comparable rates as may be reasonably selected by the Indenture Trustee after
consultation with the Master Servicer), the rate will be the Reference Bank
Rate. If no such quotations can be obtained and no Reference Bank Rate is
available, LIBOR will be LIBOR applicable to the preceding Payment Date.
"TELERATE SCREEN PAGE 3750" means the display page so designated on the
Bridge Information Systems Telerate Service (or such other page as may replace
page 3750 on such service for the purpose of displaying London interbank offered
rates of major banks).
The "REFERENCE BANK RATE" will be, with respect to any Interest Period,
as follows: the arithmetic mean (rounded upwards, if necessary, to the nearest
one sixteenth of one percent) of the offered rates for United States dollar
deposits for one month which are offered by the Reference Banks as of 11:00
a.m., London, England time, on the second LIBOR Business Day prior to the first
day of such Interest Period to prime banks in the London interbank market;
provided, that at least two such Reference Banks provide such rate. If fewer
than two offered rates appear, the Reference Bank Rate will be the arithmetic
mean of the rates quoted by one or more major banks in New York City, selected
by the Indenture Trustee after consultation with the Master Servicer, as of
11:00 a.m., New
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York time, on such date for loans in U.S. Dollars to leading European Banks for
a period of one month. If no such quotations can be obtained, the Reference Bank
Rate will be the Reference Bank Rate applicable to the preceding Interest
Period.
"LIBOR BUSINESS DAY" means any day other than (i) a Saturday or a
Sunday or (ii) a day on which banking institutions in the city of London,
England are required or authorized by law to be closed.
The establishment of LIBOR as to each Interest Period by the Indenture
Trustee and the Indenture Trustee's calculation of the rate of interest
applicable to the Offered Notes for the related Interest Period will, in the
absence of manifest error, be final and binding.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, a cash deposit will be made by the Transferor into
the Capitalized Interest Account in the name of the Indenture Trustee on behalf
of the Trust, from the proceeds of the sale of the Offered Notes. In lieu of
such deposit, a letter of credit in form and substance, and from a provider,
acceptable to the Rating Agencies evidencing the availability of such amount may
be delivered to the Owner Trustee on the Closing Date. On each Payment Date
during the Pre-Funding Period, the Indenture Trustee will transfer from the
Capitalized Interest Account (or make a drawing under such letter of credit and
transfer) to the Trustee Collection Account an amount equal to the Capitalized
Interest Requirement, if any, for such Payment Date.
The "CAPITALIZED INTEREST REQUIREMENT" will be, with respect to each
Payment Date during the Pre-Funding Period, the excess, if any of (i) the sum of
(A) the amount of interest accrued at the weighted average Note Rate on the
amount on deposit in the Pre-Funding Account as of the preceding Payment Date
(or as of the Closing Date, in the case of the first Payment Date) and (B) the
amount of fees of the Interest Rate Cap Counterparty, over (ii) the amount of
reinvestment earnings on funds on deposit in the Pre-Funding Account plus, with
respect to the initial Payment Date, $629,757.09.
To the extent the Capitalized Interest Account is overfunded on any
Payment Date during the Pre-Funding Period (i.e., there are excess funds on
deposit in the Capitalized Interest Account that are not needed to fund portions
of the interest payments on the Offered Notes on the current or any future
Payment Date), such overfunded amount may be withdrawn by the Transferor, or
such letter of credit may be reduced, on such Payment Date. Any such overfunded
amount for any Payment Date would generally be equal to the excess, if any, of
(a) the amount then on deposit in the Capitalized Interest Account over (b) the
product of (i) 1/360, (ii) the weighted average Note Rate, together with the
amount of fees paid to the Interest Rate Cap Counterparty (expressed as a per
annum rate), minus the assumed reinvestment earnings rate used in determining
the Capitalized Interest Requirement, on funds on deposit in the Pre-Funding
Account; (iii) 30 times the number of Payment Dates remaining until the latest
possible end of the Pre-Funding Period; and (iv) the amount on deposit in the
Pre-Funding Account (excluding any reinvestment earnings on funds on deposit
therein).
On the Payment Date following the end of the Pre-Funding Period, the
Indenture Trustee will distribute to the Transferor any amounts remaining in the
Capitalized Interest Account after taking into account withdrawals therefrom on
such Payment Date. The Capitalized Interest Account will be closed following
such payment.
PRINCIPAL PAYMENTS ON THE NOTES
Payments made to the holders of the Class A Notes on each Payment Date
with respect to the Principal Collection Distribution Amount, the Liquidation
Loss Amount and the Overcollateralization Increase Amount will be distributed
concurrently to (a) the Group I Notes in the aggregate, (b) the Group II Notes
in the aggregate and (c) the Group III Notes in the aggregate, in each case in
proportion to the percentage of the Net Principal Collections derived from the
related Loan Group (with respect to which any related Notes are outstanding) for
that Payment Date, until the Note Balances of the Group I Notes in the
aggregate, the Group II Notes in the aggregate and the Group III Notes in the
aggregate have been reduced to zero.
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During the Managed Amortization Period, Principal Collections on the
Mortgage Loans in Loan Group III may be used to fund Additional Balances created
during the related Collection Period, which balances will be allocated to Loan
Group III. This will reduce the Net Principal Collections for Loan Group III and
the Principal Collection Distribution Amount.
After any of the Group I Notes in the aggregate, the Group II Notes in
the aggregate or the Group III Notes in the aggregate are reduced to zero, the
Principal Collection Distribution Amount, Liquidation Loss Amount and the
Overcollateralization Increase Amount will be distributed to the remaining class
or classes of the Class A Notes, as described in the next paragraph, to the
extent necessary to pay principal due on those classes.
Payments of principal that are allocated to the Group I Notes and the
Group II Notes will be paid sequentially within the respective group of Notes,
which means that principal will not be paid on any class of Notes unless the
principal balance of each Class of Notes within such group with a lower
numerical designation has been reduced to zero. Payments of principal that are
allocated to the Group III Notes will be paid to the Class IIIA-1 Notes and the
Variable Funding Notes will be paid pro rata based on the outstanding Note
Balance or Variable Funding Balance, as applicable, thereof until paid in full.
Because principal payments on the Class A Notes in respect of
Liquidation Loss Amounts and Overcollateralization Increase Amounts will be
allocated among the Group I Notes, the Group II Notes and the Group III Notes in
proportion to the Net Principal Collections for the related Loan Group, and not
in proportion to the amount of Liquidation Loss Amounts on Mortgage Loans in the
related Loan Group or the Overcollateralization Amount derived from that Loan
Group, excess interest collections from one Loan Group may be applied on any
Payment Date to make principal payments to the Notes corresponding to another
Loan Group.
Until the Step-Down Date, no principal payments will be distributed to
the Class M-1 notes, the Class M-2 Notes and the Class B-1 Notes, unless the
Note Balances of all of the Class A Notes have been reduced to zero. In
addition, if on any Payment Date the Loss and Delinquency Tests are not
satisfied, amounts otherwise payable to the Class M-1 Notes, the Class M-2 Notes
or the Class B-1 Notes with respect to principal will be paid to the Class A
Notes, and the Class M-1 Notes, the Class M-2 Notes and the Class B-1 Notes will
receive no distributions of principal on that Payment Date. No principal will be
paid to the Class A-IO Notes, which are interest only Notes.
On the Legal Final Payment Date for a Class of Notes, principal will be
due and payable on the applicable Notes in an amount equal to the related Note
Balance (or the Variable Funding Balance in the case of the Variable Funding
Notes) remaining outstanding on that Payment Date.
The payment of principal to the Subordinate Notes after the Step-Down
Date is subject to the following loss and delinquency tests (the "LOSS AND
DELINQUENCY TESTS"):
o satisfaction of a cumulative Liquidation Loss Amount test such that the
fraction (expressed as a percentage) of cumulative Liquidation Loss
Amounts as of the respective Payment Date divided by the Principal
Balance of the Initial Mortgage Loans and the Additional Mortgage Loans
and the amount deposited to the Pre-Funding Account on the Closing Date
is less than or equal to the percentage set forth below for the related
Collection Period specified below:
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COLLECTION
PERIOD LOSS AMOUNT PERCENTAGE
------ ----------------------
36 - 48 9.5%
49 - 60 11.25%
61 - 84 11.75%
85+ 12.25%; and
o satisfaction of a delinquency test such that the three-month rolling
average of the Principal Balance of the Mortgage Loans that are 60 days
or more delinquent (including all Mortgage Loans that are in
foreclosure and Mortgage Loans for which the related Mortgaged Property
constitutes REO Property but excluding Liquidated Mortgage Loans) in
the payment of principal and interest is less than 17.75% of the Senior
Enhancement Percentage.
PRIORITY OF DISTRIBUTIONS
On each Payment Date, from Interest Collections and Principal
Collections with respect to all of the Mortgage Loans and any Interest Rate Cap
Agreement Payments on deposit in the Trustee Collection Account, the Indenture
Trustee will make the following payments in the following order of priority:
o first, to pay any prepayment penalties collected on the Mortgage Loans
during the immediately preceding Collection Period to the holders of
the Certificates;
o second, for any Payment Date up to and including the March 2004 Payment
Date, an amount not to exceed $128,900 to the Interest Rate Cap
Counterparty;
o third, to pay accrued and unpaid interest due on the Note Balances of
the Notes at the respective Note Rates as follows:
o (i) first, to the Class A Notes and the Class A-IO Notes,
on a pro rata basis in accordance with the amount of accrued
interest due thereon;
o (ii) second, to the Class M-1 Notes;
o (iii) third, to the Class M-2 Notes; and
o (iv) fourth, to the Class B-1 Notes;
o fourth, to pay as principal on the Notes (other than the Class A-IO
Notes), in an amount equal to the Principal Collection Distribution
Amount for that Payment Date as follows:
o (i) first, to the Class A Notes, in the order described above
under "-Principal Payments on the Notes," the amount necessary
to reduce the aggregate Note Balance of the Class A Notes to the
Class A Optimal Principal Balance;
o (ii) second, to the Class M-1 Notes, the amount necessary to
reduce the Note Balance of the Class M-1 Notes to the Class M-1
Optimal Principal Balance;
o (iii) third, to the Class M-2 Notes, the amount necessary to
reduce the Note Balance of the Class M-2 Notes to the Class M-2
Optimal Principal Balance; and
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o (iv) fourth, to the Class B-1 notes, the amount necessary to
reduce the principal balance of the Class B-1 notes to the Class
B-1 Optimal Principal Balance;
o fifth, to pay to the Class A Notes, in the order described above under
"-Principal Payments on the Notes," until the aggregate Note Balance of
the Class A Notes has been reduced to the Class A Optimal Principal
Balance, an amount equal to any Liquidation Loss Amounts incurred on
the Mortgage Loans during the related Collection Period, and any
Liquidation Loss Amounts allocated to the Class A Notes on any previous
Payment Date and not previously paid, plus interest on any previously
unpaid amount;
o sixth, to pay to the Class M-1 Notes, until the Note Balance of the
Class M-1 Notes has been reduced to the Class M-1 Optimal Note Balance,
an amount equal to any Liquidation Loss Amounts incurred on the
Mortgage Loans during the related Collection Period and not paid to the
holders of the Class A Notes under clause fifth above, and any
Liquidation Loss Amounts allocated to the Class M-1 Notes on any
previous Payment Date and not previously paid, plus interest on any
previously unpaid amount;
o seventh, to pay to the Class M-2 Notes, until the Note Balance of the
Class M-2 Notes has been reduced to the Class M-2 Optimal Principal
Balance, an amount equal to any Liquidation Loss Amounts incurred on
the Mortgage Loans during the related Collection Period and not paid to
the holders of the Class A Notes under clause fifth above or the Class
M-1 Notes under clause sixth above, and any Liquidation Loss Amounts
allocated to the Class M-2 Notes on any previous Payment Date and not
previously paid, plus interest on any previously unpaid amount;
o eighth, to pay to the Class B-1 Notes, until the Note Balance of the
Class B-1 Notes has been reduced to the Class B-1 Optimal Principal
Balance, an amount equal to any Liquidation Loss Amounts incurred on
the Mortgage Loans during the related Collection Period and not paid to
the holders of the Class A Notes under clause fifth above, the Class M-
1 Notes under clause sixth above or the Class M-2 Notes under clause
seventh above, and any Liquidation Loss Amounts allocated to the Class
B-1 Notes on any previous Payment Date and not previously paid, plus
interest on any previously unpaid amount;
o ninth, to pay to the Class A Notes, in the order described above under
"-Principal Payments on the Notes," the Overcollateralization Increase
Amount, if any, to reduce the aggregate Note Balance of the Class A
Notes to the Class A Optimal Principal Balance;
o tenth, to pay to the Class M-1 Notes, the Overcollateralization
Increase Amount, if any, to the extent not previously distributed to
the Class A Notes pursuant to clause ninth above, to reduce the Note
Balance of the Class M-1 Notes to the Class M-1 Optimal Principal
Balance;
o eleventh, to pay to the Class M-2 Notes, the Overcollateralization
Increase Amount, if any, to the extent not previously distributed to
the Class A Notes pursuant to clause ninth above or the Class M-1 Notes
pursuant to clause tenth above, to reduce the Note Balance of the Class
M-2 Notes to the Class M-2 Optimal Principal Balance;
o twelfth, to pay to the Class B-1 Notes, the Overcollateralization
Increase Amount, if any, to the extent not previously distributed to
the Class A Notes pursuant to clause ninth above, the Class M-1 Notes
pursuant to clause tenth above or the Class M-2 Notes pursuant to
clause eleventh above, to reduce the Note Balance of the Class B-1
Notes to the Class B-1 Optimal Principal Balance;
o thirteenth, to pay the Indenture Trustee and the Administrator any
unpaid expenses and other reimbursable amounts owed to the Indenture
Trustee and the Administrator;
o fourteenth, to pay the holders of the Class IIIA-1 Notes and the
Variable Funding Notes, pro rata, any applicable unpaid Interest
Carry-Forward Amounts, together with interest thereon;
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o fifteenth, to pay the holders of the Class M-1 Notes any applicable
unpaid Interest Carry-Forward Amounts, together with interest thereon;
o sixteenth, to pay the holders of the Class M-2 notes any applicable
unpaid Interest Carry-Forward Amounts, together with interest thereon;
o seventeenth, to pay the holders of the Class B-1 Notes any applicable
unpaid Interest Carry-Forward Amounts, together with interest thereon;
and
o eighteenth, any remaining amounts to the holders of the Certificates.
Notwithstanding the foregoing, on the Legal Final Payment Date for a
class of Notes the amounts to be paid pursuant to clause fourth above shall be
at least equal to the aggregate of the Note Balances of the Notes with a Legal
Final Payment Date on such Payment Date immediately prior to such Payment Date
and upon an Event of Default payment priorities may change as described below
under "-Priority of Distributions May Change Following an Event of Default."
"AGGREGATE BALANCE DIFFERENTIAL" means, with respect to any Payment
Date and any Variable Funding Note, the sum of the Balance Differentials that
have been added to the Variable Funding Balance of such Variable Funding Note
prior to such Payment Date. "BALANCE DIFFERENTIAL" means, with respect to any
Payment Date, the amount, if any, by which the sum of the aggregate Principal
Balance of all Additional Balances transferred to the Trust and included in Loan
Group III during the related Collection Period exceeds the Principal Collections
for Loan Group III for the previous Collection Period.
An "AMORTIZATION EVENT" will be deemed to occur upon the occurrence of
any one of the following events:
(a) the failure on the part of Irwin Union Bank and Trust Company (i)
to make any payment or deposit required to be made under the Purchase Agreement
within five (5) Business Days after the date such payment or deposit is required
to be made; or (ii) to observe or perform in any material respect any other
covenants or agreements of Irwin Union Bank and Trust Company set forth in the
Purchase Agreement, which failure continues unremedied for a period of ninety
(90) days after written notice thereof to Irwin Union Bank and Trust Company,
and such failure materially and adversely affects the interests of the
Securityholders; provided, that an Amortization Event will not be deemed to
occur if Irwin Union Bank and Trust Company has repurchased or caused to be
repurchased or substituted for the related Mortgage Loans or all Mortgage Loans,
as applicable, during such period in accordance with the provisions of the
Indenture;
(b) any representation or warranty made by Irwin Union Bank and Trust
Company in the Purchase Agreement shall prove to have been incorrect in any
material respect when made and shall continue to be incorrect in any material
respect for the related cure period specified in the Servicing Agreement after
written notice and as a result of which the interests of the Securityholders are
materially and adversely affected; provided, that an Amortization Event will not
be deemed to occur if Irwin Union Bank and Trust Company has repurchased or
caused to be repurchased or substituted for the related Mortgage Loans or all
Mortgage Loans, as applicable, during such period in accordance with the
provisions of the Indenture;
(c) the entry against Irwin Union Bank and Trust Company or the Issuer
of a decree or order by a court or agency or supervisory authority having
jurisdiction in the premises for the appointment of a trustee, conservator,
receiver or liquidator in any insolvency, conservatorship, receivership,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings, or for the winding up or liquidation of its affairs, and the
continuance of any such decree or order unstayed and in effect for a period of
ninety (90) consecutive days;
(d) Irwin Union Bank and Trust Company or the Issuer shall voluntarily
go into liquidation, consent to the appointment of a conservator, receiver,
liquidator or similar person in any insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings of or relating to
Irwin Union Bank and Trust Company or
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the Issuer or of or relating to all or substantially all of its property, or a
decree or order of a court, agency or supervisory authority having jurisdiction
in the premises for the appointment of a conservator, receiver, liquidator or
similar person in any insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings, or for the winding-up or liquidation of
its affairs, shall have been entered against Irwin Union Bank and Trust Company
or the Issuer and such decree or order shall remain in force undischarged,
unbonded or unstayed for a period of ninety (90) days or Irwin Union Bank and
Trust Company or the Issuer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors or voluntarily suspend payment of its obligations;
(e) the Issuer becomes subject to regulation by the Commission
as an investment company within the meaning of the Investment Company Act of
1940, as amended;
(f) a Servicing Default occurs and is unremedied under the
Servicing Agreement and a qualified successor Servicer has not been appointed;
or
(g) the Issuer is determined to be an association (or a publicly
traded partnership) taxable as a corporation for federal income tax purposes.
In the case of any event described in (a), (b), or (f), an Amortization
Event will be deemed to have occurred only if, after any applicable grace period
described in such clauses, either the Indenture Trustee or Noteholders
evidencing not less than 51% of the aggregate Note Balance of the Class A Notes
or the Subordinate Notes, by written notice to the Depositor, the Servicer and
the Owner Trustee (and to the Indenture Trustee, if given by the
Securityholders), declare that an Amortization Event has occurred as of the date
of such notice. See "Risk Factors-Subordinate Noteholders have Limited Rights"
above. In the case of any event described in clauses (c), (d), (e), or (g), an
Amortization Event will be deemed to have occurred without any notice or other
action on the part of the Indenture Trustee or the Noteholders immediately upon
the occurrence of such event; provided, that any Amortization Event may be
waived and deemed of no effect with the written consent of each Rating Agency,
subject to the satisfaction of any conditions to such waiver.
"CLASS A OPTIMAL PRINCIPAL BALANCE" means, with respect to any Payment
Date prior to the Step-down Date or after the Step-down Date if the Loss and
Delinquency Tests have not been satisfied, zero; and with respect to any other
Payment Date, an amount equal to the Pool Balance as of the preceding
Determination Date minus the sum of (a) approximately 41.70% of the Pool Balance
as of the preceding Determination Date and (b) the Overcollateralization Target
Amount for such Payment Date.
"CLASS B-1 OPTIMAL PRINCIPAL BALANCE" means, with respect to any
Payment Date prior to the Step-down Date, zero; and with respect to any other
Payment Date, the Pool Balance as of the preceding Determination Date minus the
sum of (a) the aggregate of the Note Balances of the Class A Notes, the Class
M-1 Notes and the Class M-2 Notes (after taking into account any payments made
on such Payment Date in reduction of such Note Balances) and (b) the
Overcollateralization Target Amount for such Payment Date; provided, however,
that the Class B-1 Optimal Principal Balance will not be reduced below the Class
B-1 Optimal Principal Balance on the prior Payment Date unless the Loss and
Delinquency Tests are satisfied.
"CLASS M-1 OPTIMAL PRINCIPAL BALANCE" means, with respect to any
Payment Date prior to the Step-down Date, zero; and with respect to any other
Payment Date, the Pool Balance as of the preceding Determination Date
minus the sum of (a) the aggregate Note Balances of the Class A Notes (after
taking into account payments made on such Payment Date in reduction of such Note
Balances), (b) approximately 26.00% of the Pool Balance as of the preceding
Determination Date, and (c) the Overcollateralization Target Amount for such
Payment Date; provided, however, that the Class M-l Optimal Principal Balance
will not be reduced below the Class M-1 Optimal Principal Balance on the prior
Payment Date unless the Loss and Delinquency Tests are satisfied.
"CLASS M-2 OPTIMAL PRINCIPAL BALANCE" means, with respect to any
Payment Date prior to the Step-down Date, zero; and with respect to any other
Payment Date, the Pool Balance as of the preceding Determination Date
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minus the sum of (a) the aggregate Note Balances of the Class A Notes and the
Class M-1 Notes (after taking into account payments made on such Payment Date in
reduction of such Note Balances), (b) approximately 13.00% of the Pool Balance
as of the preceding Determination Date, and (c) the Overcollateralization Target
Amount for such Payment Date; provided, however, that the Class M-2 Optimal
Principal Balance will not be reduced below the Class M-2 Optimal Principal
Balance on the prior Payment Date unless the Loss and Delinquency Tests are
satisfied.
"EXCESS SPREAD" means with respect to any Payment Date, amounts
available for distribution after the application of clause fourth under
"-Priority of Distributions" above.
"INTEREST COLLECTIONS" means, with respect to any Payment Date and Loan
Group, the sum of all payments by or on behalf of Mortgagors and any other
amounts constituting interest (including such portion of Insurance Proceeds,
Liquidation Proceeds and Repurchase Prices as is allocable to interest on the
applicable Mortgage Loan as are paid by the Transferor or the Master Servicer in
respect of Mortgage Loans in the applicable Loan Group or is collected by the
Master Servicer under the Mortgage Loans in such Loan Group, reduced by the
Servicing Fee for the Mortgage Loans in such Loan Group for the related
Collection Period and by any fees (including annual fees), prepayment penalties
or late charges or similar administrative fees paid by Mortgagors with respect
to Mortgage Loans in such Loan Group during such Collection Period). The terms
of the related mortgage documents shall determine the portion of each payment in
respect of such Mortgage Loan that constitutes principal and interest,
respectively. Interest Collections for all Loan Groups is the sum of Interest
Collections for each Loan Group.
"LIQUIDATED MORTGAGE LOAN" means a defaulted Mortgage Loan as to which
the Master Servicer has determined that all amounts that it expects to recover
on such Mortgage Loan have been recovered (exclusive of any possibility of a
deficiency judgment).
"LIQUIDATION LOSS AMOUNT" means, with respect to any Payment Date and
any Liquidated Mortgage Loan in a Loan Group, the unrecovered Principal Balance
thereof at the end of the related Collection Period in which such Mortgage Loan
became a Liquidated Mortgage Loan, after giving effect to the Liquidation
Proceeds in connection therewith.
"NET PRINCIPAL COLLECTIONS" means, with respect to any Payment Date,
o for Loan Group I, the Principal Collections for Loan Group I for the
related Collection Period;
o for Loan Group II, the Principal Collections for Loan Group II for the
related Collection Period;
o for Loan Group III, (1) during the Managed Amortization Period, the
difference (but not less than zero) of Principal Collections for Loan
Group III for the related Collection Period minus Principal Collections
for Loan Group III used by the Trust to acquire Additional Balances
during the related Collection Period and (2) after the Managed
Amortization Period, the Principal Collections for Loan Group III for
the related Collection Period.
"NOTE BALANCE" means the Offered Note Balance and/or the Variable
Funding Balance, as the context requires.
"OFFERED NOTE BALANCE" means as of any date of determination and with
respect to each Class of Notes (other than the Class A-IO Notes), the principal
balance of such Class of Notes on the Closing Date less any amounts actually
distributed as principal thereon on all prior Payment Dates.
"OVERCOLLATERALIZATION AMOUNT" shall mean, with respect to any Payment
Date, the excess, if any, of (x) the aggregate Principal Balance of all Mortgage
Loans as of the close of business on the last day of the related Collection
Period, together with the amounts on deposit in the Pre-Funding Account and the
Funding Account) over (y) the aggregate of the Note Balances of the Offered
Notes and the Variable Funding Balance, after taking into
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account the payment of the Principal Collection Distribution Amount and the
Liquidation Loss Amounts for such Payment Date.
"OVERCOLLATERALIZATION INCREASE AMOUNT" means, with respect to any
Payment Date, the amount necessary to increase the Overcollateralization Amount
to the Overcollateralization Target Amount.
"OVERCOLLATERALIZATION RELEASE AMOUNT" means, with respect to any
Payment Date, the excess, if any, of the Overcollateralization Amount over the
Overcollateralization Target Amount.
"OVERCOLLATERALIZATION TARGET AMOUNT" means, as to any Payment Date
prior to the Step-down Date, an amount equal to 4.50% of the initial Pool
Balance. On or after the Step-down Date, the Overcollateralization Target Amount
will be equal to the lesser of (a) the Overcollateralization Target Amount as of
the initial Payment Date and (b) 9.00% of the current Pool Balance (after
applying payments received in the related Collection Period), but not lower than
approximately $3,377,200, which is 0.50% of the initial Pool Balance. However,
any scheduled reduction to the Overcollateralization Target Amount described in
the preceding sentence shall not be made as of any Payment Date unless the Loss
and Delinquency Tests are satisfied. In addition, the Overcollateralization
Target Amount may be reduced with the prior written consent of the Rating
Agencies.
"POOL BALANCE" means, with respect to any date, the aggregate of the
sum of the Principal Balances of all Mortgage Loans conveyed to the Trust as of
that date and amounts, if any, on deposit in the Funding Account and the
Pre-Funding Account.
"PRINCIPAL COLLECTIONS" means, with respect to any Payment Date and
Loan Group (and for all Loan Groups, the sum for each Loan Group), the aggregate
of the following amounts:
(i) the total amount of payments made by or on behalf of the related
Mortgagors, received and applied as payments of principal on such Mortgage Loans
in the related Loan Group during the related Collection Period, as reported by
the Master Servicer or the related Subservicer;
(ii) any Liquidation Proceeds allocable as a recovery of principal
received in connection with such Mortgage Loans in the related Loan Group during
the related Collection Period;
(iii) if such Mortgage Loan (or Mortgage Loans) in the related Loan
Group was purchased by the Transferor pursuant to the Mortgage Loan Sale
Agreement during the related Collection Period, 100% of the Principal Balance
thereof as of the date of such purchase; and
(iv) other amounts received as payments on or proceeds of such Mortgage
Loans in the related Loan Group during the Collection Period, to the extent
applied in reduction of the Principal Balance thereof.
(v) amounts remaining in the Pre-Funding Account at the end of
the Pre-Funding Period with respect to such Loan Group and not transferred to
the Funding Account; and
(vi) with respect to Loan Group III amounts remaining in the Funding
Account at the end of the Managed Amortization Period.
"PRINCIPAL COLLECTION DISTRIBUTION AMOUNT" means, with respect to any
Payment Date, the total Principal Collections for that Payment Date minus (1)
any Overcollateralization Release Amount for such Payment Date and (2) during
the Managed Amortization Period, Principal Collections for Loan Group III used
by the Trust to acquire Additional Balances during the related Collection
Period.
"SENIOR ENHANCEMENT PERCENTAGE" means, with respect to any Payment
Date, the percentage obtained by dividing:
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o the excess of (a) the Pool Balance as of the first day of the related
Collection Period over (b) the aggregate Note Balance of the Class A
Notes immediately prior to such Payment Date, by
o the Pool Balance as of the first day of the related Collection Period.
"STEP-DOWN DATE" means the first Payment Date occurring after the
Payment Date in September 2004 as to which the aggregate Note Balance of the
Class A Notes (after applying payments received in the related Collection
Period) will be able to be reduced on such Payment Date (such determination to
be made by the Master Servicer prior to the Indenture Trustee making actual
distributions on such Payment Date) to an amount equal to the excess, if any, of
(a) the Pool Balance as of such Payment Date (after applying payments received
in the related Collection Period) over (b) the greater of (i) approximately
9.00% of the Pool Balance as of the end of the related Collection Period, and
(ii) 4.50% of the initial Pool Balance, provided that the Loss and Delinquency
Tests have been satisfied.
"VARIABLE FUNDING BALANCE" means, with respect to the Payment Date and
the Variable Funding Note, the sum of the Aggregate Balance Differential for the
Variable Funding Note immediately prior to such Payment Date reduced by all
distributions of principal on the Variable Funding Note prior to the Payment
Date.
PRIORITY OF DISTRIBUTIONS MAY CHANGE UPON AN EVENT OF DEFAULT
Upon the occurrence and continuation of any Event of Default described
below under "Description of the Trust Agreement and Indenture--Events of
Default," the Indenture Trustee or Noteholders of a majority of the aggregate
Note Balance of either the Class A Notes or the Subordinate Notes may accelerate
the maturity of the Notes. Acceleration of the Notes will result in a change in
the priority of payments. The Class A Noteholders must be paid in full before
any distributions of interest or principal may be made on the Class M-1 Notes,
the Class M-2 Notes or the Class B-1 Notes, the Class M-1 Noteholders must be
paid in full before any distribution of interest or principal may be made on the
Class M-2 Notes and Class M-2 Noteholders must be paid in full before any
distributions of interest or principal may be made on the Class B-1 Notes. The
Class A Notes will be paid pro rata.
Following an Event of Default, the Indenture Trustee may elect to
liquidate the Mortgage Loans and the other property of the Trust, subject to the
requirements set forth in the prospectus and this prospectus supplement under
"Description of the Trust Agreement and Indenture--Events of Default."
Irrespective of the type of Event of Default, upon such a liquidation of
Mortgage Loans, (1) the Class A Noteholders will be paid pro rata, (2) no
amounts will be distributed to the Class M-1, Class M-2 and the Class B-1
Noteholders until all interest and principal due on the Class A Notes has been
paid in full, (3) no amounts will be distributed to the Class M-2 and the Class
B-1 Noteholders until all interest and principal due on the Class M-1 Notes has
been paid in full, and (4) no amounts will be distributed to the Class B-1
Noteholders until all interest and principal due on the Class M-2 Notes has been
paid in full.
OVERCOLLATERALIZATION
The cashflow mechanics of the Trust are intended to create
overcollateralization by using a portion or all of the Excess Spread to make
principal payments on the Notes in an amount equal to the Overcollateralization
Increase Amount. The application of Excess Spread will continue until the
Overcollateralization Amount equals the Overcollateralization Target Amount at
which point such application will cease unless necessary on a later Payment Date
to increase the amount of overcollateralization to the target level. In
addition, the Overcollateralization Target Amount may be permitted to step down
in the future in which case a portion of the Excess Spread will not be used to
make payments to the holders of the Notes but will instead be distributed to the
holders of the Certificates. As a result of these mechanics, the weighted
average lives of the Notes will be different than they would have been in the
absence of such mechanics.
To the extent that the protection provided by the application of Excess
Spread and the availability of overcollateralization are exhausted Noteholders
may incur a loss on their investments. On the Closing Date, the
Overcollaterization Amount will be equal to $1,012,976.
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INTEREST RATE CAP AGREEMENTS
The Trust will have the benefit of three interest rate cap agreements
(the "INTEREST RATE CAP Agreements") between the Trust and Bear Stearns
Financial Products, Inc. (the "INTEREST RATE CAP COUNTERPARTY"), which are
intended to partially mitigate the interest rate risk to the Subordinate Notes
that could result from the difference between one-month LIBOR as it relates to
the interest rates on these Notes and the weighted average Mortgage Interest
Rate on the Mortgage Loans. The Interest Rate Cap Counterparty is rated "AAA" by
S&P and "Aaa" by Moody's. On each Payment Date, payments under the Interest Rate
Cap Agreements will be made based on an amount equal to the product of (x) the
excess of LIBOR over (1) 8.00% for each Payment Date until the March 2004
Payment Date and (2) for each Payment Date after the March 2004 Payment Date,
7.20%, in the case of the Class M-1 Notes, 7.00%, in the case of the Class M-2
Notes and 6.60%, in the case of the Class B-1 Notes, (y) the related Interest
Rate Cap Agreement Notional Balance for that Payment Date and (z) a fraction,
the numerator of which is the actual number of days in the related Interest
Period and the denominator of which is 360. The "INTEREST RATE CAP AGREEMENT
NOTIONAL BALANCES" will initially equal $53,022,000, $43,904,000 and
$43,904,000, for the Class M-1 Notes, Class M-2 Notes and Class B-1 Notes,
respectively, and will decline on each Payment Date based on a schedule
calculated at 100% of the Prepayment Assumptions for Loan Groups I and II and
CPR and the constant draw rate for Loan Group III, assuming no losses or
delinquencies until the February 2012 Payment Date and $0 thereafter; provided
that the Interest Rate Cap Agreement Notional Balances will not, on any Payment
Date exceed the Note Balance of the Class M-1 Notes, the Class M-2 Notes or the
Class B-1 Notes, as applicable. Any amounts received from the Interest Rate Cap
Counterparty under any Interest Rate Cap Agreement will be deposited in the
Trustee Collection Account and will be referred to in this prospectus supplement
as "INTEREST RATE CAP AGREEMENT PAYMENTS."
ALLOCATION OF LOSSES ON THE MORTGAGE LOANS
On each Payment Date, Liquidation Loss Amounts incurred on the Mortgage
Loans in the related Collection Period, to the extent not covered by Excess
Spread or a reduction in the Overcollateralization Amount on such Payment Date
(but not a reduction to less than zero), will be allocated first to reduce the
Note Balance of the Class B-1 Notes, until the outstanding Note Balance has been
reduced to zero, second to reduce the Note Balance of the Class M-2 Notes, until
the outstanding Note Balance has been reduced to zero, third to reduce the Note
Balance of the Class M-1 Notes, until the outstanding Note Balance has been
reduced to zero, and last to reduce the Note Balance of the Class A Notes until
the outstanding Note Balances have been reduced to zero. Liquidation Loss
Amounts allocated to Class A Notes shall be allocated to the Class A notes, on a
pro rata basis.
The reduction of the Note Balance of any class of Notes by application
of Liquidation Loss Amounts will entitle such class to reimbursement for such
amount, with interest thereon, in accordance with the payment priorities
specified in this prospectus supplement. Payment of that reimbursement amount
will not further reduce the Note Balance of the applicable class. Further, after
the Note Balance of any class has been reduced to zero, that class will no
longer be entitled to reimbursement.
THE PAYING AGENT
The Paying Agent shall initially be the Indenture Trustee, together
with any successor thereto. The Paying Agent shall have the revocable power to
withdraw funds from the Note Payment Account for the purpose of making payments
to the Noteholders.
MATURITY AND OPTIONAL REDEMPTION
Each class of Notes will be payable in full on its Legal Final Payment
Date specified above under "Summary" (the "LEGAL FINAL PAYMENT DATE"), in each
case to the extent of any accrued and unpaid interest and the outstanding
related Note Balance on such date, if any.
In addition, the Master Servicer may, at its option and at its sole
expense, repurchase all but not less than all of the Mortgage Loans, and thereby
cause a full redemption of the aggregate outstanding Note Balance of the Notes,
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on any Payment Date on which the aggregate Principal Balance of the Mortgage
Loans (after applying payments received in the related Collection Period) is
reduced to an amount less than or equal to 10% of the sum of (x) the aggregate
Principal Balance of the Initial Mortgage Loans as of the Cut-Off Date and (y)
the amount on deposit in the Pre-Funding Account on the Closing Date. In the
event that all of the Mortgage Loans are purchased by the Master Servicer, the
purchase price will be equal to the sum of the aggregate Principal Balances of
the Mortgage Loans so repurchased and accrued and unpaid interest thereon at the
weighted average of the related Mortgage Interest Rates on such Mortgage Loans
through the day preceding the Payment Date on which such purchase occurs plus
any Interest Carry-Forward Amounts and any amounts owed to the Indenture Trustee
and the Administrator. In addition, if the Notes are redeemed prior to the
Payment Date in March 2004, the Class A-IO Notes will be entitled to receive
their adjusted issue price, which will be approximately equal to the present
value of the remaining payments on the Class A-IO Notes, using a discount rate
equal to the discount rate reflected in the price paid by the initial purchaser
of the Class A-IO Notes on the Closing Date.
DESCRIPTION OF THE MORTGAGE LOAN SALE AGREEMENT AND
THE PURCHASE AND SALE AGREEMENT
ASSIGNMENT OF MORTGAGE LOANS
Pursuant to the Mortgage Loan Sale Agreement between Irwin Union Bank
and Trust Company, as seller (in such capacity, "IUB") and the Transferor, as
purchaser, IUB will sell, transfer, assign, set over and otherwise convey the
Initial Mortgage Loans without recourse to the Transferor on the Closing Date,
and thereafter, until the end of the Managed Amortization Period, all Additional
Balances relating thereto created on or after the initial Cut-Off Date. Pursuant
to the Purchase and Sale Agreement between the Transferor and the Depositor, the
Transferor will sell, transfer, assign, set over and otherwise convey the
Initial Mortgage Loans without recourse to the Depositor on the Closing Date,
and thereafter, until the end of the Managed Amortization Period, all Additional
Balances relating thereto created on or after the initial Cut-Off Date. Pursuant
to the Sale and Servicing Agreement, the Depositor will sell, transfer, assign,
set over and otherwise convey without recourse to the Trust in trust for the
benefit of the Securityholders all right, title and interest in and to each
Initial Mortgage Loan on the Closing Date, and thereafter, until the end of the
Managed Amortization Period all Additional Balances relating thereto created on
or after the initial Cut-Off Date. Pursuant to the terms of one or more
Subsequent Transfer Agreements among IUB, the Transferor, the Issuer and the
Indenture Trustee, IUB will sell, transfer, assign, set over and otherwise
convey the Subsequent Mortgage Loans to the Trust on the related Subsequent
Transfer Date, and thereafter, until the end of the Pre-Funding Period. Each
such transfer will convey all right, title and interest in and to (a) principal
due to the extent of the Principal Balance and (b) interest accrued after the
related Cut-Off Date; provided, however, that IUB will not convey, and IUB
reserves and retains all its right, title and interest in and to principal
(including principal prepayments in full and curtailments (i.e., partial
prepayments)) received on each such Mortgage Loan or Additional Balance on or
prior to the related Cut-Off Date.
In connection with such transfer and assignment, the Depositor will
cause to be delivered to the Indenture Trustee on the Closing Date or Subsequent
Transfer Date, as applicable, the following documents (collectively, with
respect to each Mortgage Loan, the "TRUSTEE'S MORTGAGE FILE") with respect to
each Mortgage Loan:
o The original Loan Agreement endorsed without recourse in blank;
o In the case of the HELs, the original Mortgage Note, endorsed by the
holder of record without recourse in the following form: "Pay to the
order of __________________________ without recourse" and signed in the
name of the holder of record, and if by the Transferor, by an
authorized officer;
o The original Mortgage with evidence of recording indicated thereon;
provided, however, that if such Mortgage has not been returned from the
applicable recording office, then such recorded Mortgage shall be
delivered when so returned;
o An assignment of the original Mortgage, in suitable form for
recordation in the jurisdiction in which the related Mortgaged Property
is located, in the name of the holder of record of the Mortgage Loan by
an
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authorized officer (with evidence of submission for recordation of such
assignment in the appropriate real estate recording office for such
Mortgaged Property for Mortgaged Properties located in Florida, to be
received by the Indenture Trustee within 120 days of the Closing Date
or the Subsequent Transfer Date, as applicable); provided, however,
that assignments of Mortgages for all other states will be recorded
upon the earlier to occur of (i) the occurrence of any Event of
Default, or (ii) a bankruptcy or insolvency proceeding involving the
Mortgagor is initiated or foreclosure proceedings are initiated against
the Mortgaged Property as a consequence of an event of default under
the Mortgage Loan; provided, further, that if the related Mortgage has
not been returned from the applicable recording office, then such
assignment shall be delivered when so returned (and a blanket
assignment with respect to such Mortgage shall be delivered on the
Closing Date);
o Any intervening assignments of the Mortgage with evidence of recording
thereon; and
o Any assumption, modification, consolidation or extension agreements.
Pursuant to the Sale and Servicing Agreement, the Indenture Trustee
agrees to execute and deliver on or prior to the Closing Date an acknowledgment
of receipt for each Mortgage Loan, the original Mortgage Note, item (b) above,
with respect to the Mortgage Loans (with any exceptions noted). The Indenture
Trustee agrees, for the benefit of the Securityholders, to review (or cause to
be reviewed) each Trustee's Mortgage File within 120 days after the Closing Date
(or, with respect to any Qualified Substitute Mortgage Loan, within 90 days
after the receipt by the Indenture Trustee thereof) and to deliver a
certification generally to the effect that, as to each Mortgage Loan listed in
the Mortgage Loan Schedule, (a) all documents required to be delivered to it
pursuant to the Mortgage Loan Sale Agreement are in its possession, (b) each
such document has been reviewed by it and has not been mutilated, damaged, torn
or otherwise physically altered, appears regular on its face and relates to such
Mortgage Loan, and (c) based on its examination and only as to the foregoing
documents, certain information set forth on the Mortgage Loan Schedule
accurately reflects the information set forth in the Trustee's Mortgage File
delivered on such date.
If the Indenture Trustee, during the process of reviewing the Trustee's
Mortgage Files finds any document constituting a part of a Trustee's Mortgage
File which is not executed, has not been received or is unrelated to the
Mortgage Loans, or that any Mortgage Loan does not conform to the requirements
above or to the description thereof as set forth in the Mortgage Loan Schedule,
the Indenture Trustee, shall promptly so notify the Indenture Trustee, the
Master Servicer and the Transferor. The Transferor agrees to use reasonable
efforts to cause to be remedied a material defect in a document constituting
part of a Trustee's Mortgage File of which it is so notified by the Indenture
Trustee. If, however, within 120 days after the Indenture Trustee's notice to it
respecting such defect the Transferor has not caused to be remedied the defect
and the defect materially and adversely affects the interest of the Holders in
the Principal Balance of the Mortgage Loan, the Transferor will either (i)
substitute in lieu of such Mortgage Loan a Qualified Substitute Mortgage Loan
and, if the then outstanding principal balance of such Qualified Substitute
Mortgage Loan is less than the applicable Principal Balance of such Mortgage
Loan as of the date of such substitution plus accrued and unpaid interest
thereon, deliver to the Master Servicer as part of the related monthly
remittance remitted by the Master Servicer the amount of any such shortfall (the
"SUBSTITUTION ADJUSTMENT") or (ii) purchase such Mortgage Loan at a price equal
to the outstanding Principal Balance of such Mortgage Loan as of the date of
purchase, plus the greater of (x) all accrued and unpaid interest thereon or (y)
30 days' interest thereon, computed at the related Mortgage Interest Rate, plus
the amount of any unreimbursed servicing advances made by the Master Servicer,
which purchase price shall be deposited in the Collection Account or Trustee
Collection Account on the next succeeding Determination Date after deducting
therefrom any amounts received in respect of such repurchased Mortgage Loan or
Mortgage Loans and being held in the Collection Account or Trustee Collection
Account for future distribution to the extent such amounts have not yet been
applied to principal or interest on such Mortgage Loan or Mortgage Loans (see
"Description of the Notes--Priority of Distributions" above).
A "QUALIFIED SUBSTITUTE MORTGAGE LOAN" is defined in the Indenture as
any mortgage loan or mortgage loans which will be assigned to the same Loan
Group as the deleted Mortgage Loan which (i) relates or relate to a detached
one-family residence or to the same type of residential dwelling as the deleted
Mortgage Loan and in each case has or have the same or a better lien priority as
the deleted Mortgage Loan with a Borrower having the same or
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better traditionally ranked credit status and is an owner-occupied Mortgaged
Property, (ii) matures or mature no later than (and not more than one year
earlier than) the deleted Mortgage Loan, (iii) has or have a Combined
Loan-to-Value Ratio or Combined Loan-to-Value Ratios at the time of such
substitution no higher than the Combined Loan-to-Value Ratio of the deleted
Mortgage Loan, (iv) has or have a principal balance or principal balances (after
application of all payments received on or prior to the date of
substitution)(which shall be the Principal Balance or Principal Balances
thereof) not substantially less and not more than the Principal Balance of the
deleted Mortgage Loan as of such date, and (v) complies or comply as of the date
of substitution with each representation and warranty set forth in the Purchase
and Sale Agreement.
REPRESENTATIONS AND WARRANTIES OF IUB AND THE TRANSFEROR
IUB and the Transferor will represent, among other things, with respect
to each Mortgage Loan, as of the Closing Date, the following:
o The information set forth in the Mortgage Loan Schedule with respect
to each Mortgage Loan is true and correct;
o Immediately prior to the sale of the Mortgage Loans to the Depositor,
the Transferor was the sole owner and holder thereof free and clear of
any and all liens and security interests; and
o The Mortgage Loan Sale Agreement constitutes a legal, valid and binding
obligation of IUB and the Transferor and the Purchase and Sale
Agreement constitutes a valid transfer and assignment to the Depositor
of all right, title and interest of the Transferor in and to the
Mortgage Loans and the proceeds thereof.
The benefit of the representations and warranties assigned or made to
the Depositor by the Transferor in the Purchase and Sale Agreement will be
assigned by the Depositor to the Trust pursuant to the Sale and Servicing
Agreement.
Pursuant to the Sale and Servicing Agreement, upon the discovery by any
of the Securityholders, the Master Servicer, the Transferor or the Indenture
Trustee that any of the representations and warranties contained in the Mortgage
Loan Sale Agreement or the Purchase and Sale Agreement have been breached in any
material respect as of the Closing Date, with the result that the interests of
the Securityholders in the related Mortgage Loan were materially and adversely
affected (notwithstanding that such representation and warranty was made to the
Transferor's best knowledge), the party discovering such breach is required to
give prompt written notice to the others of such breach. Subject to certain
provisions of the Mortgage Loan Sale Agreement and the Purchase and Sale
Agreement, within 120 days of the earlier to occur of the Transferor's or IUB's
discovery or its receipt of written notice of any such breach, the Transferor or
IUB will (a) promptly cure such breach in all material respects, (b) remove each
Mortgage Loan which has given rise to the requirement for action by the
Transferor or IUB to substitute one or more Qualified Substitute Mortgage Loans
and, if the outstanding principal amount of such Qualified Substitute Mortgage
Loans as of the date of such substitution is less than the outstanding Principal
Balance, plus accrued and unpaid interest thereon of the replaced Mortgage Loans
as of the date of substitution, deliver to the Trust as part of the amounts
remitted by the Master Servicer on such Payment Date the amount of such
shortfall, or (c) purchase such Mortgage Loan at a price equal to the Principal
Balance of such Mortgage Loan as of the date of purchase plus the greater of (i)
all accrued and unpaid interest thereon and (ii) 30 days' interest thereon
computed at the Mortgage Interest Rate, plus the amount of any unreimbursed
servicing advances made by the Master Servicer, and deposit such purchase price
into the Trustee Collection Account on the next succeeding Determination Date
after deducting therefrom any amounts received in respect of such repurchased
Mortgage Loan or Loans and being held in the Trustee Collection Account or the
Collection Account for future distribution to the extent such amounts have not
yet been applied to principal or interest on such Mortgage Loan. The obligation
of the Transferor to cure such breach or to substitute or purchase any Mortgage
Loan constitutes the sole remedy respecting a material breach of any such
representation or warranty to the Securityholders and the Indenture Trustee.
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DESCRIPTION OF THE SALE AND SERVICING AGREEMENT
The following summary describes certain terms of the sale and servicing
agreement dated as of August 31, 2001 (the "SALE AND SERVICING AGREEMENT"),
among the Trust, the Depositor, the Transferor, the Indenture Trustee and the
Master Servicer. Such summary does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the provisions of the Sale and
Servicing Agreement. See "Servicing of the Mortgage Loans" herein and "Servicing
of Loans" and "The Agreements" in the Prospectus.
THE MASTER SERVICER
Irwin Union Bank and Trust Company will be Master Servicer of the
Mortgage Loans; provided, that the Mortgage Loans may be serviced by one or more
subservicers designated by the Master Servicer pursuant to subservicing
agreements between the Master Servicer and such subservicers. Initially, the
Subservicer will act as sole subservicer of the Mortgage Loans on behalf of the
Master Servicer. For a general description of the Master Servicer and its
activities, see "The Master Servicer" and "Servicing of the Mortgage Loans"
herein.
COLLECTIONS
The Master Servicer will establish an account (the "COLLECTION
ACCOUNT") into which the Master Servicer will deposit or cause to be deposited
any amounts representing payments on and any collections received on or in
respect of the Mortgage Loans received by it subsequent to the initial Cut-Off
Date. On the 20th day of each month or, if such day is not a Business Day, the
immediately succeeding Business Day (each, a "DETERMINATION Date"), the Master
Servicer will notify the Paying Agent and the Indenture Trustee of the amounts
required to be withdrawn from the Collection Account and deposited into an
Eligible Account established with and maintained by the Indenture Trustee (the
"TRUSTEE COLLECTION ACCOUNT") prior to the close of business on the last
Business Day that is at least three days prior to the related Payment Date. On
each Payment Date, the Indenture Trustee will deposit such amounts into the Note
Payment Account (the "NOTE PAYMENT ACCOUNT") or the Certificate Distribution
Account (the "CERTIFICATE DISTRIBUTION ACCOUNT"), as applicable, for payment to
the related Securityholders in accordance with the priorities set forth in the
Indenture.
All Collections will generally be allocated in accordance with the
related mortgage documents between amounts collected in respect of interest and
principal, respectively.
"COLLECTION PERIOD" means, with respect to any Mortgage Loan and
Payment Date, the calendar month preceding any such Payment Date.
"EXCLUDED AMOUNT" will mean the portion of the Principal Balance of any
HELOC attributable to draws made after the end of the Managed Amortization
Period. Excluded Amounts will not be transferred to the Trust, and the portion
of the collections of principal and interest on the related HELOC for each
Collection Period after the end of the Managed Amortization Period will be
allocated, pro rata, between the Excluded Amount and the Principal Balance of
such HELOC in the Trust in proportion to the respective amounts outstanding as
of the end of the calendar month preceding such Collection Period.
"LIQUIDATION PROCEEDS" means the proceeds, including Insurance
Proceeds, if any, received in connection with the liquidation of any Mortgage
Loan or any related Mortgaged Property or REO Property, whether through
trustee's sale, foreclosure sale or otherwise, net of related liquidation
expenses (but not including the portion, if any, of such amount that exceeds the
Principal Balance of the related Mortgage Loan at the end of the Collection
Period immediately preceding the Collection Period in which such Mortgage Loan
became a Liquidated Mortgage Loan).
"PRINCIPAL BALANCE" means, with respect to any Mortgage Loan (other
than a Liquidated Mortgage Loan) and as of any day, the related Cut-Off Date
principal balance, plus, in the case of a HELOC, any Additional Balances thereof
conveyed to the Trust, minus, in the case of all Mortgage Loans, all collections
credited as principal in respect of any such Mortgage Loan in accordance with
the related mortgage documents (except for any such collections allocable to any
Excluded Amount) and applied in reduction of the Principal Balance thereof. A
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Liquidated Mortgage Loan will be deemed to have a Principal Balance equal to the
Principal Balance of the related Mortgage Loan immediately prior to the final
recovery of substantially all related Liquidation Proceeds, and a Principal
Balance of zero thereafter.
DESCRIPTION OF THE TRUST AGREEMENT AND INDENTURE
The following summary describes certain terms of the Trust Agreement
and the Indenture. Such summary does not purport to be complete and is subject
to, and qualified in its entirety by reference to, the respective provisions of
the Trust Agreement and the Indenture. See "The Agreements" in the Prospectus.
The Trust Estate. Simultaneously with the issuance of the Notes, the
Issuer will pledge the Trust Estate to the Indenture Trustee as collateral for
the Notes. As pledgee of the Mortgage Loans, the Indenture Trustee will be
entitled to direct the Issuer in the exercise of all rights and remedies of the
Trust against the Transferor under the Purchase and Sale Agreement and against
the Master Servicer under the Sale and Servicing Agreement.
Reports To Noteholders. The Indenture Trustee will, to the extent such
information is provided to it by the Master Servicer pursuant to the terms of
the Sale and Servicing Agreement, make available to each Noteholder and each
Rating Agency and the Depositor, a report setting forth certain amounts relating
to the Notes for each Payment Date, including, without limitation, the amount of
the payment on such Payment Date, the amount of such distribution allocable to
principal and allocable to interest, the aggregate outstanding principal amount
of each Note as of such Payment Date, the amount of any Interest Rate Cap
Agreement Payments for such Payment Date and such other information as required
by the Sale and Servicing Agreement.
The Indenture Trustee will make such report (and, at its option, any
addition files containing the same information in an alternative format)
available each month to the Noteholders, via the Indenture Trustee's internet
website. The Indenture Trustee's internet website shall initially be located at
www.ctslink.com. Assistance in using the website can be obtained by calling the
Indenture Trustee's customer service desk at (301) 815-6610. Parties that are
unable to use the above distribution option are entitled to have a paper copy
mailed to them via first class mail by calling the customer service desk and
indicating such. The Indenture Trustee shall have the right to change the way
such reports are distributed in order to make such distribution more convenient
and/or more accessible to the above parties and the Indenture Trustee shall
provide timely and adequate notification to all above parties regarding any such
changes.
Certain Covenants. The Indenture will provide that the Issuer may
not consolidate or merge with or into any other Person, unless:
o the Person (if other than the Issuer) formed by or surviving such
consolidation or merger will be a Person organized and existing under
the laws of the United States of America or any state, and will
expressly assume, by an indenture supplemental hereto, executed and
delivered to the Indenture Trustee, in form reasonably satisfactory to
the Indenture Trustee, the due and punctual payment of the principal of
and interest on all Notes, and to the Certificate Paying Agent, on
behalf of the Noteholders, and the performance or observance of every
agreement and covenant of the Indenture on the part of the Issuer to be
performed or observed;
o immediately after giving effect to such transaction, no Event of
Default shall have occurred and be continuing;
o no Rating Agency, after prior notice thereto, shall have notified the
Issuer that such transaction would cause such Rating Agency's
then-current rating of the Offered Notes to be qualified, reduced or
withdrawn, or to be considered by either Rating Agency to be below
investment grade;
o the Issuer shall have received an Opinion of Counsel (and will have
delivered a copy thereof to the Indenture Trustee) to the effect that
such transaction will not have any material adverse tax consequence to
the Issuer or any Noteholder;
S-81
o any action necessary to maintain the lien and security interest
created by the Indenture shall have been taken; and
o the Issuer shall have delivered to the Indenture Trustee an officer's
certificate and an opinion of counsel each stating that such
consolidation or merger and such supplemental indenture comply with
certain provisions of the Indenture and that all conditions precedent
therein provided for relating to such transaction have been complied
with (including any filing required by the Securities Exchange Act of
1934, as amended).
Modification of Indenture. The Indenture provides that, without the
consent of the Holders of any Notes, but with prior notice to the Issuer and the
Indenture Trustee, when authorized by a request of the Issuer pursuant to the
Indenture, at any time and from time to time, may enter into one or more
supplemental indentures (which will conform to the provisions of the Trust
Indenture Act of 1939, as amended (the "TIA"), as in force at the date of the
execution thereof), in form satisfactory to the Indenture Trustee, for any of
the following purposes:
o to correct or amplify the description of any property at any time
subject to the lien of the Indenture, or better to assure, convey and
confirm unto the Indenture Trustee any property subject or required to
be subjected to the lien of the Indenture, or to subject to the lien of
the Indenture additional property;
o to evidence the succession, in compliance with the applicable
provisions of the Indenture, of another entity to the Issuer, and the
assumption by any such successor of the covenants of the Issuer
contained in the Notes or the Indenture;
o to add to the covenants of the Issuer for the benefit of the Holders
of the Notes, or to surrender any right or power conferred upon the
Issuer in the Indenture;
o to convey, transfer, assign, mortgage or pledge any property to or
with the Indenture Trustee;
o to cure any ambiguity, to correct or supplement any provision in the
Indenture or in any supplemental indenture that may be inconsistent
with any other provision in the Indenture or in any supplemental
indenture;
o to make any other provisions with respect to matters or questions
arising under the Indenture or in any supplemental indenture; provided,
that such action will not materially and adversely affect the interests
of the Noteholders;
o to evidence and provide for the acceptance of the appointment under the
Indenture by a successor trustee with respect to the Notes and to add
to or change any of the provisions of the Indenture as will be
necessary to facilitate the administration of the trusts thereunder by
more than one trustee, pursuant to the requirements of the Indenture;
or
o to modify, eliminate or add to the provisions of the Indenture to such
extent as will be necessary to effect the qualification of the
Indenture under the TIA or under any similar federal statute enacted
after the date of the Indenture and to add to the Indenture such other
provisions as may be expressly required by the TIA;
provided, however, that no such supplemental indentures will be entered into
unless the Indenture Trustee shall have received an Opinion of Counsel to the
effect that entering into such supplemental indenture will not have any material
adverse tax consequences to the Noteholders.
The Indenture also provides that the Issuer and the Indenture Trustee,
when authorized by an Issuer Request, also may, with prior notice to each Rating
Agency and with the consent of the Holders of Notes affected thereby
representing not less than a majority of the aggregate Note Balance thereof,
enter into a supplemental indenture for the purpose of adding any provisions to,
or changing in any manner or eliminating any of the
S-82
provisions of, the Indenture or of modifying in any manner the rights of the
Noteholders thereunder; provided, that no such supplemental indenture may,
without the consent of the Holder of each Note affected thereby:
o change the date of payment of any installment of principal of or
interest on any Note, or reduce the principal amount thereof or the
interest rate thereon, change the provisions of the Indenture relating
to the application of collections on, or the proceeds of the sale of,
the Trust Estate to payment of principal of or interest on the Notes,
or change any place of payment where, or the coin or currency in which,
any Note or the interest thereon is payable, or impair the right to
institute suit for the enforcement of the provisions of the Indenture
requiring the application of funds available therefor to the payment of
any such amount due on the Notes on or after the respective dates such
amounts become due;
o reduce the percentage of the Note Balances of the Notes, the consent of
the Holders of which is required for any such supplemental indenture,
or the consent of the Holders of which is required for any waiver of
compliance with certain provisions of the Indenture or certain defaults
thereunder and their consequences provided for in the Indenture;
o modify or alter the provisions of the proviso to the definition of the
term "Outstanding" in the Indenture or modify or alter the exception
in the definition of the term "Holder" therein;
o reduce the percentage of the Note Balances of the Notes required to
direct the Indenture Trustee to direct the Issuer to sell or liquidate
the Trust pursuant to the Indenture;
o modify any provision of the amendment provisions of the Indenture
except to increase any percentage specified in the Indenture or to
provide that certain additional provisions of the Indenture cannot be
modified or waived without the consent of the Holder of each Note
affected thereby;
o modify any of the provisions of the Indenture in such manner as to
affect the calculation of the amount of any payment of interest or
principal due on any Note on any Payment Date (including the
calculation of any of the individual components of such calculation);
or
o permit the creation of any lien ranking prior to or on a parity with
the lien of the Indenture with respect to any part of the Trust or,
except as otherwise permitted or contemplated in the Indenture,
terminate the lien of the Indenture on any property at any time subject
thereto or deprive the Holder of any Note of the security provided by
the lien of the Indenture; and provided, further, that such action will
not, as evidenced by an opinion of counsel, cause the Issuer to be
subject to an entity level tax.
Certain Matters Regarding the Indenture Trustee and the Issuer. Neither
the Indenture Trustee nor any director, officer or employee of the Indenture
Trustee will be under any liability to the Issuer or the Noteholders for taking
any action or for refraining from the taking of any action in good faith
pursuant to the Indenture, or for errors in judgment; provided, that none of the
Indenture Trustee or any director, officer or employee thereof will be protected
against any liability that would otherwise be imposed on it by reason of its
willful malfeasance, bad faith or negligence in the performance of its duties or
by reason of its reckless disregard of its obligations and duties under the
Indenture. Subject to certain limitations set forth in the Indenture, the
Indenture Trustee and any director, officer, employee or agent thereof will be
indemnified by the Issuer and held harmless against any loss, liability or
expense incurred in connection with investigating, preparing to defend or
defending any legal action, commenced or threatened, relating to the Indenture,
other than any loss, liability or expense incurred by reason of its willful
malfeasance, bad faith or negligence in the performance of its duties under the
Indenture, or by reason of its reckless disregard of its obligations and duties
under the Indenture. All persons into which the Indenture Trustee may be merged
or with which it may be consolidated, or any person resulting from such merger
or consolidation, will be the successor to the Indenture Trustee under the
Indenture.
S-83
Conditions Constituting an Event of Default under the Indenture. An
"EVENT OF DEFAULT" under the Indenture will occur if:
o the full amount of interest due on the Notes is not paid within five
days of the related Payment Date.
o the amount of principal due on a Legal Final Payment Date has not been
paid in full;
o a default in the observance or performance in any material respect of
any covenant or agreement of the Trust made in the Indenture, or any
representation or warranty made by the Trust in the Indenture or in any
certificate delivered pursuant thereto or in connection therewith
having been incorrect as of the time made, and the continuation of any
such default or the failure to cure such breach of a representation or
warranty for a period of 30 days after notice thereof is given to the
trust by the indenture trustee or to the trust and the indenture
trustee by the holders of at least 25% in principal amount of the Class
A Notes or the Subordinate Notes then outstanding; or
o certain events of bankruptcy, insolvency, receivership or liquidation
of the Trust as specified in the Indenture.
While any of the Class A Notes remain outstanding, the failure to pay
interest due on the Class M-1 Notes, Class M-2 Notes and the Class B-1 Notes
will not be an Event of Default. While any Class M-1 Notes are outstanding, the
failure to pay interest due on the Class M-2 Notes and the Class B-1 Notes will
not be an Event of Default. While any Class M-2 Notes remain outstanding, the
failure to pay interest due on the Class B-1 Notes will not be an Event of
Default.
Each Class M-1 Noteholder, Class M-2 Noteholder and Class B-1
Noteholder, by accepting its respective interest in the Class M-1 Notes, Class
M-2 Note or Class B-1 Note, will be deemed to have consented to any such delay
in payment of interest on such class of Notes and to have waived its right to
institute a suit for enforcement of any such payment, in each case in the
circumstances and to the extent described above.
Rights upon Event of Default. Upon an Event of Default under the
Indenture, holders of the Class A Notes in the aggregate or the Subordinate
Notes in the aggregate will have the rights set forth in the prospectus under
"The Agreements -- Events of Default; Rights upon Event of Default -- Indenture"
including the right to declare all of the Notes to be immediately due and
payable.
Under the Trust Indenture Act of 1939, the Indenture Trustee may be
deemed to have a conflict of interest and be required to resign as trustee for
the Class A Notes, the Class M-1 Notes, the Class M-2 Notes or the Class B-1
Notes if a default occurs under the Indenture. In these circumstances, the
indenture will provide for a successor trustee to be appointed for one or all of
the Class A Notes, the Class M-1 Notes, Class M-2 Notes and the Class B Notes.
If the Indenture Trustee relating to any class of Notes resigns, its
resignation will become effective only after a successor Indenture Trustee for
that class of Notes is appointed and the successor accepts the appointment.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Stroock & Stroock & Lavan LLP, for federal income tax
purposes, the Offered Notes will be characterized as indebtedness and neither
the Issuer nor any portion of the Issuer, as created pursuant to the terms and
conditions of the Trust Agreement, will be characterized as an association (or
publicly traded partnership within the meaning of section 7704 of the Code)
taxable as a corporation or as a taxable mortgage pool within the meaning of
section 7701(i) of the Code.
For federal income tax purposes, the Offered Notes, other than the
Class A-IO Offered Notes, will not be treated as having been issued with
"original issue discount" (as defined in the prospectus). See "Certain Federal
Income Tax Considerations" in the prospectus.
S-84
The Offered Notes will not be treated as assets described in Section
7701(a)(19)(C) of the Code and will not be treated as "real estate assets" under
Section 856(c)(4)(A) of the Code. In addition, interest on the Offered Notes
will not be treated as "interest on obligations secured by mortgages on real
property" under Section 856(c)(3)(B) of the Code. The Offered Notes also will
not be treated as "qualified mortgages" under Section 860G(a)(3)(C) of the Code.
Prospective investors in the Offered Notes should see "Certain Federal
Income Tax Considerations" and "State Tax Considerations" in the prospectus for
a discussion of the application of certain federal income and state and local
tax laws to the Issuer and purchasers of the Offered Notes.
ERISA CONSIDERATIONS
Any fiduciary or other investor of Plan assets that proposes to acquire
or hold the Offered Notes on behalf of or with Plan assets of any Plan should
consult with its counsel with respect to the application of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and the Code to the proposed investment. See "ERISA Considerations" in the
prospectus.
Each purchaser of a Offered Note, by its acceptance of such Offered
Note, shall be deemed to have represented that a class or individual exemption
under section 406 of ERISA or section 4975 of the Code is applicable to the
acquisition of the Offered Note by such purchaser or the acquisition of the
Offered Note by such purchaser does not constitute or give rise to a prohibited
transaction under section 406 of ERISA or section 4975 of the Code, for which no
statutory, regulatory or administrative exemption is available. See "ERISA
Considerations" in the prospectus.
Insurance companies contemplating the investment of general account
assets in the Offered Notes should consult with their legal advisors with
respect to the applicability of section 401(c) of ERISA, as described under
"ERISA Considerations" in the prospectus. The DOL issued final regulations under
section 401(c) of ERISA on January 5, 2000.
The Offered Notes may not be purchased with the assets of a Plan if the
Underwriters, Depositor, the Master Servicer, the Indenture Trustee, the Owner
Trustee or any of their affiliates (a) has investment or administrative
discretion with respect to such Plan assets; (b) has authority or responsibility
to give, or regularly gives, investment advice with respect to such Plan assets,
for a fee and pursuant to an agreement or understanding that such advice (i)
will serve as a primary basis for investment decisions with respect to such Plan
assets and (ii) will be based on the particular investment needs for such Plan;
or (c) is an employer maintaining or contributing to such Plan.
The sale of any of the Offered Notes to a Plan is in no respect a
representation by the Issuer or the Underwriters that such an investment meets
all relevant legal requirements with respect to investments by Plans generally
or any particular Plan, or that such an investment is appropriate for Plans
generally or any particular Plan.
LEGAL INVESTMENT
The Offered Notes will not constitute "mortgage related securities" for
purposes of SMMEA. Accordingly, many institutions with legal authority to invest
in mortgage related securities may not be legally authorized to invest in the
Offered Notes. No representation is made herein as to whether the Offered Notes
constitute legal investments for any entity under any applicable statute, law,
rule, regulation or order. Prospective purchasers are urged to consult with
their counsel concerning the status of the Offered Notes as legal investments
for such purchasers prior to investing in Offered Notes.
S-85
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated September 25, 2001 (the "UNDERWRITING AGREEMENT"), between
Bear, Stearns & Co. Inc., as representative (in such capacity, the
"REPRESENTATIVE") of the underwriters named below (the "UNDERWRITERS"), and the
Depositor, the Underwriters have agreed to purchase and the Depositor has agreed
to sell, severally but not jointly, the following principal or notional amounts
of Offered Notes set forth opposite their names below.
PRINCIPAL AMOUNT/NOTIONAL AMOUNT OF:
CLASS IA-1 CLASS IA-2 CLASS IIA-1
NOTES NOTES NOTES
----- ----- -----
UNDERWRITER
Bear, Stearns & Co. Inc. ...................... $21,643,334 $38,333,334 $24,324,000
Credit Suisse First Boston Corporation......... $21,643,333 $38,333,333 $24,324,000
Deutsche Banc Alex. Brown Inc.................. $21,643,333 $38,333,333 $24,324,000
----------- ----------- -----------
Total ................................. $64,930,000 $115,000,000 $72,972,000
=========== ============ ===========
PRINCIPAL AMOUNT/NOTIONAL AMOUNT OF:
CLASS IIA-2 CLASS IIA-3 CLASS IIA-4
NOTES NOTES NOTES
----- ----- -----
UNDERWRITER
Bear, Stearns & Co. Inc. ..................... $ 8,983,000 $16,948,667 $10,368,000
Credit Suisse First Boston Corporation........ $ 8,983,000 $16,948,667 $10,368,000
Deutsche Banc Alex. Brown Inc................. $ 8,983,000 $16,948,666 $10,368,000
----------- ----------- -----------
Total ................................ $26,949,000 $50,846,000 $31,104,000
=========== =========== ===========
PRINCIPAL AMOUNT/NOTIONAL AMOUNT OF:
CLASS IIA-5 CLASS IIIA-1 CLASS A-IO
NOTES NOTES NOTES
----- ----- -----
UNDERWRITER
Bear, Stearns & Co. Inc. .................... $13,932,000 $43,333,334 $54,112,000
Credit Suisse First Boston Corporation....... $13,932,000 $43,333,333 0
Deutsche Banc Alex. Brown Inc................ $13,932,000 $43,333,333 0
----------- ----------- -
Total ............................... $41,796,000 $130,000,000 $54,112,000
=========== ============ ===========
PRINCIPAL AMOUNT/NOTIONAL AMOUNT OF:
CLASS M-1 CLASS M-2 CLASS B-1
NOTES NOTES NOTES
----- ----- -----
UNDERWRITER
Bear, Stearns & Co. Inc. ................... $17,674,000 $14,634,667 $14,634,667
Credit Suisse First Boston Corporation...... $17,674,000 $14,634,667 $14,634,667
Deutsche Banc Alex. Brown Inc............... $17,674,000 $14,634,666 $14,634,666
----------- ----------- -----------
Total .............................. $53,022,000 $43,904,000 $43,904,000
=========== =========== ===========
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The Transferor has been advised by the Underwriters that they propose
initially to offer the Offered Notes to the public at the prices set forth
herein, and to certain dealers at such prices less the initial concession not in
excess of the percentage set forth below for each Class. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of the
percentage set forth below for each Class. After the initial public offering of
the Offered Notes, the public offering price and such concessions and
reallowances may be changed.
CLASS IA-1 CLASS IA-2 CLASS IIA-1
---------- ---------- ------------
Concession............................... 0.0630% 0.1500% 0.0630%
Reallowances............................. 0.0470% 0.1100% 0.0470%
CLASS IIA-2 CLASS IIA-3 CLASS IIA-4
---------- ---------- ------------
Concession............................... 0.1020% 0.1200% 0.1800%
Reallowances............................. 0.0750% 0.0900% 0.1350%
CLASS IIA-5 CLASS IIIA-1 CLASS A-IO
---------- ---------- ------------
Concession............................... 0.2400% 0.1500% 0.1000%
Reallowances............................. 0.1800% 0.1125% 0.0750%
CLASS M-1 CLASS M-2 CLASS B-1
---------- ---------- ------------
Concession............................... 0.3000% 0.3900% 0.4200%
Reallowances............................. 0.2250% 0.2900% 0.3150%
Until the distribution of the Offered Notes is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Offered Notes. As an
exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the price of the Offered Notes. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Offered Notes.
If the Underwriters create a short position in the Offered Notes in
connection with the offering, i.e., if it sells more Offered Notes than are set
forth on the cover page of this Prospectus Supplement, the Underwriters may
reduce that short position by purchasing Offered Notes in the open market.
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither the Transferor nor the Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Offered Notes. In addition, neither
the Transferor nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
It is expected that delivery of the Offered Notes will be made only in
book-entry form through DTC, Clearstream, Luxembourg and Euroclear as discussed
herein, on or about September 28, 2001, against payment therefor in immediately
available funds.
The Underwriting Agreement provides that the obligation of the
Underwriters to pay for and accept delivery of the Offered Notes is subject to,
among other things, the receipt of certain legal opinions and to the conditions,
among others, that no stop order suspending the effectiveness of the Depositor's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
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The Underwriting Agreement provides that the Depositor will indemnify
the Underwriters, and that under limited circumstances the Underwriters will
indemnify the Depositor, against certain civil liabilities under the Securities
Act of 1933, as amended, or contribute to payments required to be made in
respect thereof.
There can be no assurance that a secondary market for the Offered Notes
will develop or, if it does develop, that it will continue. The primary source
of information available to investors concerning the Offered Notes will be the
monthly statements discussed herein under "Description of the Trust Agreement
and Indenture Reports to Offered Noteholders" and in the Prospectus under
"Reports to Holders," which will include information as to the outstanding
principal balance of the Offered Notes. There can be no assurance that any
additional information regarding the Offered Notes will be available through any
other source. In addition, the Depositor is not aware of any source through
which price information about the Offered Notes will be generally available on
an ongoing basis. The limited nature of such information regarding the Offered
Notes may adversely affect the liquidity of the Offered Notes, even if a
secondary market for the Offered Notes becomes available.
The Underwriters have agreed to reimburse the Depositor for certain
expenses of the issuance and distribution of the Offered Notes.
LEGAL MATTERS
Certain legal matters with respect to the Offered Notes will be passed
upon for Irwin Union Bank and Trust Company, IHE Funding Corp. II and Irwin Home
Equity Corporation by Stroock & Stroock & Lavan LLP, New York, New York, and by
Ellen Mufson, Esq. and for the Depositor and the Underwriter by Morgan, Lewis &
Bockius LLP, New York, New York.
RATINGS
It is a condition to issuance that the Offered Notes have the ratings
set forth under "Summary" above. The Depositor has not requested a rating on the
Offered Notes by any rating agency other than the rating agencies listed under
"Summary" above (the "RATING AGENCIES"). However, there can be no assurance as
to whether any other rating agency will rate the Offered Notes, or, if it does,
what rating would be assigned by any such other rating agency. A rating on the
Offered Notes by another rating agency, if assigned at all, may be lower than
the ratings assigned to the Offered Notes under "Summary" above. A securities
rating addresses the likelihood of the receipt by holders of Offered Notes of
distributions on the Mortgage Loans. The rating takes into consideration the
structural and legal aspects associated with the Offered Notes. The ratings on
the Offered Notes do not, however, constitute statements regarding the
possibility that Holders might realize a lower than anticipated yield. The
ratings also do not address the likelihood of the payment of any Interest
Carry-Forward Amounts. A securities rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or withdrawal at any time by
the assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
S-88
INDEX OF DEFINED TERMS
Account Balance..................................S-26
Additional Balances..............................S-36
Additional Charges...............................S-26
Additional Mortgage Loans........................S-23
Aggregate Balance Differential...................S-71
Amortization Event...............................S-71
Appraised Value..................................S-27
Balance Differential.............................S-71
Billing Cycle....................................S-25
Book-Entry Notes.................................S-63
Business Day.....................................S-65
Capitalized Interest Account.....................S-36
Capitalized Interest Requirement.................S-67
Cede.............................................S-63
Certificate Distribution Account.................S-80
Certificates.....................................S-23
Class A Notes....................................S-23
Class A Optimal Principal Balance................S-72
Class B-1 Optimal Principal Balance..............S-72
Class M-1 Optimal Principal Balance..............S-72
Class M-2 Optimal Principal Balance..............S-72
Collection Account...............................S-80
Collection Period................................S-80
Combined Loan-to-Value Ratio.....................S-27
CPR..............................................S-43
Definitive Note..................................S-64
Depositor........................................S-23
Determination Date...............................S-80
Draw Period......................................S-26
Due Date.........................................S-25
European Depositaries............................S-63
Event of Default.................................S-84
Excess Spread....................................S-73
Excluded Amount..................................S-80
Finance Charge...................................S-26
Financial Intermediary...........................S-64
Global Securities.................................S-1
governing instrument.............................S-62
Gross Margin.....................................S-25
Group I Mortgage Loans...........................S-23
Group I Notes....................................S-23
Group II Mortgage Loans..........................S-23
Group II Notes...................................S-23
Group III Mortgage Loans.........................S-23
Group III Notes..................................S-23
HELOCs...........................................S-23
HELs.............................................S-23
Homeownership Act................................S-26
IFC..............................................S-37
IHE..............................................S-37
Indenture........................................S-23
Initial HELOCs...................................S-23
Initial HELs.....................................S-23
Initial Mortgage Loans...........................S-23
Interest Adjustment Date.........................S-27
Interest Carry-Forward Amount....................S-66
Interest Collections.............................S-73
Interest Period..................................S-66
Interest Rate Cap Agreement Notional Balances....S-76
Interest Rate Cap Agreement Payments.............S-76
Interest Rate Cap Agreements.....................S-76
Interest Rate Cap Counterparty...................S-76
Issuer...........................................S-23
IUB..............................................S-77
Legal Final Payment Date.........................S-76
LIBOR Business Day...............................S-67
Lifetime Rate Caps...............................S-25
Lifetime Rate Floors.............................S-25
Liquidated Mortgage Loan.........................S-73
Liquidation Loss Amount..........................S-73
Liquidation Proceeds.............................S-80
Loan Agreement...................................S-24
Loan Group.......................................S-23
Loss and Delinquency Tests.......................S-68
Maximum Variable Funding Balance.................S-63
Monthly Payment..................................S-25
Mortgage Interest Rate...........................S-27
Mortgage Loans...................................S-23
Mortgage Note....................................S-24
Mortgage Sale Agreements.........................S-37
Mortgaged Properties.............................S-24
Mortgages........................................S-24
Mortgagor........................................S-27
Net Principal Collections........................S-73
Non-U.S. Person...................................S-4
Note Balance.....................................S-73
Note Payment Account.............................S-80
Note Rate........................................S-65
Notes............................................S-23
Offered Note Balance.............................S-73
Offered Note Owners..............................S-63
Offered Notes....................................S-23
Overcollateralization Amount.....................S-73
Overcollateralization Increase Amount............S-74
Overcollateralization Release Amount.............S-74
Overcollateralization Target Amount..............S-74
Payment Date.....................................S-65
PNB Trust........................................S-25
Pool Balance.....................................S-74
Pre-Funded Amount................................S-36
S-89
Pre-Funding Account..............................S-36
Pre-Funding Period...............................S-36
Prepayment Assumption............................S-43
Principal Balance................................S-80
Principal Collection Distribution Amount.........S-74
Principal Collections............................S-74
Qualified Substitute Mortgage Loan...............S-78
Rating Agencies..................................S-88
Real estate owned................................S-39
Reference Bank Rate..............................S-66
Relevant Depositary..............................S-63
Repayment Period.................................S-26
Representative...................................S-86
Rules............................................S-64
Sale and Servicing Agreement.....................S-80
Securities.......................................S-23
Senior Enhancement Percentage....................S-74
Servicer Default.................................S-61
Step-down Date...................................S-75
Step-Up Date......................................S-3
Subordinate Notes................................S-23
Subsequent Mortgage Loans........................S-35
Subsequent Transfer Date.........................S-35
Subservicer......................................S-37
Substitution Adjustment..........................S-78
Telerate Page 3750...............................S-66
TIA..............................................S-82
Transferor.......................................S-37
Trust............................................S-23
Trust Agreement..................................S-23
Trust Estate.....................................S-62
Trustee Collection Account.......................S-80
Trustee's Mortgage File..........................S-77
U.S. Person.......................................S-3
Underwriters.....................................S-86
Underwriting Agreement...........................S-86
Variable Funding Balance.........................S-75
Variable Funding Notes...........................S-23
Weighted average life............................S-42
S-90
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Bear
Stearns Asset Backed Securities, Inc., Home Equity Loan-Backed Term Notes,
Series 2001-2 (the "GLOBAL SECURITIES") will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities through
any of DTC, Clearstream, Luxembourg or Euroclear. The Global Securities will be
tradable as home market instruments in both the European and U.S. domestic
markets. Initial settlement and all secondary trades will settle in same-day
funds.
Secondary market trading between investors through Clearstream,
Luxembourg and Euroclear will be conducted in the ordinary way in accordance
with the normal rules and operating procedures of Clearstream, Luxembourg and
Euroclear and in accordance with conventional eurobond practice (i.e., seven
calendar day settlement).
Secondary market trading between investors through DTC will be
conducted according to DTC's rules and procedures applicable to U.S. corporate
debt obligations.
Secondary cross-market trading between Clearstream, Luxembourg or
Euroclear and DTC Participants holding Offered Notes will be effected on a
delivery-against-payment basis through the respective Depositaries of
Clearstream, Luxembourg and Euroclear (in such capacity) and as DTC
Participants.
Beneficial owners of Global Securities that are non-U.S. Persons (as
described below) will be subject to U.S. withholding taxes unless such holders
meet certain requirements and deliver appropriate U.S. tax documents to the
securities clearing organizations or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the
name of Cede as nominee of DTC. Investors' interests in the Global Securities
will be represented through financial institutions acting on their behalf as
direct and indirect Participants in DTC. As a result, Clearstream, Luxembourg
and Euroclear will hold positions on behalf of their participants through their
Relevant Depositary which in turn will hold such positions in their accounts as
DTC Participants.
Investors electing to hold their Global Securities through DTC (other
than through accounts at Euroclear or Clearstream, Luxembourg) will follow DTC
settlement practices. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream,
Luxembourg or Euroclear accounts will follow the settlement procedures
applicable to conventional Eurobonds in registered form. Global Securities will
be credited to the securities custody accounts of Clearstream, Luxembourg and
Euroclear holders on the business day following the settlement date against
payment for value on the settlement date.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important
to establish at the time of the trading of any Global Securities where both the
purchaser's and seller's accounts are located to ensure that settlement can be
made on the desired value date.
Trading between DTC Participants. Secondary market trading between DTC
Participants (other than Morgan Guaranty Trust Company of New York ("Morgan")
and Citibank, N.A. ("Citibank") as depositories for Euroclear and Clearstream,
Luxembourg, respectively) will be settled using the procedures applicable to
U.S. corporate debt obligations in same-day funds.
A-1-1
Trading between Clearstream, Luxembourg and/or Euroclear Participants.
Secondary market trading between Clearstream, Luxembourg Participants or
Euroclear Participants will be settled using the procedures applicable to
conventional eurobonds in same-day funds.
Trading between DTC, Transferor and Clearstream, Luxembourg or
Euroclear Participants. When Global Securities are to be transferred from the
account of a Participant (other than Morgan and Citibank as depositories for
Euroclear and Clearstream, Luxembourg, respectively) to the account of a
Clearstream, Luxembourg customer or a Euroclear Participant, the purchaser must
send instructions to Clearstream, Luxembourg or Euroclear at least one business
day prior to settlement. Clearstream, Luxembourg or Euroclear will instruct the
Relevant Depositary, as the case may be, to receive the Global Securities
against payment. Payment will then be made by Morgan or Citibank a the case may
be, to the Participant's account against delivery of the Global Securities.
After settlement has been completed, the Global Securities will be credited to
the respective clearing system and by the clearing system, in accordance with
its usual procedures, to the Clearstream, Luxembourg customers' or Euroclear
Participant's accounts. The securities credit will appear the next day (European
time) and the cash debt will be back-valued to, and the interest on the Global
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Clearstream, Luxembourg or
Euroclear cash debt will be valued instead as of the actual settlement date.
Clearstream, Luxembourg customers and Euroclear Participants will need
to make available to the respective clearing systems the funds necessary to
process same-day funds settlement. The most direct means of doing so is to
preposition funds for settlement, either from cash on hand or existing lines of
credit, as they would for any settlement occurring within Clearstream,
Luxembourg or Euroclear. Under this approach, they may take on credit exposure
to Clearstream, Luxembourg or Euroclear until the Global Securities are credited
to their account one day later.
As an alternative, if Clearstream, Luxembourg or Euroclear has extended
a line of credit to them, Clearstream, Luxembourg customers or Euroclear
Participants can elect not to preposition funds and allow that credit line to be
drawn upon to finance settlement. Under this procedure, Clearstream, Luxembourg
customers or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one-day period may
substantially reduce or offset the amount of such overdraft charges, although
the result will depend on each Clearstream, Luxembourg Participant's or
Euroclear Participant's particular cost of funds.
Because the settlement is taking place during New York business hours,
Participants can employ their usual procedures for crediting Global Securities
to Morgan or Citibank for the benefit of Clearstream, Luxembourg customers or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two Participants.
Trading between Clearstream, Luxembourg or Euroclear Transferor and DTC
Purchaser. Due to time zone differences in their favor, Clearstream, Luxembourg
customers and Euroclear Participants may employ their customary procedures for
transactions in which Global Securities are to be transferred by the respective
clearing system, through Morgan or Citibank, to another Participant. The seller
will send instructions to Clearstream, Luxembourg or Euroclear through a
Clearstream, Luxembourg Participant or Euroclear Participant at least one
business day prior to settlement. In these cases Clearstream, Luxembourg or
Euroclear will instruct Morgan or Citibank, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. The payment will
then be reflected in the account of Clearstream, Luxembourg Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
Clearstream, Luxembourg Participant's or Euroclear Participant's account would
be back-valued to the value date (which would be the preceding day, when
settlement occurred in New York). If the Clearstream, Luxembourg customer or
Euroclear Participant has a line of credit with its respective clearing system
and elects to draw on such line of credit in anticipation of receipt of the sale
proceeds in its account, the back-valuation may substantially reduce or offset
any overdraft charges incurred over that one-day
A-1-2
period. If settlement is not completed on the intended value date (i.e., the
trade fails), receipt of the cash proceeds in the Clearstream, Luxembourg
customers' or Euroclear Participant's account would instead be valued as of the
actual settlement date.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of 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% U.S. withholding tax that
generally applies to payments of interest (including original issue discount) on
registered debt issued by U.S. Persons (as defined below), unless (i) each
clearing system, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business in the chain of
intermediaries between such beneficial owner and the U.S. entity required to
withhold tax complies with applicable certification requirements and (ii) such
beneficial owner takes one of the following steps to obtain an exemption or
reduced tax rate:
Exemption for non-U.S. Persons (Form W-8BEN). Beneficial owners of
Global Securities that are non-U.S. Persons and are neither "10-percent
shareholders" of the issuer within the meaning of Code Section 871(h)(3)(B) nor
controlled foreign corporations related to the issuer within the meaning of Code
Section 881(c)(3)(C) can obtain a complete exemption from the withholding tax by
filing a signed Form W-8BEN (Certificate of Foreign Status of Beneficial Owner
for United States Tax Withholding). Further, non-U.S. Persons that are
beneficial owners residing in a country that has a tax treaty with the United
States and are eligible for benefits under that treaty can obtain an exemption
or reduced tax rate (depending on the treaty terms) by filing a properly
completed Form W-8BEN claiming eligibility for treaty benefits. If the
information shown on Form W-8BEN changes, a new Form W-8BEN must be filed within
30 days of such change. If the owner of Global Securities is a partnership or
other type of pass-through entity that is not treated for U.S. withholding tax
purposes as the beneficial owner of the income with respect to such Securities,
the owner generally must receive a properly completed Form W-8BEN or other form
or statement describing status for U.S. withholding tax purposes from the
owner's partners or other beneficial owners of the income with respect to the
Securities and may be required to provide such forms or statements, and certain
additional information, to the person through whom the owner holds the
Securities.
Exemption for non-U.S. Persons with effectively connected income (Form
W-8ECI). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form W-8ECI (Certificate of Foreign Person's Claim for
Exemption from Withholding on Income Effectively Connected with the Conduct of a
Trade or Business in the United States). Such non-U.S. Persons will be subject
to U.S. tax at the normal graduated rates in respect of income on the Global
Securities and, in the case of a corporation, possibly also "branch profits"
tax.
Exemption for U.S. Persons (Form W-9). U.S. Persons (as defined below)
can obtain a complete exemption form the withholding tax by filing Form W-9
(Request for Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The beneficial owner of a
Global Security files by submitting the appropriate form to the person through
whom it holds the security (the clearing agency, in the case of persons holding
directly on the books of the clearing agency). If Form W-8BEN contains a
taxpayer identification number, then the form generally remains effective as
long as the information on the form remains unchanged. If Form W-8BEN does not
contain a taxpayer identification number, then the form will expire, and cease
to be effective, not later than the end of the third calendar year following the
year in which the Form W-8BEN is signed. Form W-8ECI generally remains effective
until the end of the third calendar year following the calendar year in which
the Form W-8ECI is signed. The term "U.S. PERSON" means (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
(treated as a corporation or a partnership for federal income tax purposes)
organized in or under the laws of the United States, any state thereof or the
District of Columbia (unless, in the case of a partnership, future Treasury
regulations provide otherwise), (iii) an estate that is subject to U.S. federal
income tax regardless of the source of its income, or (iv) a trust if a court
within the United States is able to exercise primary supervision of the
administration of the trust and one or more United States persons have the
authority to control all
A-1-3
substantial decisions of the trust. Notwithstanding the previous sentence, to
the extent provided in Treasury regulations, certain trusts in existence on
August 20, 1996, and treated as United States persons prior to such date, that
elect to continue to be treated as United States persons will also be U.S.
Persons. The term "NON-U.S. PERSON" means any person who is not a U.S. Person.
This summary does not deal with all aspects of U.S. Federal income tax
withholding that may be relevant to foreign holders of the Global Securities.
Investors are advised to consult their own tax advisors for specific tax advice
concerning their holding and disposing of the Global Securities.
A-1-4
ANNEX II
INITIAL GROUP I MORTGAGE LOANS
LIEN POSITION OF INITIAL GROUP I MORTGAGE LOANS
PERCENTAGE OF
UNPAID STATISTICAL CALCULATION
NUMBER OF INITIAL PRINCIPAL BALANCE DATE PRINCIPAL BALANCE
GROUP I OF INITIAL GROUP I OF INITIAL GROUP I
LIEN POSITION MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOAN
-----------------------------------------------------------------------------------------------------------
First Lien 32 $ 1,781,840.31 1.90%
Second Lien 2,054 90,797,824.82 96.85
Third Lien 32 1,171,607.07 1.25
-----------------------------------------------------------------------------------------------------------
Total 2,118 $93,751,272.20 100.00%
-----------------------------------------------------------------------------------------------------------
MORTGAGE INTEREST RATES OF INITIAL GROUP I MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP I OF INITIAL GROUP I BALANCE OF INITIAL GROUP
MORTGAGE INTEREST RATES (%) MORTGAGE LOANS MORTGAGE LOANS I MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
7.000 to 7.999 80 $ 4,391,171.48 4.68%
8.000 to 8.999 157 7,223,423.49 7.70
9.000 to 9.999 268 13,679,827.15 14.59
10.000 to 10.999 308 14,736,051.80 15.72
11.000 to 11.999 401 18,924,662.33 20.19
12.000 to 12.999 343 15,303,134.67 16.32
13.000 to 13.999 316 12,701,300.85 13.55
14.000 to 14.999 147 4,513,185.84 4.81
15.000 to 15.999 74 1,723,404.64 1.84
16.000 to 16.999 16 327,219.95 0.35
17.000 to 17.999 3 117,884.68 0.13
19.000 to 19.999 4 85,509.50 0.09
20.000 + 1 24,495.82 0.03
-----------------------------------------------------------------------------------------------------------
Total 2,118 $93,751,272.20 100.00%
-----------------------------------------------------------------------------------------------------------
The weighted average mortgage interest rate of the initial Group I
Mortgage Loans as of the Statistical Calculation Date is approximately
11.431% per annum.
A-II-1
COMBINED LOAN-TO-VALUE RATIOS OF INITIAL GROUP I MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
COMBINED LOAN-TO-VALUE GROUP I OF INITIAL GROUP I BALANCE OF INITIAL GROUP
RATIOS (%) MORTGAGE LOANS MORTGAGE LOANS I MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
0.001 to 40.000 13 $ 471,642.48 0.50%
40.001 to 50.000 8 302,502.76 0.32
50.001 to 60.000 32 1,695,919.16 1.81
60.001 to 70.000 60 3,131,347.03 3.34
70.001 to 80.000 171 7,163,427.99 7.64
80.001 to 90.000 442 20,133,783.82 21.48
90.001 to 100.000 1,390 60,735,460.40 64.78
100.001 to 100.002 2 117,188.56 0.12
-----------------------------------------------------------------------------------------------------------
Total 2,118 $93,751,272.20 100.00%
-----------------------------------------------------------------------------------------------------------
The minimum and maximum Combined Loan-to-Value Ratios of the initial
Group I Mortgage Loans as of the Statistical Calculation Date are
approximately 13.84% and 100.002%, respectively, and the weighted average
Combined Loan-to-Value Ratio as of the Statistical Calculation Date of the
initial Group I Mortgages Loans is approximately 91.21%.
A-II-2
INITIAL GROUP I MORTGAGE LOANS
PRINCIPAL BALANCES OF INITIAL GROUP I MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP I OF INITIAL GROUP I BALANCE OF INITIAL GROUP
PRINCIPAL BALANCES MORTGAGE LOANS MORTGAGE LOANS I MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
$0.01 to $25,000.00 557 $11,240,092.72 11.99%
$25,000.01 to $50,000.00 1,007 36,562,804.96 39.00
$50,000.01 to $75,000.00 336 20,707,852.77 22.09
$75,000.01 to $100,000.00 131 11,522,680.49 12.29
$100,000.01 to $125,000.00 30 3,357,461.43 3.58
$125,000.01 to $150,000.00 25 3,456,766.35 3.69
$150,000.01 to $175,000.00 10 1,647,799.91 1.76
$175,000.01 to $200,000.00 11 2,072,564.85 2.21
$200,000.01 to $300,000.00 9 2,263,248.72 2.41
$400,000.01 to $500,000.00 2 920,000.00 0.98
-----------------------------------------------------------------------------------------------------------
Total 2,118 $93,751,272.20 100.00%
-----------------------------------------------------------------------------------------------------------
The average unpaid principal balance of the initial Group I Mortgage
Loans as of the Statistical Calculation Date is approximately $44,264.06.
MORTGAGED PROPERTIES SECURING INITIAL GROUP I MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP I OF INITIAL GROUP I BALANCE OF INITIAL GROUP
PROPERTY TYPE MORTGAGE LOANS MORTGAGE LOANS I MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
Single-Family Dwelling 1,842 $79,798,312.78 85.12%
Condominium 98 3,835,574.19 4.09
Planned Unit Development 156 9,365,510.79 9.99
Multi-Family 9 382,002.25 0.41
Leasehold 13 369,872.19 0.39
-----------------------------------------------------------------------------------------------------------
Total 2,118 $93,751,272.20 100.00%
-----------------------------------------------------------------------------------------------------------
A-II-3
INITIAL GROUP I MORTGAGE LOANS
ORIGINAL TERM TO MATURITY OF INITIAL GROUP I MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP I OF INITIAL GROUP I BALANCE OF INITIAL GROUP
ORIGINAL TERM TO MATURITY MORTGAGE LOANS MORTGAGE LOANS I MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
0 to 60 1 $ 17,966.98 0.02%
61 to 120 278 6,510,245.65 6.94
121 to 180 1,165 49,630,290.19 52.94
181 to 240 205 11,151,184.95 11.89
241 to 300 469 26,441,584.43 28.20
-----------------------------------------------------------------------------------------------------------
Total 2,118 $93,751,272.20 100.00%
-----------------------------------------------------------------------------------------------------------
The weighted average original term to maturity of the initial Group I
Mortgage Loans as of the Statistical Calculation Date is approximately 217
months.
REMAINING TERM TO MATURITY OF INITIAL GROUP I MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP I OF INITIAL GROUP I BALANCE OF INITIAL GROUP
REMAINING TERM TO MATURITY MORTGAGE LOANS MORTGAGE LOANS I MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
0 to 60 107 $ 2,068,938.75 2.21%
61 to 120 172 4,459,273.88 4.76
121 to 180 1,165 49,630,290.19 52.94
181 to 240 205 11,151,184.95 11.89
241 to 300 469 26,441,584.43 28.20
-----------------------------------------------------------------------------------------------------------
Total 2,118 $93,751,272.20 100.00%
-----------------------------------------------------------------------------------------------------------
The weighted average remaining term to maturity of the initial Group I
Mortgage Loans as of the Statistical Calculation Date is approximately 213
months.
A-II-4
INITIAL GROUP I MORTGAGE LOANS
YEAR OF ORIGINATION OF INITIAL GROUP I MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP I OF INITIAL GROUP I BALANCE OF INITIAL GROUP I
YEAR OF ORIGINATION MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
2001 1,899 $88,759,133.06 94.68%
2000 36 1,536,996.34 1.64
1996 178 3,377,847.00 3.60
1995 5 77,295.80 0.08
-----------------------------------------------------------------------------------------------------------
Total 2,118 $93,751,272.20 100.00%
-----------------------------------------------------------------------------------------------------------
The earliest month and year of origination of any initial Group I
Mortgage Loan as of the Statistical Calculation Date is October 1995 and the
latest month and year of origination of any initial Group I Mortgage Loan as of
the Statistical Calculation Date is July 2001.
OCCUPANCY TYPE OF INITIAL GROUP I MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP I OF INITIAL GROUP I BALANCE OF INITIAL GROUP I
OCCUPANCY TYPE MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
Owner Occupied 2,107 $93,398,477.60 99.62%
Non-Owner Occupied 11 352,794.60 0.38
-----------------------------------------------------------------------------------------------------------
Total 2,118 $93,751,272.20 100.00%
-----------------------------------------------------------------------------------------------------------
CREDIT QUALITY OF INITIAL GROUP I MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP I OF INITIAL GROUP I BALANCE OF INITIAL GROUP I
CREDIT QUALITY MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
Excellent 1,511 $70,050,730.36 74.72%
Superior 388 15,736,426.91 16.79
Good 205 7,363,932.13 7.85
Fair 10 482,714.36 0.51
Non-Prime 4 117,468.44 0.13
-----------------------------------------------------------------------------------------------------------
Total 2,118 $93,751,272.20 100.00%
-----------------------------------------------------------------------------------------------------------
Credit grades run from Excellent to Superior to Good to Fair to
Non-Prime in descending order.
A-II-5
INITIAL GROUP I MORTGAGE LOANS
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES SECURING
INITIAL GROUP I MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP I OF INITIAL GROUP I BALANCE OF INITIAL GROUP I
STATE MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
----------------------------------------------------------------------------------------------------------
California 677 $37,839,665.83 40.36%
Florida 161 5,217,768.76 5.57
Virginia 116 5,203,944.74 5.55
New Jersey 101 4,955,335.00 5.29
Illinois 93 3,502,310.60 3.74
Georgia 102 3,443,674.10 3.67
Michigan 98 3,261,821.65 3.48
Maryland 85 3,131,231.93 3.34
Colorado 62 3,034,705.63 3.24
Pennsylvania 77 2,985,942.60 3.18
Washington 57 2,373,819.38 2.53
Oregon 51 2,132,765.58 2.27
Arizona 58 1,905,393.98 2.03
Other (<2%) 380 14,762,892.42 15.75
----------------------------------------------------------------------------------------------------------
Total 2,118 $93,751,272.20 100.00%
----------------------------------------------------------------------------------------------------------
No more than approximately 0.73% of the initial Group I Mortgage Loans
as of the Statistical Calculation Date are secured by mortgaged properties
located in any one zip code.
DEBT-TO-INCOME RATIOS OF INITIAL GROUP I MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP I OF INITIAL GROUP I BALANCE OF INITIAL GROUP I
DEBT-TO-INCOME RATIOS (%) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
----------------------------------------------------------------------------------------------------------
10.001 to 15.000 2 $ 69,692.19 0.07%
15.001 to 20.000 24 840,615.40 0.90
20.001 to 25.000 85 3,210,497.00 3.42
25.001 to 30.000 184 7,060,881.27 7.53
30.001 to 35.000 298 13,065,203.22 13.94
35.001 to 40.000 408 17,032,820.91 18.17
40.001 to 45.000 424 17,802,769.49 18.99
45.001 to 50.000 455 21,071,157.57 22.48
50.001 to 55.000 238 13,597,635.15 14.50
----------------------------------------------------------------------------------------------------------
Total 2,118 $93,751,272.20 100.00%
----------------------------------------------------------------------------------------------------------
The weighted average debt-to-income ratio of the initial Group 1
Mortgage Loans as of the Statistical Calculation Date is approximately
40.92%.
A-II-6
INITIAL GROUP I MORTGAGE LOANS
PREPAYMENT PENALTY FOR INITIAL GROUP I MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP I OF INITIAL GROUP I BALANCE OF INITIAL GROUP I
MONTHS APPLICABLE MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
No Prepayment Penalty 351 $12,590,094.25 13.43%
12 2 70,444.55 0.08
24 20 1,257,961.06 1.34
36 604 29,495,449.18 31.46
48 6 321,202.15 0.34
60 1,135 50,016,121.01 53.35
-----------------------------------------------------------------------------------------------------------
Total 2,118 $93,751,272.20 100.00%
-----------------------------------------------------------------------------------------------------------
ORIGINATION CHANNEL FOR INITIAL GROUP I MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP I OF INITIAL GROUP I BALANCE OF INITIAL GROUP I
ORIGINATION CHANNEL MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
Direct Mail 1,295 $52,473,240.83 55.97%
Correspondent 473 21,243,157.59 22.66
Broker 350 20,034,873.78 21.37
-----------------------------------------------------------------------------------------------------------
Total 2,118 $93,751,272.20 100.00%
-----------------------------------------------------------------------------------------------------------
DELINQUENCY STATUS FOR INITIAL GROUP I MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP I OF INITIAL GROUP I BALANCE OF INITIAL GROUP I
DELINQUENCY MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
0 1,995 $89,126,086.54 95.07%
1-29 123 4,625,185.66 4.93
-----------------------------------------------------------------------------------------------------------
Total 2,118 $93,751,272.20 100.00%
-----------------------------------------------------------------------------------------------------------
INITIAL GROUP II MORTGAGE LOANS
LIEN POSITION OF INITIAL GROUP II MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP II OF INITIAL GROUP II BALANCE OF INITIAL GROUP II
LIEN POSITION MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-------------------------------------------------------------------------------------------------------------
Second Lien 3,849 $161,699,470.90 98.67%
Third Lien 58 2,177,898.78 1.33
-------------------------------------------------------------------------------------------------------------
Total 3,907 $163,877,369.68 100.00%
-------------------------------------------------------------------------------------------------------------
MORTGAGE INTEREST RATES OF INITIAL GROUP II MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP II OF INITIAL GROUP II BALANCE OF INITIAL GROUP II
MORTGAGE INTEREST RATES (%) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
--------------------------------------------------------------------------------------------------------------
8.000 to 8.999 2 $ 156,398.98 0.10%
9.000 to 9.999 36 2,099,965.91 1.28
10.000 to 10.999 96 5,604,235.99 3.42
11.000 to 11.999 165 8,257,094.60 5.04
12.000 to 12.999 339 15,681,099.31 9.57
13.000 to 13.999 614 28,566,330.95 17.43
14.000 to 14.999 666 29,270,640.75 17.86
15.000 to 15.999 560 22,167,416.67 13.53
16.000 to 16.999 475 18,597,884.88 11.35
17.000 to 17.999 413 15,354,880.98 9.37
18.000 to 18.999 278 9,488,393.33 5.79
19.000 to 19.999 199 6,824,545.23 4.16
20.000 + 64 1,808,482.10 1.10
--------------------------------------------------------------------------------------------------------------
Total 3,907 $163,877,369.68 100.00%
--------------------------------------------------------------------------------------------------------------
The weighted average mortgage interest rate of the initial Group II
Mortgage Loans as of the Statistical Calculation Date is approximately 15.048%
per annum.
A-II-8
INITIAL GROUP II MORTGAGE LOANS
COMBINED LOAN-TO-VALUE RATIOS OF INITIAL GROUP II MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP II OF INITIAL GROUP II BALANCE OF INITIAL GROUP II
COMBINED LOAN-TO-VALUE RATIO (%) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-------------------------------------------------------------------------------------------------------------
100.001 to 110.000 618 $ 23,481,415.33 14.33%
110.001 to 120.000 1,480 60,500,433.71 36.92
120.001 to 130.000 1,809 79,895,520.64 48.75
-------------------------------------------------------------------------------------------------------------
Total 3,907 $163,877,369.68 100.00%
-------------------------------------------------------------------------------------------------------------
The minimum and maximum Combined Loan-to-Value Ratios of the initial
Group II Mortgage Loans as of the Statistical Calculation Date are approximately
100.02% and 125.00%, respectively, and the weighted average Combined
Loan-to-Value Ratio as of the Statistical Calculation Date of the initial Group
II Mortgage Loans is approximately 118.11%.
PRINCIPAL BALANCES OF INITIAL GROUP II MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP II OF INITIAL GROUP II BALANCE OF INITIAL GROUP II
PRINCIPAL BALANCES MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-------------------------------------------------------------------------------------------------------------
$0.01 to $25,000.00 736 $ 16,027,675.15 9.78%
$25,000.01 to $50,000.00 2,272 84,973,716.41 51.85
$50,000.01 to $75,000.00 673 41,467,571.82 25.30
$75,000.01 to $100,000.00 191 17,028,347.08 10.39
$100,000.01 to $125,000.00 30 3,484,488.01 2.13
$125,000.01 to $150,000.00 3 436,716.08 0.27
$150,000.01 to $175,000.00 1 158,855.13 0.10
$200,000.01 to $300,000.00 1 300,000.00 0.18
-------------------------------------------------------------------------------------------------------------
Total 3,907 $163,877,369.68 100.00%
-------------------------------------------------------------------------------------------------------------
The average unpaid principal balance of the initial Group II Mortgage
Loans as of the Statistical Calculation Date is approximately $41,944.55.
A-II-9
INITIAL GROUP II MORTGAGE LOANS
MORTGAGED PROPERTIES SECURING INITIAL GROUP II MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP II OF INITIAL GROUP II BALANCE OF INITIAL GROUP
PROPERTY TYPE MORTGAGE LOANS MORTGAGE LOANS II MORTGAGE LOANS
------------------------------------------------------------------------------------------------------------
Single-Family Dwelling 3,283 $138,019,398.45 84.22%
Planned Unit Development 344 15,581,212.03 9.51
Condominium 237 8,902,804.03 5.43
Leasehold 40 1,289,253.88 0.79
Multi-Family 3 84,701.29 0.05
------------------------------------------------------------------------------------------------------------
Total 3,907 $163,877,369.68 100.00%
------------------------------------------------------------------------------------------------------------
ORIGINAL TERM TO MATURITY OF INITIAL GROUP II MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
ORIGINAL TERM TO MATURITY GROUP II OF INITIAL GROUP II BALANCE OF INITIAL GROUP II
(MONTHS) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
--------------------------------------------------------------------------------------------------------------
61 to 120 168 $ 5,760,292.12 3.52%
121 to 180 1,911 74,601,121.77 45.52
181 to 240 485 20,475,577.98 12.49
241 to 300 1,343 63,040,377.81 38.47
--------------------------------------------------------------------------------------------------------------
Total 3,907 $163,877,369.68 100.00%
--------------------------------------------------------------------------------------------------------------
The weighted average original term to maturity of the initial Group II
Mortgage Loans as of the Statistical Calculation Date is approximately 231
months.
REMAINING TERM TO MATURITY OF GROUP II MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
REMAINING TERM TO MATURITY GROUP II OF INITIAL GROUP II BALANCE OF INITIAL GROUP II
(MONTHS) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
--------------------------------------------------------------------------------------------------------------
0 to 60 1 $ 20,384.81 0.01%
61 to 120 167 5,739,907.31 3.50
121 to 180 1,913 74,732,180.02 45.60
181 to 240 486 20,550,443.03 12.54
241 to 300 1,340 62,834,454.51 38.34
--------------------------------------------------------------------------------------------------------------
Total 3,907 $163,877,369.68 100.00%
--------------------------------------------------------------------------------------------------------------
The weighted average remaining term to maturity of the initial Group II
Mortgage Loans as of the Statistical Calculation Date is approximately 230
months.
A-II-10
INITIAL GROUP II MORTGAGE LOANS
YEAR OF ORIGINATION OF INITIAL GROUP II MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP II OF INITIAL GROUP II BALANCE OF INITIAL GROUP II
YEAR OF ORIGINATION MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-------------------------------------------------------------------------------------------------------------
2001 3,775 $159,499,668.61 97.33%
2000 132 4,377,701.07 2.67
-------------------------------------------------------------------------------------------------------------
Total 3,907 $163,877,369.68 100.00%
-------------------------------------------------------------------------------------------------------------
The earliest month and year of origination of any initial Group II
Mortgage Loan as of the Statistical Calculation Date is June 2000 and the latest
month and year of origination of any initial Group II Mortgage Loan as of the
Statistical Calculation Date is July 2001.
OCCUPANCY TYPE OF INITIAL GROUP II MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP II OF INITIAL GROUP II BALANCE OF INITIAL GROUP II
OCCUPANCY TYPE MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
------------------------------------------------------------------------------------------------------------
Owner Occupied 3,905 $163,800,535.30 99.95%
Non-Owner Occupied 2 76,834.38 0.05
------------------------------------------------------------------------------------------------------------
Total 3,907 $163,877,369.68 100.00%
------------------------------------------------------------------------------------------------------------
CREDIT QUALITY OF INITIAL GROUP II MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP II OF INITIAL GROUP II BALANCE OF INITIAL GROUP II
CREDIT QUALITY MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-------------------------------------------------------------------------------------------------------------
Excellent 2,786 $124,930,276.58 76.23%
Superior 731 26,180,045.13 15.98
Good 385 12,632,880.52 7.71
Fair 5 134,167.45 0.08
-------------------------------------------------------------------------------------------------------------
Total 3,907 $163,877,369.68 100.00%
-------------------------------------------------------------------------------------------------------------
Credit grades run from Excellent to Superior to Good to Fair in
descending order.
A-II-11
INITIAL GROUP II MORTGAGE LOANS
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES SECURING
INITIAL GROUP II MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP II OF INITIAL GROUP II BALANCE OF INITIAL GROUP II
STATE MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-------------------------------------------------------------------------------------------------------------
California 648 $ 30,537,746.50 18.63%
Florida 340 12,584,446.87 7.68
Maryland 260 11,680,801.93 7.13
Virginia 258 10,754,094.70 6.56
Ohio 216 8,082,629.74 4.93
Arizona 204 7,901,549.22 4.82
Pennsylvania 186 7,899,423.01 4.82
Washington 163 7,421,977.27 4.53
Illinois 140 6,385,970.17 3.90
Georgia 144 5,673,149.76 3.46
Nevada 143 5,282,888.39 3.22
Colorado 107 5,167,273.28 3.15
Michigan 116 4,954,739.45 3.02
New Jersey 95 4,888,240.04 2.98
Oregon 106 4,451,548.43 2.72
Missouri 97 3,762,972.72 2.30
Other (<2%) 684 26,447,918.20 16.14
-------------------------------------------------------------------------------------------------------------
Total 3,907 $163,877,369.68 100.00%
-------------------------------------------------------------------------------------------------------------
No more than approximately 0.26% of the initial Group II Mortgage Loans
as of the Statistical Calculation Date are secured by mortgaged properties
located in any one zip code.
DEBT-TO-INCOME RATIOS OF INITIAL GROUP II MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP II OF INITIAL GROUP II BALANCE OF INITIAL GROUP II
DEBT-TO-INCOME RATIOS (%) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
------------------------------------------------------------------------------------------------------------
10.001 to 15.000 4 $ 140,251.21 0.09%
15.001 to 20.000 16 873,768.78 0.53
20.001 to 25.000 61 2,329,817.38 1.42
25.001 to 30.000 227 8,323,061.47 5.08
30.001 to 35.000 492 19,564,243.96 11.94
35.001 to 40.000 767 31,642,778.69 19.31
40.001 to 45.000 875 35,473,203.05 21.65
45.001 to 50.000 1,167 49,668,333.45 30.31
50.001 to 55.000 298 15,861,911.69 9.68
------------------------------------------------------------------------------------------------------------
Total 3,907 $163,877,369.68 100.00%
------------------------------------------------------------------------------------------------------------
The weighted average debt-to-income ratio of the initial Group II Mortgage Loans
as of the Statistical Calculation Date is approximately 41.79%.
A-II-12
INITIAL GROUP II MORTGAGE LOANS
PREPAYMENT PENALTY FOR INITIAL GROUP II MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP II OF INITIAL GROUP II BALANCE OF INITIAL GROUP II
MONTHS APPLICABLE MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
No Prepayment Penalty 490 $ 19,877,931.79 12.13%
6 1 37,721.33 0.02
24 6 269,938.75 0.16
36 1,706 73,204,270.42 44.67
42 3 86,174.11 0.05
48 6 304,718.62 0.19
60 1,695 70,096,614.66 42.77
-----------------------------------------------------------------------------------------------------------
Total 3,907 $163,877,369.68 100.00%
-----------------------------------------------------------------------------------------------------------
ORIGINATION CHANNEL FOR INITIAL GROUP II MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP II OF INITIAL GROUP II BALANCE OF INITIAL GROUP II
ORIGINATION CHANNEL MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
Broker 972 $ 44,677,288.27 27.26%
Direct Mail 1,399 56,823,871.51 34.67
Correspondent 1,536 62,376,209.90 38.06
-----------------------------------------------------------------------------------------------------------
Total 3,907 $163,877,369.68 100.00%
-----------------------------------------------------------------------------------------------------------
DELINQUENCY STATUS FOR INITIAL GROUP II MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP II OF INITIAL GROUP II BALANCE OF INITIAL GROUP II
DELINQUENCY MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
0 3,610 $152,223,438.04 92.89%
1-29 297 11,653,931.64 7.11
-----------------------------------------------------------------------------------------------------------
Total 3,907 $163,877,369.68 100.00%
-----------------------------------------------------------------------------------------------------------
A-II-13
INITIAL GROUP III MORTGAGE LOANS
LIEN POSITION OF INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
LIEN POSITION MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
First Lien 60 $ 2,748,043.73 2.80%
Second Lien 2,300 90,629,932.16 92.35
Third Lien 123 4,764,548.83 4.85
-----------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
-----------------------------------------------------------------------------------------------------------
MORTGAGE INTEREST RATES OF INITIAL GROUP III MORTGAGE LOANS
AS OF THE STATISTICAL CALCULATION DATE
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
MORTGAGE INTEREST RATES (%) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
6.000 to 6.999 10 $ 575,928.61 0.59%
7.000 to 7.999 56 3,764,805.81 3.84
8.000 to 8.999 137 6,915,328.23 7.05
9.000 to 9.999 301 13,831,485.89 14.09
10.000 to 10.999 416 18,030,854.59 18.37
11.000 to 11.999 534 19,231,936.89 19.60
12.000 to 12.999 395 12,029,480.03 12.26
13.000 to 13.999 222 7,624,761.09 7.77
14.000 to 14.999 176 7,194,918.33 7.33
15.000 to 15.999 118 4,381,010.73 4.46
16.000 to 16.999 84 3,288,405.25 3.35
17.000 to 17.999 28 1,069,312.73 1.09
18.000 to 18.999 6 204,296.54 0.21
-----------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
-----------------------------------------------------------------------------------------------------------
The weighted average mortgage interest rate of the initial Group III
Mortgage Loans as of the Statistical Calculation Date is approximately 11.703%
per annum.
A-II-14
INITIAL GROUP III MORTGAGE LOANS
GROSS MARGIN OF INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
GROSS MARGINS (%) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
Less than 0.000 10 $ 575,928.61 0.59%
0.000 to 0.999 52 3,328,943.28 3.39
1.000 to 1.999 161 7,862,954.04 8.01
2.000 to 2.999 303 14,680,721.96 14.96
3.000 to 3.999 416 17,285,847.55 17.61
4.000 to 4.999 541 19,514,295.10 19.88
5.000 to 5.999 382 11,298,229.75 11.51
6.000 to 6.999 202 7,248,512.04 7.39
7.000 to 7.999 168 6,920,038.15 7.05
8.000 to 8.999 116 4,335,437.37 4.42
9.000 to 9.999 90 3,474,207.60 3.54
10.000 to 10.999 36 1,385,212.73 1.41
11.000 to 11.999 6 232,196.54 0.24
-----------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
-----------------------------------------------------------------------------------------------------------
The weighted average gross margin of the initial Group III Mortgage
Loans as of the Statistical Calculation Date is approximately 4.71% per annum.
LIFETIME RATE CAPS OF INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
LIFETIME RATE CAPS (%) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
15.000 to 15.999 47 $ 3,087,129.87 3.15%
16.000 to 16.999 93 5,545,515.43 5.65
17.000 to 17.999 120 6,430,779.57 6.55
18.000 to 18.999 189 9,481,346.60 9.66
19.000 to 19.999 1,198 40,616,764.17 41.39
20.000 to 20.999 176 7,455,161.23 7.60
21.000 to 21.999 168 6,530,080.12 6.65
22.000 to 22.999 177 6,982,661.52 7.11
23.000 to 23.999 146 5,588,966.92 5.69
24.000 to 24.999 169 6,424,119.29 6.55
-----------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
-----------------------------------------------------------------------------------------------------------
The weighted average lifetime rate cap of the initial Group III
Mortgage Loans as of the Statistical Calculation Date is approximately 20.11%
per annum.
A-II-15
INITIAL GROUP III MORTGAGE LOANS
LIFETIME RATE FLOORS OF INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
LIFETIME RATE FLOORS (%) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
5.000 to 5.999 46 $ 3,051,430.06 3.11%
6.000 to 6.999 96 5,628,840.79 5.74
7.000 to 7.999 160 8,129,951.32 8.28
8.000 to 8.999 243 11,469,965.44 11.69
9.000 to 9.999 331 13,489,464.34 13.74
10.000 to 10.999 397 15,515,004.43 15.81
11.000 to 11.999 493 16,934,888.07 17.26
12.000 to 12.999 373 11,169,379.16 11.38
13.000 to 13.999 176 6,389,481.82 6.51
14.000 to 14.999 104 3,897,355.36 3.97
15.000 to 15.999 46 1,849,824.99 1.88
16.000 to 16.999 13 463,634.90 0.47
17.000 to 17.999 3 86,304.04 0.09
18.000 to 18.999 2 67,000.00 0.07
-----------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
-----------------------------------------------------------------------------------------------------------
The weighted average lifetime rate floor of the initial Group III
Mortgage Loans as of the Statistical Calculation Date is approximately 10.45%
per annum.
A-II-16
INITIAL GROUP III MORTGAGE LOANS
CREDIT LIMIT UTILIZATION RATES OF INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
CREDIT LIMIT GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
UTILIZATION RATES (%) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
0.001 to 5.000 13 $ 11,710.55 0.01%
5.001 to 10.000 7 38,081.48 0.04
10.001 to 15.000 7 49,398.51 0.05
15.001 to 20.000 5 38,535.86 0.04
20.001 to 25.000 4 25,501.14 0.03
25.001 to 30.000 11 233,217.31 0.24
30.001 to 35.000 10 208,977.74 0.21
35.001 to 40.000 12 178,563.74 0.18
40.001 to 45.000 11 384,748.71 0.39
45.001 to 50.000 19 373,643.52 0.38
50.001 to 55.000 14 341,329.22 0.35
55.001 to 60.000 22 650,015.06 0.66
60.001 to 65.000 31 816,748.43 0.83
65.001 to 70.000 38 1,142,077.00 1.16
70.001 to 75.000 30 970,277.62 0.99
75.001 to 80.000 35 967,572.73 0.99
80.001 to 85.000 53 1,632,192.08 1.66
85.001 to 90.000 87 2,664,456.12 2.71
90.001 to 95.000 195 6,484,190.08 6.61
95.001 to 100.000 1,869 80,325,026.29 81.85
100.001 + 10 606,261.53 0.62
-----------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
-----------------------------------------------------------------------------------------------------------
The weighted average credit limit utilization rate of the initial Group III
Mortgage Loans as of the Statistical Calculation Date is approximately 96.24%.
A-II-17
INITIAL GROUP III MORTGAGE LOANS
COMBINED LOAN-TO-VALUE RATIOS OF INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
COMBINED LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
0.001 to 40.000 18 $ 711,331.69 0.72%
40.001 to 50.000 15 590,624.24 0.60
50.001 to 60.000 24 1,923,933.11 1.96
60.001 to 70.000 67 3,116,231.90 3.18
70.001 to 80.000 181 7,437,598.72 7.58
80.001 to 90.000 378 14,515,271.44 14.79
90.001 to 100.000 814 30,515,425.19 31.09
100.001 to 110.000 218 7,262,179.74 7.40
110.001 to 120.000 325 12,946,400.83 13.19
120.001 to 125.000 443 19,123,527.86 19.49
-----------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
-----------------------------------------------------------------------------------------------------------
The minimum and maximum Combined Loan-to-Value Ratios of the initial
Group III Mortgage Loans as of the Statistical Calculation Date are
approximately 8.86% and 125.00%, respectively, and the weighted average Combined
Loan-to-Value Ratio as of the Statistical Calculation Date of the initial Group
III Mortgages is approximately 100.16%.
PRINCIPAL BALANCES OF INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
PRINCIPAL BALANCES MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
$0.01 to $25,000.00 810 $14,908,372.60 15.19%
$25,000.01 to $50,000.00 1,128 41,199,387.29 41.98
$50,000.01 to $75,000.00 377 23,039,633.53 23.48
$75,000.01 to $100,000.00 108 9,511,121.74 9.69
$100,000.01 to $125,000.00 26 2,920,346.79 2.98
$125,000.01 to $150,000.00 14 1,946,447.30 1.98
$150,000.01 to $175,000.00 5 793,700.00 0.81
$175,000.01 to $200,000.00 6 1,158,515.47 1.18
$200,000.01 to $300,000.00 6 1,486,000.00 1.51
$300,000.01 to $400,000.00 2 765,000.00 0.78
$400,000.01 to $500,000.00 1 414,000.00 0.42
-----------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
-----------------------------------------------------------------------------------------------------------
The average unpaid principal balance of the initial Group III Mortgage
Loans as of the Statistical Calculation Date is approximately $39,525.79.
A-II-18
INITIAL GROUP III MORTGAGE LOANS
MORTGAGED PROPERTIES SECURING INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
PROPERTY TYPE MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
Single-Family Dwelling 2,255 $87,994,985.60 89.66%
Planned Unit Development 100 5,232,772.40 5.33
Condominium 92 3,608,668.60 3.68
Leasehold 27 988,793.42 1.01
Multi-Family 9 317,304.70 0.32
-----------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
-----------------------------------------------------------------------------------------------------------
ORIGINAL TERM TO MATURITY OF INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
ORIGINAL TERM TO MATURITY GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
(MONTHS) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
------------------------------------------------------------------------------------------------------------
121 to 180 1,000 $32,070,439.46 32.68%
181 to 240 1,472 65,607,747.07 66.85
241 to 300 11 464,338.19 0.47
------------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
------------------------------------------------------------------------------------------------------------
The weighted average original term to maturity of the initial Group III
Mortgage Loans as of the Statistical Calculation Date is approximately 221
months.
REMAINING TERM TO MATURITY OF INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
REMAINING TERM TO MATURITY GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
(MONTHS) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-----------------------------------------------------------------------------------------------------------
0 to 60 5 $ 163,991.16 0.17%
61 to 120 285 8,511,575.31 8.67
121 to 180 852 28,358,539.49 28.90
181 to 240 1,341 61,108,418.76 62.26
-----------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
-----------------------------------------------------------------------------------------------------------
The weighted average remaining term to maturity of the initial Group III
Mortgage Loans as of the Statistical Calculation Date is approximately 199
months.
A-II-19
INITIAL GROUP III MORTGAGE LOANS
YEAR OF ORIGINATION OF INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
YEAR OF ORIGINATION MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
------------------------------------------------------------------------------------------------------------
2001 1,340 $61,077,618.76 62.23%
2000 1 30,800.00 0.03
1999 62 2,256,389.46 2.30
1998 300 10,154,549.96 10.35
1997 253 8,438,527.71 8.60
1996 169 4,564,429.74 4.65
1995 227 7,269,762.67 7.41
1994 62 1,786,786.06 1.82
1993 27 890,735.30 0.91
1992 24 945,915.36 0.96
1991 7 262,671.51 0.27
1990 8 297,425.10 0.30
1989 2 114,275.73 0.12
1988 1 52,637.36 0.05
------------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
------------------------------------------------------------------------------------------------------------
The earliest month and year of origination of any initial Group III
Mortgage Loan as of the Statistical Calculation Date is November 1988 and the
latest month and year of origination of any initial Group III Mortgage Loan as
of the Statistical Calculation Date is July 2001.
OCCUPANCY TYPE OF INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
OCCUPANCY TYPE MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-------------------------------------------------------------------------------------------------------------
Owner Occupied 2,472 $97,680,016.39 99.53%
Non-Owner Occupied 11 462,508.33 0.47
-------------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
-------------------------------------------------------------------------------------------------------------
CREDIT QUALITY OF INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
CREDIT QUALITY MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
------------------------------------------------------------------------------------------------------------
Excellent 1,729 $71,197,376.51 72.54%
Superior 379 14,775,182.57 15.05
Good 211 7,280,975.43 7.42
Fair 43 1,417,209.38 1.44
Non-Prime 121 3,471,780.83 3.54
------------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
------------------------------------------------------------------------------------------------------------
Credit Grades run from Excellent to Superior to Good to Fair to
Non-Prime in descending order.
A-II-20
INITIAL GROUP III MORTGAGE LOANS
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES SECURING
Initial Group III Mortgage Loans
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
STATE MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-------------------------------------------------------------------------------------------------------------
California 420 $22,107,662.01 22.53%
Illinois 194 7,460,735.48 7.60
New York 159 6,103,306.78 6.22
Michigan 161 5,410,186.83 5.51
Ohio 153 5,110,616.34 5.21
Washington 120 4,974,259.27 5.07
New Jersey 121 4,502,986.22 4.59
Florida 127 4,375,963.39 4.46
Arizona 105 3,794,158.84 3.87
Virginia 102 3,704,964.86 3.78
Georgia 105 3,493,347.51 3.56
Colorado 71 3,030,227.30 3.09
Maryland 58 2,706,027.65 2.76
Missouri 72 2,359,888.23 2.40
Pennsylvania 64 2,303,762.23 2.35
Indiana 60 2,139,017.59 2.18
Connecticut 37 2,026,717.42 2.07
Oregon 51 1,974,811.75 2.01
Others (<2%) 303 10,563,885.02 10.76
-------------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
-------------------------------------------------------------------------------------------------------------
No more than approximately 0.59% of the initial Group III Mortgage
Loans as of the Statistical Calculation Date are secured by mortgaged properties
located in any one zip code.
DEBT-TO-INCOME RATIOS OF INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
DEBT-TO-INCOME RATIOS (%) MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-------------------------------------------------------------------------------------------------------------
5.001 to 10.000 1 $ 31,302.72 0.03%
10.001 to 15.000 5 268,903.13 0.27
15.001 to 20.000 24 1,007,377.00 1.03
20.001 to 25.000 87 3,342,288.69 3.41
25.001 to 30.000 171 6,485,291.49 6.61
30.001 to 35.000 282 9,677,966.07 9.86
35.001 to 40.000 314 11,703,979.54 11.93
40.001 to 45.000 451 17,314,793.08 17.64
45.001 to 50.000 550 21,742,386.01 22.15
50.001 to 55.000 598 26,568,236.99 27.07
-------------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
-------------------------------------------------------------------------------------------------------------
The weighted average debt-to-income ratio of the initial Group III
Mortgage Loans as of the Statistical Calculation Date is approximately 42.98%.
A-II-21
INITIAL GROUP III MORTGAGE LOANS
PREPAYMENT PENALTY FOR INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
MONTHS APPLICABLE MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
--------------------------------------------------------------------------------------------------------------
No Prepayment Penalty 1,151 $37,928,610.39 38.65%
24 10 485,676.21 0.49
36 351 16,910,655.80 17.23
48 4 219,919.74 0.22
60 967 42,597,662.58 43.40
--------------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
--------------------------------------------------------------------------------------------------------------
ORIGINATION CHANNEL FOR INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
ORIGINATION CHANNEL MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-------------------------------------------------------------------------------------------------------------
Direct Mail 1,099 $47,325,301.02 48.22%
Acquisitions 1,011 32,534,777.65 33.15
Broker 373 18,282,446.05 18.63
-------------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
-------------------------------------------------------------------------------------------------------------
DELINQUENCY STATUS FOR INITIAL GROUP III MORTGAGE LOANS
UNPAID PERCENTAGE OF STATISTICAL
NUMBER OF INITIAL PRINCIPAL BALANCE CALCULATION DATE PRINCIPAL
GROUP III OF INITIAL GROUP III BALANCE OF INITIAL GROUP III
DELINQUENCY MORTGAGE LOANS MORTGAGE LOANS MORTGAGE LOANS
-------------------------------------------------------------------------------------------------------------
0 2,266 $90,400,337.93 92.11%
1-29 217 7,742,186.79 7.89
-------------------------------------------------------------------------------------------------------------
Total 2,483 $98,142,524.72 100.00%
-------------------------------------------------------------------------------------------------------------
PROSPECTUS
MORTGAGE-BACKED/ASSET-BACKED SECURITIES (ISSUABLE IN SERIES)
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
THE SECURITIES
--------------------------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
The securities represent obligations of the trust only and do not represent an
interest in or obligation of the depositor, the seller, the master servicer or
any of their affiliates.
This prospectus may be used to offer and sell the securities only if accompanied
by a prospectus supplement.
--------------------------------------------------------------------------------
Each issue of securities will have its own series designation and will evidence
either the ownership of assets in the related trust fund or debt obligations
secured by assets of the related trust fund.
o Each series of securities will consist of one or more classes of
mortgage-backed or asset-backed certificates or notes.
o Each class of securities will represent the entitlement to a specified portion
of interest payments and a specified portion of principal payments on the trust
assets.
o A series may include classes of securities that are senior in right of payment
to other classes. Classes of securities may be entitled to receive distributions
of principal, interest or both prior to other classes or before or after
specified events.
o No market will exist for the securities of any series before they are issued.
In addition, even after the securities of a series have been issued and sold,
there can be no assurance that a resale market for them will develop.
Offers of the securities will be made through Bear, Stearns & Co. Inc. and the
other underwriters listed in the related prospectus supplement.
THE TRUST FUND AND ITS ASSETS
As specified in the related prospectus supplement, each trust fund will consist
primarily of assets from one of the following categories:
o mortgage loans secured by senior or junior liens on one- to four-family
residential properties;
o closed-end and/or revolving home equity loans secured by senior or
junior liens on one- to four-family residential or mixed-use
properties;
o home improvement installment sales contracts and loan agreements that
are either unsecured or secured by senior or junior liens on one- to
four-family residential or mixed-use properties or by purchase money
security interests in the related home improvements;
o installment sales contracts and installment loan agreements secured by
senior or junior liens on manufactured homes or by mortgages on the
related real estate;
o mortgage-backed securities issued or guaranteed by Ginnie Mae, Freddie
Mac or Fannie Mae; and o private label mortgage-backed or asset-backed
securities.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
BEAR, STEARNS & CO. INC.
JUNE 8, 2001
IMPORTANT NOTICE ABOUT INFORMATION IN THIS PROSPECTUS
AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Information about each series of securities is contained in two separate
documents:
o this prospectus, which provides general information, some of which may
not apply to a particular series; and
o the accompanying prospectus supplement for a particular series, which
describes the specific terms of the securities of that series.
Although the accompanying prospectus supplement cannot contradict the
information contained in this prospectus, insofar as the prospectus supplement
contains specific information about a particular series of securities that
differs from the more general information contained in this prospectus, you
should rely on the information in the prospectus supplement.
You should rely only on the information contained in this prospectus and the
accompanying prospectus supplement. We have not authorized anyone to provide you
with information that is different from that contained in this prospectus and
the accompanying prospectus supplement.
Each prospectus supplement generally will include the following information with
respect to the related series of securities:
o the principal amount, interest rate and authorized denominations of
each class of securities;
o information concerning the mortgage loans, home equity loans, home
improvement contracts, manufactured housing contracts, mortgage backed
securities and/or private securities in the related trust fund;
o information concerning the seller or sellers of the mortgage loans,
home equity loans, home improvement contracts, manufactured housing
contracts, mortgage backed securities and/or private securities and
information concerning any servicer;
o the terms of any credit enhancement with respect to particular classes
of the securities;
o information concerning other trust fund assets, including any reserve
fund;
o the final scheduled distribution date for each class of securities;
o the method for calculating the amount of principal to be paid to each
class of securities, and the timing and order of priority of principal
payments;
o information about any REMIC or FASIT tax elections for some or all of
the trust fund assets; and
o particulars of the plan of distribution for the securities.
2
We include cross-references in this prospectus and the accompanying
prospectus supplement to captions in these materials where you can find further
related discussions. The Table of Contents included in the accompanying
prospectus supplement lists the pages on which these captions are located.
There is also a Glossary of Terms beginning on page 125 where you will find
definitions of certain capitalized terms used in this prospectus.
If you require additional information, the mailing address of our principal
executive offices is Bear Stearns Asset Backed Asset Securities, Inc., 245 Park
Avenue, New York, New York 10167 and our telephone number is (212) 272-4095. For
other means of acquiring additional information about us or a series of
securities, see "Incorporation of Certain Information by Reference" beginning on
page 122 of this prospectus.
3
RISK FACTORS
You should consider carefully the following information, together with the
information set forth under "Risk Factors" in the accompanying prospectus
supplement, since it identifies the principal risk factors associated with an
investment in the securities.
YOU MAY HAVE DIFFICULTY SELLING YOUR
SECURITIES OR OBTAINING YOUR DESIRED
PRICE.................................. No market will exist for the
securities before they are issued. In
addition, we cannot give you any
assurance that a resale market will
develop following the issuance and
sale of any series of the securities.
Even if a resale market does develop,
you may not be able to sell your
securities when you wish or at the
price you want.
ONLY THE ASSETS OF THE RELATED TRUST
FUND ARE AVAILABLE TO PAY YOUR
SECURITIES ............................ The securities of each series will be
payable solely from the assets of the
related trust fund, including any
applicable credit enhancement, and
will not have a claim against the
assets of any other trust. In the
case of securities that are in the
form of notes, the related indenture
will require that noteholders proceed
only against the assets of the
related trust fund. We cannot give
you any assurance that the market
value of the assets in any trust fund
will be equal to or greater than the
total principal amount of the related
securities then outstanding, plus
accrued interest. Moreover, if the
assets of a trust fund are ever sold,
the sale proceeds will be applied
first to reimburse any related
trustee, servicer and credit
enhancement provider for their unpaid
fees and expenses before any
remaining amounts are distributed to
securityholders.
In addition, at the times specified
in the related prospectus supplement,
assets of the trust fund and the
related security accounts may be
released to the depositor, the
servicer, the credit enhancement
provider or other persons, if
o all payments then due on the
related securities have been
made, and
o any other payments specified in
the related prospectus
supplement have been made.
Once released, such assets will no
longer be available to make payments
to securityholders.
4
You will have no recourse against the
depositor or any other person if any
required distribution on the
securities is not made or for any
other default. The only obligations
of the depositor with respect to a
trust fund or the related securities
would result from a breach of the
representations and warranties that
the depositor may make concerning the
trust assets. However, because of the
depositor's very limited assets, even
if the depositor should be required
to repurchase a loan from a
particular trust fund because of the
breach of a representation or
warranty, its sole source of funds
for the repurchase would be:
o funds obtained from enforcing
any similar obligation of the
originator of the loan, or
o monies from any reserve fund
established to pay for loan
repurchases.
CREDIT ENHANCEMENT MAY BE
INSUFFICIENT TO PROVIDE AGAINST
PARTICULAR RISKS ...................... Although credit enhancement is
intended to reduce the effect of
delinquent payments or loan losses on
particular classes of securities, the
amount of any credit enhancement is
subject to the limits described in
the related prospectus supplement. In
addition, the amount of credit
enhancement may decline or be
depleted before the related
securities are paid in full. As a
result, securityholders may suffer
losses.
PRINCIPAL PAYMENTS ON THE LOANS MAY
ADVERSELY AFFECT THE AVERAGE LIFE OF,
AND RATE OF RETURN ON, YOUR
SECURITIES ............................ You may be unable to reinvest the
principal payments on your securities
at a rate of return equal to the rate
on your securities. The timing of
principal payments on the securities
of a series will be affected by a
number of factors, including the
following:
o the extent of prepayments on the
underlying loans in the trust
fund or, if the trust fund
contains underlying securities,
on the loans backing the
underlying securities;
o how payments of principal are
allocated among the classes of
securities of that series as
specified in the related
prospectus supplement;
5
o if any party has an option to
terminate the related trust
early, the effect of the
exercise of the option;
o the rate and timing of defaults
and losses on the assets in the
related trust fund;
o repurchases of assets in the
related trust fund as a result
of material breaches of
representations and warranties
made by the depositor or a
seller; and
o in the case of a trust fund that
contains revolving credit line
loans, any provisions for
non-amortization, early
amortization or scheduled
amortization periods described
in the related prospectus
supplement.
All the above factors may affect the
yield to maturity of the securities.
THE INTEREST ACCRUAL PERIOD MAY
REDUCE THE EFFECTIVE YIELD ON
YOUR SECURITIES ....................... Interest payable on the securities on
any given distribution date will
include all interest accrued during
the related interest accrual period.
Each prospectus supplement will
specify the interest accrual period
for the related securities. If
interest accrues during the calendar
month before the related distribution
date, your effective yield will be
less than it would be if the interest
accrual period ended the day before
the distribution date. As a result,
your effective yield at par may be
less than the indicated coupon rate.
LOANS WITH BALLOON PAYMENTS MAY INCREASE
YOUR RISK OF LOSS........................ Certain underlying loans may not be
fully amortizing over their terms to
maturity and may require a
substantial principal payment (a
"balloon" payment) at their stated
maturity. Loans of this type involve
greater risk than fully amortizing
loans since the borrower generally
must be able to refinance the loan or
sell the related property prior to
the loan's maturity date. The
borrower's ability to do so will
depend on such factors as the level
of available mortgage rates at the
time of sale or refinancing, the
relative strength of the local
housing market, the borrower's equity
in the property, the borrower's
general financial condition and tax
laws.
6
ADJUSTABLE RATE LOANS MAY BE
UNDERWRITTEN TO LESS STRINGENT STANDARDS
THAN FIXED RATE LOANS.................... A trust fund may include adjustable
rate loans that were underwritten on
the assumption that the borrowers
would be able to make higher monthly
payments in a relatively short period
of time. In fact, however, the
borrowers' income may not be
sufficient to meet their loan
payments as payment amounts increase,
thus increasing the risk of default.
JUNIOR LIEN LOANS GENERALLY ARE RISKIER
THAN SENIOR LIEN LOANS................... If the mortgage or home equity loans
in a trust fund are primarily in a
junior lien position, any proceeds
from liquidations, insurance
recoveries or condemnations must be
used first to satisfy the claims of
the related senior lien loans (and
related foreclosure expenses) before
being available to satisfy the junior
lien loans. In addition, a junior
mortgage lender may only foreclose
subject to the related senior
mortgage. As a result, the junior
mortgage lender must either pay the
related senior mortgage lender in
full, at or before the foreclosure
sale, or agree to make the regular
payments on the senior mortgage. The
trust will not have a source of funds
to satisfy any senior mortgages or to
continue making payments on them. As
a result, the trust's ability, as a
practical matter, to foreclose on any
junior mortgage loan will be quite
limited.
A DECLINE IN PROPERTY VALUES COULD
REDUCE THE AMOUNT AND DELAY THE TIMING
OF RECOVERIES ON DEFAULTED MORTGAGE
LOANS ................................. The following factors, among others,
could adversely affect property
values in such a way that the
outstanding balance of the related
loans, together with any senior
financing on the same properties,
would equal or exceed those values:
o an overall decline in the
residential real estate markets
where the properties are
located;
o failure of borrowers to maintain
their properties adequately; and
o natural disasters that may not
be covered by hazard insurance,
such as earthquakes and floods.
7
If property values decline, actual
rates of delinquencies, foreclosures
and losses on the underlying loans
could be higher than those currently
experienced by the mortgage lending
industry in general.
SOME MORTGAGED PROPERTIES MAY NOT BE
OWNER OCCUPIED........................... The mortgaged properties in the trust
fund may not be owner occupied. Rates
of delinquencies, foreclosures and
losses on mortgage loans secured by
non-owner occupied properties may be
higher than those on mortgage loans
secured by the borrower's primary
residence.
HOME IMPROVEMENT CONTRACTS AND OTHER
LOANS MAY NOT HAVE SUFFICIENT SECURITY... A trust fund may include home
improvement contracts that are not
secured by an interest in real estate
or otherwise. A trust fund may also
include mortgage or home equity loans
with original loan-to-value ratios
(or combined loan-to-value ratios in
the case of junior loans) greater
than 100%. In these cases, the trust
fund could be treated as a general
unsecured creditor for the unsecured
portion of these loans. If a loan of
this type goes into default, the
trust fund will have recourse only
against the borrower's assets
generally for the unsecured portion
of the loan, along with the
borrower's other general unsecured
creditors. In a bankruptcy
proceeding, the unsecured portion of
the loan may be discharged, even if
the value of the borrower's assets
available to the trust fund would be
insufficient to pay the remaining
amounts owing on the loan.
HOME IMPROVEMENT CONTRACTS WILL NOT BE
TAMPED.................................. The depositor will ensure that a
UCC-1 financing statement is filed
that identifies as collateral the
home improvement contracts included
in a trust fund. However, unless the
related prospectus supplement
provides otherwise, the home
improvement contracts themselves will
not be stamped or marked to reflect
their assignment to the trust fund.
Thus, if as a result of negligence,
fraud or otherwise, a subsequent
purchaser were able to take physical
possession of the contracts without
notice of the assignment to the trust
fund, the interests of the related
securityholders in those contracts
could be defeated.
8
IF AMOUNTS IN ANY PRE-FUNDING ACCOUNT
ARE NOT USED TO
PURCHASE TRUST ASSETS, YOU WILL
RECEIVE A PREPAYMENT ON THE
RELATED SECURITIES....................... The related prospectus supplement may
provide that the depositor or seller
will deposit a specified amount in a
pre-funding account on the date the
securities are issued. In this case,
the deposited funds may be used only
to acquire additional assets for the
trust during a specified period after
the initial issuance of the
securities. Any amounts remaining in
the account at the end of that period
will be distributed as a prepayment
of principal to the holders of the
related securities. The resulting
prepayment could adversely affect the
yield to maturity on those
securities.
BANKRUPTCY LAWS MAY RESULT IN ADVERSE
CLAIMS AGAINST TRUST FUND ASSETS......... The federal bankruptcy code and state
debtor relief laws may adversely
affect the ability of the trust fund,
as a secured lender, to realize upon
its security. For example, in a
federal bankruptcy proceeding, a
lender may not foreclose on mortgaged
property without the bankruptcy
court's permission. Similarly, the
debtor may propose a rehabilitation
plan, in the case of mortgaged
property that is not his principal
residence, that would reduce the
amount of the lender's secured
indebtedness to the value of the
property as of the commencement of
the bankruptcy. As a result, the
lender would be treated as a general
unsecured creditor for the reduced
amount, the amount of the monthly
payments due on the loan could be
reduced, and the interest rate and
loan payment schedule could be
changed.
Any such actions could result in
delays in receiving payments on the
loans underlying the securities and
result in the reduction of total
payments.
ENVIRONMENTAL RISKS MAY ADVERSELY AFFECT
TRUST FUND ASSETS........................ Federal, state and local laws and
regulations impose a wide range of
requirements on activities that may
affect the environment, health and
safety. In certain circumstances,
these laws and regulations impose
obligations on owners or operators of
residential properties such as those
that secure the loans. Failure to
comply with these laws and
regulations can
9
result in fines and penalties that
could be assessed against the trust
fund as owner of the related
property.
In some states, a lien on the
property due to contamination has
priority over the lien of an existing
mortgage. Further, a mortgage lender
may be held liable as an "owner" or
"operator" for costs associated with
the release of petroleum from an
underground storage tank under
certain circumstances. If the trust
fund is considered the owner or
operator of a property, it will
suffer losses as a result of any
liability imposed for environmental
hazards on the property.
CONSUMER PROTECTION LAWS MAY ADVERSELY
AFFECT TRUST FUND ASSETS................. The loans and contracts in each trust
fund also may be subject to federal
laws relating to loan origination and
underwriting. These laws
o require certain disclosures to
the borrowers regarding the
terms of the loans;
o prohibit discrimination on the
basis of age, race, color, sex,
religion, marital status,
national origin, receipt of
public assistance or the
exercise of any right under the
consumer credit protection act,
in the extension of credit;
o regulate the use and reporting
of information related to the
borrower's credit experience;
and
o require additional application
disclosures, limit changes that
may be made to the loan
documents without the borrower's
consent and restrict a lender's
ability to declare a default or
to suspend or reduce a
borrower's credit limit to
certain enumerated events.
Loans may also be subject to federal
laws that impose additional
disclosure requirements on creditors
with respect to non-purchase money
mortgage loans with high interest
rates or high up-front fees and
charges. These laws can impose
specific liabilities upon creditors
that fail to comply and may affect
the enforceability of the related
loans. In addition, the trust fund,
as assignee of the creditor, would
generally be subject to all claims
and defenses that the borrower could
assert against the creditor,
including the right to rescind the
loan.
10
Home improvement contracts may be
subject to federal laws that protect
the borrower from defective or
incomplete work by a contractor.
These laws permit the borrower to
withhold payment if the work does not
meet the quality and durability
standards agreed to between the
borrower and the contractor. These
laws have the effect of subjecting
the trust fund, as assignee of the
creditor, to all claims and defenses
which the borrower in a sale
transaction could assert against the
seller of defective goods.
If certain provisions of these
federal laws are violated, the
servicer may be unable to collect all
or part of the principal or interest
on the loans. The trust fund also
could be subject to damages and
administrative enforcement.
SUBORDINATE SECURITIES ARE SUBJECT TO
ADDITIONAL RISK.......................... If you invest in any class of
subordinate securities, your rights
as an investor to receive payments
otherwise due you will be subordinate
to the rights of the servicer and the
holders of the related senior
securities. As a result, before
investing in any subordinate
securities, you must be prepared to
bear the risk that payments on your
securities may be delayed and that
you might not recover all of your
initial investment.
ANY CREDIT SUPPORT PROVIDED BY FINANCIAL
INSTRUMENTS MAY BE INSUFFICIENT TO
PROTECT AGAINST PARTICULAR RISKS......... As described under "Credit
Enhancement--Financial Instruments"
in this prospectus, a trust fund may
include financial instruments to
protect against certain risks or to
provide certain cash flow
characteristics for particular
classes of the securities of a
series. If you invest in one of these
classes and the issuer of the
financial instruments fails to
perform its obligations, the yield to
maturity, market price and liquidity
of your securities could be
materially adversely affected. In
addition, if the issuer of the
related financial instruments
experiences a credit rating
downgrade, the market price and
liquidity of your securities could be
reduced. Finally, if the financial
instruments are intended to provide
an approximate or partial hedge for
certain risks or cashflow
characteristics, the yield to
maturity, market price and liquidity
of your securities could be adversely
affected to the extent that the
financial instrument does not provide
a perfect hedge.
11
REMIC RESIDUAL SECURITIES ARE SUBJECT TO
ADDITIONAL RISK.......................... If you invest in any class of
securities that represent the
"residual interest" in a real estate
mortgage investment conduit (REMIC),
you will be required to report as
ordinary income your pro rata share
of the REMIC's taxable income,
whether or not you actually received
any cash. Thus, as the holder of a
REMIC residual interest security, you
could have taxable income and tax
liabilities in a year that are in
excess of your ability to deduct
servicing fees and any other REMIC
expenses. In addition, because of
their special tax treatment, your
after-tax yield on a REMIC residual
interest security may be
significantly less than that of a
corporate bond with similar cash-flow
characteristics and pre-tax yield.
Transfers of REMIC residual interest
securities are also restricted.
FASIT OWNERSHIP SECURITIES ARE SUBJECT
TO ADDITIONAL RISK....................... If you are a fully taxable domestic
corporation that invests in any class
of securities representing the
"ownership interest" in a financial
asset securitization investment trust
(FASIT), you will be required to
report as ordinary income your pro
rata share of the FASIT's taxable
income, whether or not you actually
received any cash. Thus, as the
holder of a FASIT ownership interest
security, you could have taxable
income and tax liabilities in a year
that are in excess of your ability to
deduct servicing fees and any other
FASIT expenses. In addition, because
of their special tax treatment, your
after-tax yield on a FASIT ownership
interest security may be
significantly less than that of a
corporate bond with similar cash-flow
characteristics and pre-tax yield.
Transfers of FASIT ownership interest
securities are also restricted.
BOOK-ENTRY REGISTRATION MAY LIMIT YOUR
ABILITY TO SELL SECURITIES AND DELAY
YOUR RECEIPT OF PAYMENTS................. Limit on Liquidity of Securities.
Securities issued in book-entry form
may have only limited liquidity in
the resale market, since investors
may be unwilling to purchase
securities for which they cannot
obtain physical instruments.
Limit on Ability to Transfer or
Pledge. Transactions in book-entry
securities can be effected only
through The Depository Trust Company,
its participating organizations, its
indirect participants and certain
banks. As a result, your
12
ability to transfer or pledge
securities issued in book-entry form
may be limited.
Delays in Distributions. You may
experience some delay in the receipt
of distributions on book-entry
securities since the distributions
will be forwarded by the trustee to
DTC for DTC to credit to the accounts
of its participants. In turn, these
participants will credit the
distributions to your account either
directly or indirectly through
indirect participants.
RATINGS OF THE SECURITIES DO NOT ADDRESS
ALL INVESTMENT RISKS AND MUST BE VIEWED
WITH CAUTION............................. Any class of securities issued under
this prospectus and the accompanying
prospectus supplement will be rated
in one of the four highest rating
categories of a nationally recognized
rating agency. A rating is based on
the adequacy of the value of the
trust fund assets and any credit
enhancement for that class and
reflects the rating agency's
assessment of the likelihood that
holders of the class of securities
will receive the payments to which
they are entitled. A rating is not an
assessment of the likelihood that
principal prepayments on the
underlying loans will be made, the
degree to which the rate of
prepayments might differ from that
originally anticipated or the
likelihood of an early termination of
the securities. You should not view a
rating as a recommendation to
purchase, hold or sell securities
because it does not address the
market price or suitability of the
securities for any particular
investor.
There is no assurance that any rating
will remain in effect for any given
period or that the rating agency will
not lower or withdraw the rating in
the future. The rating agency could
lower or withdraw its rating due to:
o any decrease in the adequacy of
the value of the trust fund
assets or any related credit
enhancement, or
o an adverse change in the
financial or other condition of
a credit enhancement provider.
13
DESCRIPTION OF THE SECURITIES
GENERAL
Bear Stearns Asset Backed Securities, Inc., as depositor, will establish a
trust fund for each series of its securities. A particular series of
certificates will consist of mortgage-backed or asset-backed certificates or
notes or both certificates and notes.
Each series of certificates will be issued under a pooling and servicing
agreement or a trust agreement among the depositor, the trustee and, if the
trust fund includes loans, the related servicer. A form of pooling and servicing
agreement has been filed as an exhibit to the registration statement of which
this prospectus forms a part.
Each series of notes will be issued under an indenture between the related
trust fund and the trustee named in the prospectus supplement for that series. A
form of indenture has been filed as an exhibit to the registration statement of
which this prospectus forms a part. If the trust fund includes loans, the trust
fund and the servicer of the loans will also enter into a servicing agreement.
Each seller named in the related prospectus supplement, from which the
depositor will have purchased assets to be included in the trust fund, may agree
to reimburse the depositor for certain fees and expenses that the depositor
incurs in connection with the offering of the securities.
The following summaries describe the material provisions which may appear
in each pooling and servicing agreement or trust agreement, in the case of a
series of certificates, and in each indenture and servicing agreement, in the
case of a series of notes. The prospectus supplement for each series of
securities will describe any provision of the pooling and servicing agreement or
trust agreement, in the case of a series of certificates, and of the indenture
and servicing agreement, in the case of a series of notes, which materially
differs from the description contained in this prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the prospectus supplement and the
governing agreements for that series.
Each series of securities will consist of one or more classes which may be
compound interest securities, variable interest securities, planned balance
(PAC) securities, zero coupon securities, principal only securities, interest
only securities or participating securities. A series may also include one or
more classes of subordinated 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 any conditions applicable to a particular class 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 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.
14
Unless otherwise provided in the related prospectus supplement, payments of
principal of and interest on a series of securities will be made on each
distribution date specified in the prospectus supplement by check mailed to
holders of that series, registered as such at the close of business on the
record date specified in the prospectus supplement that is applicable to that
distribution date, at their addresses appearing on the security register.
However, payments may be made by wire transfer (at the expense of the holder
requesting payment by wire transfer) in circumstances described in the
prospectus supplement. However, final payments of principal in retirement of
each security will be made only upon presentation and surrender of the security
at the office of the related trustee. Notice of the final payment on a security
will be mailed to each holder before the distribution date on which the final
principal payment is expected to be made.
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. Unless otherwise provided in the related prospectus
supplement, the following amounts will be deposited directly into the collection
account established for a particular series of securities with the trustee (or
with the servicer in the name of the trustee):
o all payments with respect to the primary assets for that series (see,
"--The Primary Assets and Their Valuation" below), together with
reinvestment income thereon;
o amounts withdrawn from any cash, letters of credit, short-term
investments or other instruments acceptable to the rating agencies
identified in the prospectus supplement as rating that series and
deposited in each reserve fund for the series established in the name
of the trustee; and
o amounts available pursuant to any other credit enhancement for the
series.
If provided in the related prospectus supplement, the deposits may be net
of certain amounts payable to the servicer and any other person specified in the
prospectus supplement. These amounts thereafter will be deposited into the
separate distribution account established for the series and will be available
to make payments on the related securities on the next distribution date. See
"The Trust Funds--Collection and Distribution Accounts" in this prospectus.
THE PRIMARY ASSETS AND THEIR VALUATION
The primary assets of each trust fund may include one or more pools of the
following:
o Residential Loans,
o Home Equity Loans,
o Home Improvement Contracts,
o Manufactured Housing Contracts,
o Agency Securities, and
15
o Private Label Securities.
When we use the term "loans" in this prospectus, we include Residential
Loans, Home Equity Loans, Home Improvement Contracts and Manufactured Housing
Contracts. The residential or mixed-use properties that secure the loans are
collectively referred to in this prospectus as the "mortgaged properties."
If specified in the related prospectus supplement for a series of notes,
each primary asset included in the related trust fund will be assigned an
initial Asset Value. Unless otherwise specified in the related prospectus
supplement, the initial Asset Value of the primary assets of the trust fund will
be at least equal to the principal amount of the related notes on the date of
issuance.
PAYMENTS OF INTEREST
The securities of each class that by their terms are entitled to receive
interest will bear interest (calculated, unless otherwise specified in the
related prospectus supplement, on the basis of a 360-day year of twelve 30-day
months) from the date and at the rate specified in the prospectus supplement, or
will be entitled to receive interest payment amounts calculated in the method
described in the prospectus supplement. Interest on the interest-bearing
securities of a series will be payable on the distribution date specified in the
related prospectus supplement. The rate of interest on securities of a series
may be variable or may change with changes in the annual interest rates of the
loans (or underlying loans) included in the related trust fund and/or as
prepayments occur with respect to the loans (or underlying loans). 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 principal on that 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 that distribution date.
PAYMENTS OF PRINCIPAL
On each distribution date for a series, principal payments will be made to
the holders of the securities on which principal is then payable, to the extent
set forth in the prospectus supplement. The payments will be made in a total
amount determined as specified in the prospectus supplement and will be
allocated among the respective classes of the series in the manner, at the times
and in the priority (which may include allocation by random lot) set forth in
the prospectus supplement.
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date with respect to each class of a
series of notes is the date no later than which the total principal balance of
the class will be fully paid, and the final scheduled distribution date with
respect to each class of a series of certificates is the date on
16
which the principal balance of the class is expected to be reduced to zero, in
each case calculated on the basis of the assumptions applicable to that series
described in the related prospectus supplement. The final scheduled distribution
date for each class of a series will be specified in the related prospectus
supplement.
Since payments on the primary assets of each trust fund will be used to
make distributions that reduce the outstanding principal amount of the related
securities, it is likely that the actual final distribution date of any class
will occur earlier, and may occur substantially earlier, than its final
scheduled distribution date. Furthermore, with respect to a series of
certificates, unless otherwise specified in the related prospectus supplement,
the actual final distribution date of any certificate may occur later than its
final scheduled distribution date as a result of delinquencies, defaults and
liquidations of the primary assets of the related trust fund. No assurance can
be given as to the actual prepayment experience with respect to any series. See
"--Weighted Average Lives of the Securities" below.
SPECIAL REDEMPTION
If so specified in the prospectus supplement relating to a series of
securities having other than monthly distribution dates, one or more classes of
the securities may be subject to special redemption, in whole or in part, on the
special redemption date specified in the related prospectus supplement if, as a
consequence of prepayments on the loans (or underlying loans) or low yields then
available for reinvestment, the entity specified in the prospectus supplement
determines, based on assumptions set forth in the applicable agreement, that the
available interest amount that will have accrued on the securities through the
designated interest accrual date specified in the related prospectus supplement
is less than the amount of interest that will have accrued on the securities to
that date. In this event and as further described in the related prospectus
supplement, the trustee will redeem a principal amount of outstanding securities
of the series sufficient to cause the available interest amount to equal the
amount of interest that will have accrued through the designated interest
accrual date for the securities outstanding immediately after the redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The depositor or the servicer or any other entity that may be designated in
the related prospectus supplement will have the option, on any distribution
date, to purchase one or more classes of certificates of any series or redeem,
in whole or in part, one or more classes of notes of any series under the
circumstances, if any, specified in the related prospectus supplement.
Alternatively, if the prospectus supplement for a series of certificates so
provides, the depositor, the servicer or another entity designated in the
prospectus supplement will have the option to cause an early termination of the
related trust fund by repurchasing all of the primary assets from the trust fund
on or after a date specified in the prospectus supplement, or on or after such
time as the total outstanding principal amount of the certificates or primary
assets (as specified in the prospectus supplement) is equal to or less than the
amount or percentage specified in the prospectus supplement. Notice of the
redemption, purchase or termination must be given by the depositor or the
trustee prior to the related date. The redemption, purchase or repurchase price
will be set forth in the prospectus supplement. If specified in the prospectus
supplement, in the event that a REMIC election has been made, the trustee shall
receive a satisfactory opinion of
17
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.
In addition, the prospectus supplement may provide other circumstances
under which holders of securities of a series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related primary assets.
WEIGHTED AVERAGE LIVES OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of the
security will be repaid to the investor. Unless otherwise specified in the
related prospectus supplement, the weighted average life of the securities of a
class will be influenced by the rate at which the amount financed under the
loans (or underlying loans relating to the Agency Securities or Private Label
Securities, as applicable), included in the trust fund for a series is paid,
whether in the form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The prospectus supplement for each series of
securities will describe the prepayment standard or model, if any, that is used
and may contain tables setting forth the projected weighted average life of each
class of securities of the series and the percentage of the original principal
amount of each class of securities of the series that would be outstanding on
specified distribution dates based on the assumptions stated in the prospectus
supplement, including assumptions that prepayments on the loans (or underlying
loans relating to the Agency Securities or Private Label Securities, as
applicable) included in the related trust fund are made at rates corresponding
to various percentages of the prepayment standard or model specified in the
prospectus supplement.
There is, however, no assurance that prepayment of the loans (or underlying
loans relating to the Agency Securities or Private Label Securities, as
applicable) included in the related trust fund will conform to any level of any
prepayment standard or model specified in the related prospectus supplement. The
rate of principal prepayments on pools of loans may be influenced by a variety
of factors, including job-related factors such as transfers, layoffs or
promotions and personal factors such as divorce, disability or prolonged
illness. Economic conditions, either generally or within a particular geographic
area or industry, also may affect the rate of principal prepayments. Demographic
and social factors may influence the rate of principal prepayments in that some
borrowers have greater financial flexibility to move or refinance than do
others. The deductibility of mortgage interest payments, servicing decisions and
other factors also can affect the rate of principal prepayments. As a result,
there can be no assurance as to the rate or timing of principal prepayments of
the loans (or underlying loans) either from time to time or over the lives of
the loans (or underlying loans).
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the loans (or
underlying loans) for a series, the loans are
18
likely to prepay at rates higher than if prevailing interest rates remain at or
above the interest rates borne by the loans. In this regard, it should be noted
that the loans (or underlying loans) for a series may have different interest
rates. In addition, the weighted average life of a class of securities may be
affected by the varying maturities of the loans (or underlying loans). If any
loans (or underlying loans) for a series have actual terms to stated maturity
that are less than those that were assumed in calculating the final scheduled
distribution date of the related securities, one or more classes of the series
may be fully paid prior to their respective final scheduled distribution date,
even in the absence of prepayments and a reinvestment return higher than the
Assumed Reinvestment Rate established by the rating agencies named in the
related prospectus supplement.
THE TRUST FUNDS
GENERAL
The notes of each series will be secured by the pledge of the assets of the
related trust fund, and the certificates of each series will represent interests
in the assets of the related trust fund. The trust fund of each series will
include assets purchased by the depositor from the seller composed of:
o the primary assets of the trust fund;
o amounts available from the reinvestment of payments on the primary
assets at any Assumed Reinvestment Rate that may be established by the
rating agencies specified in the related prospectus supplement;
o any credit enhancement in the form of an irrevocable letter of credit,
surety bond, insurance policy or other form of credit support;
o REO property consisting of any mortgaged property or home improvement
that secured a loan but which is acquired by foreclosure or deed in
lieu of foreclosure or repossession; and
o the amount, if any, initially deposited into the collection account or
distribution account(s) for the series as specified in the related
prospectus supplement.
The securities will be non-recourse obligations of the related trust fund.
Unless the prospectus supplement indicates otherwise, the assets of the trust
fund specified in the related prospectus supplement will serve as collateral
only for that series of securities. Holders of a series of notes may only
proceed against the collateral securing that series in the case of a default
with respect to the notes and may not proceed against any assets of the
depositor or the related trust fund not pledged to secure the notes.
The primary assets for a series will be sold by the seller to the depositor
or purchased by the depositor in the open market or in privately negotiated
transactions (which may include transactions with affiliates) and will be
transferred by the depositor to the related trust fund. Loans relating to a
series will be serviced by the servicer (which may be the seller) that is
19
specified in the related prospectus supplement. The servicer will service the
loans pursuant to a pooling and servicing agreement with respect to a series of
certificates, or a servicing agreement between the trust fund and servicer with
respect to a series of notes.
If the prospectus supplement so provides, a trust fund relating to a series
of securities may be a business trust formed under the laws of the state
specified in the prospectus supplement pursuant to a trust agreement between the
depositor and the trustee.
Each trust fund, prior to the initial offering of the related series of
securities, will have no assets or liabilities. No trust fund is expected to
engage in any activities other than:
o to acquire, manage and hold the related primary assets and other assets
contemplated in this prospectus and in the related prospectus
supplement, and the proceeds thereof,
o to issue the related securities,
o to make payments and distributions on the securities, and
o to perform certain related activities.
No trust fund is expected to have any source of capital other than its assets
and any related credit enhancement.
Primary assets included in the trust fund for a series may consist of any
combination of loans, Agency Securities and Private Label Securities, as and to
the extent the related prospectus supplement specifies.
THE LOANS
General. Loans in each trust fund may consist of Residential Loans, Home
Equity Loans, Home Improvement Contracts or Manufactured Housing Contracts. If
specified in the related prospectus supplement, the loans in the related trust
fund may include cooperative apartment loans secured by security interests in
shares issued by private, non-profit, cooperative housing corporations and in
the related proprietary leases or occupancy agreements granting exclusive rights
to occupy specific dwelling units in the cooperatives' buildings. As more fully
described in the related prospectus supplement, the loans may be either
"conventional" loans or loans that are insured or guaranteed by a governmental
agency like the FHA or VA. The loans will have been originated in accordance
with the underwriting criteria specified in the related prospectus supplement.
In general, the loans in a pool will have monthly payments due on the first
day of each month. However, as described in the related prospectus supplement,
the loans in a pool may have payments due more or less frequently than monthly.
In addition, payments may be due on any day during a month. The payment terms of
the loans to be included in a trust fund will be described in the related
prospectus supplement and may include any of the following features, all as
described in this prospectus or in the related prospectus supplement:
20
o Interest may be payable at
- a fixed rate,
- a rate that adjusts from time to time in relation to an index that
will be specified in the related prospectus supplement,
- a rate that is fixed for a period of time or under certain
circumstances and is followed by an adjustable rate,
- a rate that otherwise varies from time to time, or
- a rate that is convertible from an adjustable rate to a fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of these limitations. As
specified in the related prospectus supplement, the loans may provide for
payments in level monthly installments, for balloon payments, or for
payments that are allocated to principal and interest according to the "sum
of the digits" or "Rule of 78s" methods. Accrued interest may be deferred
and added to the principal of a loan for the periods and under the
circumstances as may be specified in the related prospectus supplement.
Loans may provide for the payment of interest at a rate lower than the
specified loan rate for a period of time or for the life of the loan, and
the amount of any difference may be contributed from funds supplied by the
seller of the property or another source.
o Principal may be
- payable on a level debt service basis to fully amortize the loan
over its term,
- calculated on the basis of an assumed amortization schedule that is
significantly longer than the original term to maturity or on an
interest rate that is different from the loan rate, or
- nonamortizing during all or a portion of the original term.
Payment of all or a substantial portion of the principal may be due on
maturity in the form of a balloon payment. Principal may include interest
that has been deferred and added to the principal balance of the loan.
o Monthly payments of principal and interest may
- be fixed for the life of the loan,
- increase over a specified period of time or
- change from period to period.
21
Loans may include limits on periodic increases or decreases in the amount
of monthly payments and may include maximum or minimum amounts of monthly
payments.
Prepayments of principal may be conditioned on payment of a prepayment fee,
which may be fixed for the life of the loan or may decline over time, and may be
prohibited for the life of the loan or for particular lockout periods. Some
loans may permit prepayments after expiration of the applicable lockout period
and may require the payment of a prepayment fee in connection with any
subsequent prepayment. Other loans may permit prepayments without payment of a
fee unless the prepayment occurs during specified time periods. The loans may
include "due on sale" clauses which permit the mortgagee to demand payment of
the entire loan in connection with the sale or transfers of the related
property. Other loans may be assumable by persons meeting the then applicable
underwriting standards of the related seller.
A trust fund may contain buydown loans that include provisions for a third
party to subsidize partially the monthly payments of the borrowers on those
loans during the early years of those loans, the difference to be made up from a
buydown fund contributed by that third party at the time of origination of the
loan. A buydown fund will be in an amount equal either to the discounted value
or full aggregate amount of future payment subsidies. The underlying assumption
of buydown plans is that the income of the borrower will increase during the
buydown period as a result of normal increases in compensation and inflation, so
that the borrower will be able to meet the full loan payments at the end of the
buydown period. If assumption of increased income is not fulfilled, the
possibility of defaults on buydown loans is increased. The related prospectus
supplement will contain information with respect to any buydown loan concerning
limitations on the interest rate paid by the borrower initially, on annual
increases in the interest rate and on the length of the buydown period.
When we use the term "mortgaged property" in this prospectus, we mean the
real property which secures repayment of the related loan. Home Improvement
Contracts and Manufactured Housing Contracts may, and the other loans will, be
secured by mortgages or deeds of trust or other similar security instruments
creating a lien on a mortgaged property. In the case of Home Equity Loans, the
related liens may be subordinated to one or more senior liens on the related
mortgaged properties as described in the prospectus supplement. As specified in
the related prospectus supplement, home improvement contracts and manufactured
housing contracts may be unsecured or secured by purchase money security
interests in the financed home improvements and the financed manufactured homes.
When we use the term "properties" in this prospectus supplement, we mean the
related mortgaged properties, home improvements and manufactured homes. The
properties relating to the loans will consist primarily of single-family
properties, meaning detached or semi-detached one- to four-family dwelling
units, townhouses, rowhouses, individual condominium units, individual units in
planned unit developments and other dwelling units, or mixed-use properties. Any
mixed-use property will not exceed three stories and its primary use will be for
one- to four-family residential occupancy, with the remainder of its space for
retail, professional or other commercial uses. Any non-residential use will be
in compliance with local zoning laws and regulations. Properties may include
vacation and second homes, investment properties and leasehold interests. In the
case of leasehold interests, the term of the leasehold will exceed the scheduled
maturity of the related loan by a time period specified in the related
prospectus supplement. The properties may be
22
located in any one of the fifty states, the District of Columbia, Guam, Puerto
Rico or any other territory of the United States.
Loans with specified loan-to-value ratios and/or principal balances may be
covered wholly or partially by primary mortgage guaranty insurance policies. The
existence, extent and duration of any coverage provided by primary mortgage
guaranty insurance policies will be described in the related prospectus
supplement.
Home Equity Loans. The primary assets for a series may consist, in whole or
in part, of, closed-end home equity loans, revolving credit line home equity
loans or certain balances forming a part of the revolving credit line loans,
secured by mortgages creating senior or junior liens primarily on one- to
four-family residential or mixed-use properties. The full principal amount of a
closed-end loan is advanced at origination of the loan and generally is
repayable in equal (or substantially equal) installments of an amount sufficient
to fully amortize the loan at its stated maturity. Unless otherwise described in
the related prospectus supplement, the original terms to stated maturity of
closed-end loans will not exceed 360 months. Principal amounts of a revolving
credit line loan may be drawn down (up to the maximum amount set forth in the
related prospectus supplement) or repaid from time to time, but may be subject
to a minimum periodic payment. Except to the extent provided in the related
prospectus supplement, the trust fund will not include any amounts borrowed
under a revolving credit line loan after the cut-off date designated in the
prospectus supplement. As more fully described in the related prospectus
supplement, interest on each revolving credit line loan, excluding introductory
rates offered from time to time during promotional periods, is computed and
payable monthly on the average daily principal balance of that loan. Under
certain circumstances, a borrower under either a revolving credit line loan or a
closed-end loan may choose an interest-only payment option. In this case only
the amount of interest that accrues on the loan during the billing cycle must be
paid. An interest-only payment option may be available for a specified period
before the borrower must begin making at least the minimum monthly payment of a
specified percentage of the average outstanding balance of the loan.
The rate of prepayment on Home Equity Loans cannot be predicted. Home
Equity Loans have been originated in significant volume only during the past few
years and the depositor is not aware of any publicly available studies or
statistics on the rate of their prepayment. The prepayment experience of the
related trust fund may be affected by a wide variety of factors, including
general economic conditions, prevailing interest rate levels, the availability
of alternative financing and homeowner mobility and the frequency and amount of
any future draws on any revolving credit line loans. Other factors that might be
expected to affect the prepayment rate of a pool of Home Equity Loans include
the amounts of, and interest rates on, the underlying first mortgage loans, and
the use of first mortgage loans as long-term financing for home purchase and
junior mortgage loans as shorter-term financing for a variety of purposes,
including home improvement, education expenses and purchases of consumer
durables such as automobiles. Accordingly, Home Equity Loans may experience a
higher rate of prepayment than traditional fixed-rate first mortgage loans. On
the other hand, because Home Equity Loans such as the revolving credit line
loans generally are not fully amortizing, the absence of voluntary borrower
prepayments could cause rates of principal payments to be lower than, or similar
to, those of traditional fully-amortizing first mortgage loans. Any future
limitations on the right of borrowers to deduct interest payments on Home Equity
Loans for federal income tax
23
purposes may further increase the rate of prepayments of the Home Equity Loans.
Moreover, the enforcement of a "due-on-sale" provision (as described below) will
have the same effect as a prepayment of the related Home Equity Loans. See
"Material Legal Aspects of the Loans--Due-on-Sale Clauses in Mortgage Loans" in
this prospectus.
Collections on revolving credit line loans may vary for a number of
reasons, including those listed below.
o A borrower may make a payment during a month in an amount that is as
little as the minimum monthly payment for that month or, during the
interest-only period for certain revolving credit line loans (and, in
more limited circumstances, closed-end loans with respect to which an
interest-only payment option has been selected), the interest, fees and
charges for that month.
o A borrower may make a payment that is as much as the entire principal
balance plus accrued interest and related fees and charges during a
month.
o A borrower may fail to make the required periodic payment.
o Collections on the mortgage loans may vary due to seasonal purchasing
and the payment habits of borrowers.
Each single family property will be located on land owned in fee simple by
the borrower or on land leased by the borrower for a term at least ten years
(unless otherwise provided in the related prospectus supplement) greater than
the term of the related loan. Attached dwellings may include owner-occupied
structures where each borrower owns the land upon which the unit is built, with
the remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building. Unless otherwise specified in the related prospectus supplement,
mortgages on cooperative dwelling units consist of a lien on the shares issued
by the cooperative dwelling corporation and the proprietary lease or occupancy
agreement relating to the cooperative dwelling.
The aggregate principal balance of loans secured by single family
properties that are owner-occupied will be disclosed in the related prospectus
supplement. Unless otherwise specified in the prospectus supplement, the sole
basis for a representation that a given percentage of the loans are secured by
single family property that is owner-occupied will be either
o a representation by the borrower at origination of the loan either that
the underlying mortgaged property will be used by the borrower for a
period of at least six months every year or that the borrower intends
to use the mortgaged property as a primary residence, or
o a finding that the address of the underlying mortgaged property is the
borrower's mailing address as reflected in the servicer's records.
To the extent specified in the related prospectus supplement, single family
properties may include non-owner occupied investment properties and vacation and
second homes.
24
Home Improvement Contracts. The primary assets for a series may consist, in
whole or in part, of home improvement installment sales contracts and
installment loan agreements originated by home improvement contractors in the
ordinary course of business. As specified in the related prospectus supplement,
the Home Improvement Contracts will be either unsecured or secured by senior or
junior mortgages primarily on single family properties, or by purchase money
security interests in the related home improvements. Unless otherwise specified
in the applicable prospectus supplement, the Home Improvement Contracts will be
fully amortizing and may have fixed interest rates or adjustable interest rates
and may provide for other payment characteristics as described below and in the
related prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the home
improvements securing the Home Improvement Contracts include, but are not
limited to, replacement windows, house siding, new roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels.
Manufactured Housing Contracts. The trust fund assets for a series may
consist, in whole or part, of conventional manufactured housing installment
sales contracts and installment loan agreements originated by a manufactured
housing dealer in the ordinary course of business. As specified in the related
prospectus supplement, the Manufactured Housing Contracts will be secured by
manufactured homes, located in any of the fifty states or the District of
Columbia or by mortgages on the real estate on which the manufactured homes are
located.
The manufactured homes securing the Manufactured Housing Contracts will
consist of manufactured homes within the meaning of 42 United States Code,
Section 5402(6), or manufactured homes meeting those other standards as shall be
described in the related prospectus supplement. Section 5402(6) defines a
"manufactured home" as "a structure, transportable in one or more sections,
which, in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to the
required utilities, and includes the plumbing, heating, air conditioning and
electrical systems contained therein; except that the term shall include any
structure which meets all the requirements of [this] paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
Manufactured homes, unlike mortgaged properties, generally depreciate in
value. Consequently, at any time after origination it is possible, especially in
the case of contracts with high loan-to-value ratios at origination, that the
market value of a manufactured home or home improvement may be lower than the
principal amount outstanding under the related contract.
Additional Information. The selection criteria applicable to the loans will
be specified in the related prospectus supplement. These include, but are not
limited to, the combined loan-to-value ratios or loan-to-value ratios, as
applicable, original terms to maturity and delinquency information.
25
The loans for a series of securities may include loans that do not amortize
their entire principal balance by their stated maturity in accordance with their
terms but require a balloon payment of the remaining principal balance at
maturity, as specified in the related prospectus supplement. As further
described in the related prospectus supplement, the loans for a series of
securities may include loans that do not have a specified stated maturity.
The loans will be either conventional contracts or contracts insured by the
Federal Housing Administration (FHA) or partially guaranteed by the Veterans
Administration (VA). Loans designated in the related prospectus supplement as
insured by the FHA will be insured under various FHA programs as authorized
under the United States Housing Act of 1937, as amended.. These programs
generally limit the principal amount and interest rates of the mortgage loans
insured. Loans insured by the FHA generally require a minimum down payment of
approximately 5% of the original principal amount of the loan. No FHA-insured
loans relating to a series of securities may have an interest rate or original
principal amount exceeding the applicable FHA limits at the time or origination
of such loan.
The insurance premiums for loans insured by the FHA are collected by
lenders approved by the Department of Housing and Urban Development (HUD) and
are paid to the FHA. The regulations governing FHA single-family mortgage
insurance programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance of the mortgaged
premises to HUD or upon assignment of the defaulted loan to HUD. With respect to
a defaulted FHA-insured loan, the servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, either by the servicer or HUD,
that default was caused by circumstances beyond the borrower's control, the
servicer is expected to make an effort to avoid foreclosure by entering, if
feasible, into one of a number of available forms of forbearance plans with the
borrower. Such plans may involve the reduction or suspension of regular mortgage
payments for a specified period, with such payments to be made upon or before
the maturity date of the mortgage, or the recasting of payments due under the
mortgage up to or beyond the maturity date. In addition, when a default caused
by such circumstances is accompanied by certain other criteria, HUD may provide
relief by making payments to the servicer in partial or full satisfaction of
amounts due under the loan (which payments are to be repaid by the borrower to
HUD) or by accepting assignment of the loan from the servicer. With certain
exceptions, at least three full monthly installments must be due and unpaid
under the loan and HUD must have rejected any request for relief from the
borrower before the servicer may initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The servicer of each FHA-insured loan will be obligated
to purchase any such debenture issued in satisfaction of a loan upon default for
an amount equal to the principal amount of the debenture.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted loan adjusted to reimburse the
servicer for certain costs and expenses and to deduct certain amounts received
or retained by the servicer after default. When entitlement to insurance
benefits results from foreclosure (or other acquisition of possession) and
26
conveyance to HUD, the servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to the date of foreclosure but in general only to the extent it was allowed
pursuant to a forbearance plan approved by HUD. When entitlement to insurance
benefits results from assignment of the loan to HUD, the insurance payment
includes full compensation for interest accrued and unpaid to the assignment
date. The insurance payment itself, upon foreclosure of an FHA-insured loan,
bears interest from a date 30 days after the borrower's first uncorrected
failure to perform any obligation to make any payment due under the loan and,
upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Loans designated in the related prospectus supplement as guaranteed by the
VA will be partially guaranteed by the VA under the Serviceman's Readjustment
Act of 1944, as amended. The Serviceman's Readjustment Act permits a veteran (or
in certain instances, the spouse of a veteran) to obtain a mortgage loan
guaranty by the VA covering mortgage financing of the purchase of a one- to
four-family dwelling unit at interest rates permitted by the VA. The program has
no mortgage loan limits, requires no down payment from the purchaser and permits
the guarantee of mortgage loans of up to 30 years' duration.
The maximum guaranty that may be issued by the VA under a VA-guaranteed
mortgage loan depends upon the original principal amount of the mortgage loan,
as further described in 38 United States Code Section 1803(a), as amended. The
liability on the guaranty is reduced or increased pro rata with any reduction or
increase in the amount of indebtedness, but in no event will the amount payable
on the guaranty exceed the amount of the original guaranty. The VA may, at its
option and without regard to its guaranty, make full payment to a mortgage
holder of unsatisfied indebtedness on a mortgage upon its assignment to the VA.
With respect to a defaulted VA-guaranteed loan, the servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for the
guaranteed amount is submitted to the VA after liquidation of the related
mortgaged property.
The amount payable under a VA guaranty will be the percentage of the
VA-insured loan originally guaranteed by the VA applied to the indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guaranty will be equal to the unpaid principal
amount of the loan, interest accrued on the unpaid balance of the loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the mortgaged property. The amount payable under the guaranty may
in no event exceed the amount of the original guaranty.
The prospectus supplement for each series will provide information with
respect to the loans that are primary assets of the related trust fund as of the
cut-off date, including, among other things, and to the extent relevant:
o the aggregate unpaid principal balance of the loans;
27
o the range and weighted average interest rates on the loans and, in the
case of adjustable rate loans, the range and weighted average of the
current interest rates and the lifetime interest rate caps, if any;
o the range and average principal balance of the loans;
o the weighted average original and remaining terms to stated maturity of
the loans and the range of original and remaining terms to stated
maturity, if applicable;
o the range and weighted average of combined loan-to-value ratios or
loan-to-value ratios for the loans, as applicable;
o the percentage (by principal balance as of the cut-off date) of loans
that accrue interest at adjustable or fixed interest rates;
o any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the loans;
o the percentage (by principal balance as of the cut-off date) of loans
that are secured by mortgaged properties or home improvements or that
are unsecured;
o the geographic distribution of any mortgaged properties securing the
loans;
o for loans that are secured by single family properties, the percentage
(by principal balance as of the cut-off date) secured by shares
relating to cooperative dwelling units, condominium units, investment
property and vacation or second homes;
o the lien priority of the loans;
o the delinquency status and year of origination of the loans;
o whether the loans are closed-end loans and/or revolving credit line
loans; and
o in the case of revolving credit line loans, the general payments and
credit line terms of those loans and other pertinent features.
The prospectus supplement will also specify any other limitations on the
types or characteristics of the loans in the trust fund for the related series
of securities.
If information of the nature described above respecting the loans is not
known to the depositor at the time the securities are initially offered, more
general or approximate information of the nature described above will be
provided in the prospectus supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related series of securities and to be filed with the SEC
within 15 days after the initial issuance of the securities.
28
PRIVATE LABEL SECURITIES
General. Primary assets for a series may consist, in whole or in part, of
Private Label Securities or PLS (i.e., private mortgage-backed asset-backed
securities) that include:
o pass-through certificates representing beneficial interests in
underlying loans of a type that would otherwise be eligible to be loans
held directly by the trust fund, or
o collateralized obligations secured by underlying loans of a type that
would otherwise be eligible to be loans held directly by the trust
fund.
The Private Label Securities will previously have been
o offered and distributed to the public pursuant to an effective
registration statement, or
o purchased in a transaction not involving any public offering from a
person that is not an affiliate of the Private Label Securities at the
time of sale (nor its affiliate at any time during the three preceding
months) and a period of two years has elapsed since the date the
Private Label Securities were acquired from the issuer or its
affiliate, whichever is later.
Although individual underlying loans may be insured or guaranteed by the
United States or one of its agencies or instrumentalities, they need not be, and
the Private Label Securities themselves may be, but need not be, insured or
guaranteed.
The Private Label Securities will have been issued pursuant to a pooling
and servicing agreement, a trust agreement or similar agreement. The
seller/servicer of the underlying loans will have entered into a PLS agreement
with the PLS trustee. The PLS trustee, its agent or a custodian will take
possession of the underlying loans. The underlying loans will be serviced by the
PLS servicer directly or by one or more sub-servicers subject to the supervision
of the PLS servicer.
The issuer Private Label Securities will be
o a financial institution or other entity engaged generally in the
business of lending,
o a public agency or instrumentality of a state, local or federal
government, or
o a limited purpose corporation organized for the purpose of, among other
things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in trusts.
If specified in the prospectus supplement, the PLS issuer may be an affiliate of
the depositor. The obligations of the PLS issuer generally will be limited to
certain representations and warranties that it makes with respect to the assets
it conveys to the related trust. Unless otherwise specified in the related
prospectus supplement, the PLS issuer will not have guaranteed
29
any of the assets conveyed to the related trust or any of the Private Label
Securities issued under the PLS agreement.
Distributions of principal and interest will be made on the Private Label
Securities on the dates specified in the related prospectus supplement. The
Private Label Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Label Securities by the PLS trustee or
the PLS servicer. The PLS issuer or the PLS servicer may have the right to
repurchase the underlying loans after a certain date or under other
circumstances specified in the related prospectus supplement.
The loans underlying the Private Label Securities may be fixed rate, level
payment, fully amortizing loans or adjustable rate loans or loans having balloon
or other irregular payment features. The underlying loans will be secured by
mortgages on mortgaged properties.
Credit Support Relating to Private Label Securities. Credit support in the
form of reserve funds, subordination of other private securities issued under
the PLS agreement, guarantees, cash collateral accounts, security policies or
other types of credit support may be provided with respect to the underlying
loans or with respect to the Private Label Securities themselves. The type,
characteristics and amount of credit support will be a function of the
characteristics of the underlying loans and other factors and will be based on
the requirements of the nationally recognized statistical rating organization
that rated the Private Label Securities.
Additional Information. If the primary assets of a trust fund include
Private Label Securities, the related prospectus supplement will specify the
items listed below, to the extent relevant and to the extent information is
reasonably available to the depositor and the depositor reasonably believes the
information to be reliable:
o the total approximate principal amount and type of the Private Label
Securities to be included in the trust fund,
o the maximum original term to stated maturity of the Private Label
Securities,
o the weighted average term to stated maturity of the Private Label
Securities,
o the pass-through or certificate rate or range of rates of the Private
Label Securities,
o the PLS issuer, the PLS servicer (if other than the PLS issuer) and the
PLS trustee,
o certain characteristics of any credit support such as reserve funds,
security policies or guarantees relating to the underlying loans or to
the Private Label Securities themselves;
o the terms on which underlying loans may, or are required to, be
purchased prior to their stated maturity or the stated maturity of the
Private Label Securities, and
o the terms on which underlying loans may be substituted for those
originally underlying the Private Label Securities.
30
In addition, the related prospectus supplement will provide information about
the loans underlying the Private Label Securities, including
o the payment features of the underlying loans (i.e., whether closed-end
loans or revolving credit line loans, whether fixed rate or adjustable
rate, whether level payment or balloon payment loans),
o the approximate aggregate principal balance, if known, of the
underlying loans insured guaranteed by a governmental entity,
o the servicing fee or range of servicing fees with respect to the
underlying loans,
o the minimum and maximum stated maturities of the underlying loans at
origination,
o the lien priority of the underlying loans, and
o the delinquency status and year of origination of the underlying loans.
The above disclosure may be on an approximate basis and will be as of the
date specified in the related prospectus supplement. If information of the
nature described above for the Private Label Securities is not known to the
depositor at the time the securities are initially offered, more general or
approximate information of a similar nature will be provided in the prospectus
supplement and the additional information, if available, will be set forth in a
Current Report on Form 8-K to be available to investors on the date of issuance
of the related series of securities and to be filed with the SEC within 15 days
of the initial issuance of the securities.
AGENCY SECURITIES
Ginnie Mae. The Government National Mortgage Association (Ginnie Mae) is a
wholly-owned corporate instrumentality of HUD. Section 306(g) of Title II of the
National Housing Act of 1934, as amended, authorizes Ginnie Mae to, among other
things, guarantee the timely payment of principal of and interest on
certificates which represent an interest in a pool of mortgage loans insured by
the FHA under the National Housing Act of 1934 or Title V of the National
Housing Act of 1949, or partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38 of the United
States Code.
Section 306 (g) of the National Housing Act of 1934 provides that "the full
faith and credit of the United States is pledged to the payment of all amounts
which may be required to be paid under any guarantee under this subsection." In
order to meet its obligations under any guarantee under Section 306 (g) of the
National Housing Act, Ginnie Mae may, under Section 306(d) of the National
Housing Act, borrow from the United States Treasury in an amount which is at any
time sufficient to enable Ginnie Mae, with no limitations as to amount, to
perform its obligations under its guarantee.
Ginnie Mae Certificates. Each Ginnie Mae certificate held in a trust fund
for a series of securities will be a "fully modified pass-through"
mortgaged-backed certificate issued and serviced by a mortgage banking company
or other financial concern approved by Ginnie Mae or approved by Fannie Mae as a
seller-servicer of FHA loans and/or VA loans. Each Ginnie Mae
31
certificate may be a GNMA I certificate or a GNMA II certificate. The mortgage
loans underlying the Ginnie Mae certificates will consist of FHA loans and/or VA
loans. Each mortgage loan of this type is secured by a one- to four-family
residential property or a manufactured home. Ginnie Mae will approve the
issuance of each Ginnie Mae certificate in accordance with a guaranty agreement
between Ginnie Mae and the issuer and servicer of the Ginnie Mae certificate.
Pursuant to its guaranty agreement, a Ginnie Mae servicer will be required to
advance its own funds in order to make timely payments of all amounts due on
each of the related Ginnie Mae certificates, even if the payments received by
the Ginnie Mae servicer on the FHA loans or VA loans underlying each of those
Ginnie Mae certificates are less than the amounts due on those Ginnie Mae
certificates.
The full and timely payment of principal of and interest on each Ginnie Mae
certificate will be guaranteed by Ginnie Mae, which obligation is backed by the
full faith and credit of the United States. Each Ginnie Mae certificate will
have an original maturity of not more than 40 years (but may have original
maturities of substantially less than 40 years). Each Ginnie Mae certificate
will provide for the payment by or on behalf of the Ginnie Mae servicer to the
registered holder of the Ginnie Mae certificate of scheduled monthly payments of
principal and interest equal to the registered holder's proportionate interest
in the aggregate amount of the monthly principal and interest payment on each
FHA loan or VA loan underlying the Ginnie Mae certificate, less the applicable
servicing and guarantee fee which together equal the difference between the
interest on the FHA loans or VA loans and the pass-through rate on the Ginnie
Mae certificate. In addition, each payment will include proportionate
pass-through payments of any prepayments of principal on the FHA loans or VA
loans underlying the Ginnie Mae certificate and liquidation proceeds in the
event of a foreclosure or other disposition of any the related FHA loans or VA
loans.
If a Ginnie Mae servicer is unable to make the payments on a Ginnie Mae
certificate as it becomes due, it must promptly notify Ginnie Mae and request
Ginnie Mae to make the payment. Upon notification and request, Ginnie Mae will
make payments directly to the registered holder of a Ginnie Mae certificate. In
the event no payment is made by a Ginnie Mae servicer and the Ginnie Mae
servicer fails to notify and request Ginnie Mae to make the payment, the holder
of the related Ginnie Mae certificate will have recourse only against Ginnie Mae
to obtain the payment. The trustee or its nominee, as registered holder of the
Ginnie Mae certificates held in a trust fund, will have the right to proceed
directly against Ginnie Mae under the terms of the guaranty agreements relating
to the Ginnie Mae certificates for any amounts that are not paid when due.
Except for pools of mortgage loans secured by manufactured homes, all
mortgage loans underlying a particular Ginnie Mae certificate must have the same
interest rate over the term of the loan. The interest rate on a GNMA I
certificate will equal the interest rate on the mortgage loans included in the
pool of mortgage loans underlying the GNMA I certificate, less one-half
percentage point per year of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II certificate may have annual
interest rates that vary from each other by up to one percentage point. The
interest rate on each GNMA II certificate will be between one-half percentage
point and one and one-half percentage points lower than the highest interest
rate on the mortgage loans included in the pool of mortgage loans
32
underlying the GNMA II certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments on each Ginnie Mae certificate will be
comprised of interest due as specified on a Ginnie Mae certificate plus the
scheduled principal payments on the FHA loans or VA loans underlying the Ginnie
Mae certificate due on the first day of the month in which the scheduled monthly
installments on the Ginnie Mae certificate is due. Regular monthly installments
on each Ginnie Mae certificate, are required to be paid to the trustee
identified in the related prospectus supplement as registered holder by the 15th
day of each month in the case of a GNMA I certificate, and are required to be
mailed to the trustee by the 20th day of each month in the case of a GNMA II
certificate. Any principal prepayments on any FHA loans or VA loans underlying a
Ginnie Mae certificate held in a trust fund or any other early recovery of
principal on a loan will be passed through to the trustee identified in the
related prospectus supplement as the registered holder of the Ginnie Mae
certificate.
Ginnie Mae certificates may be backed by graduated payment mortgage loans
or by "buydown" mortgage loans for which funds will have been provided, and
deposited into escrow accounts, for application to the payment of a portion of
the borrowers' monthly payments during the early years of those mortgage loans.
Payments due the registered holders of Ginnie Mae certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from other Ginnie Mae certificates and will include amounts to
be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, during the early years of the mortgage loans, will be less than the amount
of stated interest on the mortgage loans. The interest not so paid will be added
to the principal of the graduated payment mortgage loans and, together with
interest on that interest, will be paid in subsequent years. The obligations of
Ginnie Mae and of a Ginnie Mae issuer/servicer will be the same irrespective of
whether the Ginnie Mae certificates are backed by graduated payment mortgage
loans or "buydown" mortgage loans. No statistics comparable to the FHA's
prepayment experience on level payment, non-buydown loans are available in
inspect of graduated payment or buydown mortgages. Ginnie Mae certificates
related to a series of certificates may be held in book-entry form.
Fannie Mae. The Federal National Mortgage Association (Fannie Mae) is a
federally chartered and privately owned corporation organized and existing under
the Federal National Mortgage Association Charter Act. Fannie Mae was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder-owned
and privately managed corporation by legislation enacted in 1968.
Fannie Mae provides funds to the mortgage market primarily by purchasing
mortgage loans from lenders. Fannie Mae acquires funds to purchase mortgage
loans from many capital market investors that may not ordinarily invest in
mortgages. In so doing, it expands the total amount of funds available for
housing. Operating nationwide, Fannie Mae helps to redistribute mortgage funds
from capital-surplus to capital-short areas.
Fannie Mae Certificates. Fannie Mae certificates are either guaranteed
mortgage pass-through certificates or stripped mortgage-backed securities. The
following discussion of
33
Fannie Mae certificates applies equally to both types of Fannie Mae
certificates, except as otherwise indicated. Each Fannie Mae certificate to be
included in the trust fund for a series of securities will represent a
fractional undivided interest in a pool of mortgage loans formed by Fannie Mae.
Each pool formed by Fannie Mae will consist of mortgage loans of one of the
following types:
o fixed-rate level installment conventional mortgage loans,
o fixed-rate level installment mortgage loans that are insured by FHA or
partially guaranteed by the VA,
o adjustable rate conventional mortgage loans, or
o adjustable rate mortgage loans that are insured by the FHA or partially
guaranteed by the VA.
Each mortgage loan must meet the applicable standards set forth under the Fannie
Mae purchase program and will be secured by a first lien on a one- to
four-family residential property.
Each Fannie Mae certificate will be issued pursuant to a trust indenture.
Original maturities of substantially all of the conventional, level payment
mortgage loans underlying a Fannie Mae certificate are expected to be between
either eight to 15 years or 20 to 40 years. The original maturities of
substantially all of the fixed rate level payment FHA loans or VA loans are
expected to be 30 years.
Mortgage loans underlying a Fannie Mae certificate may have annual interest
rates that vary by as much as two percentage points from one another. The rate
of interest payable on a Fannie Mae guaranteed mortgage-backed certificate and
the series pass-through rate payable with respect to a Fannie Mae stripped
mortgage-backed security is equal to the lowest interest rate of any mortgage
loan in the related pool, less a specified minimum annual percentage
representing servicing compensation and Fannie Mae's guaranty fee. Under a
regular servicing option pursuant to which the mortgagee or other servicer
assumes the entire risk of foreclosure losses, the annual interest rates on the
mortgage loans underlying a Fannie Mae certificate will be between 50 basis
points and 250 basis points greater than the annual pass-through rate, in the
case of a Fannie Mae guaranteed mortgage-backed certificate, or the series
pass-through rate in the case of a Fannie Mae stripped mortgage-backed security.
Under a special servicing option pursuant to which Fannie Mae assumes the entire
risk for foreclosure losses, the annual interest rates on the mortgage loans
underlying a Fannie Mae certificate will generally be between 55 basis points
and 255 basis points greater than the annual pass-through rate, in the case of a
Fannie Mae guaranteed mortgage-backed certificate, or the series pass-through
rate in the case of a Fannie Mae stripped mortgage-backed security.
Fannie Mae guarantees to each registered holder of a Fannie Mae certificate
that it will distribute on a timely basis amounts representing the holder's
proportionate share of scheduled principal and interest payments at the
applicable pass-through rate provided for by the Fannie Mae certificate on the
underlying mortgage loans, whether or not received, and the holder's
proportionate share of the full principal amount of any foreclosed or other
finally liquidated
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mortgage loan, whether or not the principal amount is actually recovered. The
obligations of Fannie Mae under its guarantees are obligations solely of Fannie
Mae and are not backed by, or entitled to, the full faith and credit of the
United States. If Fannie Mae were unable to satisfy its obligations,
distributions to holders of Fannie Mae certificates would consist solely of
payments and other recoveries on the underlying mortgage loans and, accordingly,
monthly distributions to holders of Fannie Mae certificates would be affected by
delinquent payments and defaults on those mortgage loans.
Fannie Mae stripped mortgage-backed securities are issued in series of two
or more classes, with each class representing a specified undivided fractional
interest in principal distributions and interest distributions, adjusted to the
series pass-through rate, on the underlying pool of mortgage loans. The
fractional interests of each class in principal and interest distributions are
not identical, but the classes in the aggregate represent 100% of the principal
distributions and interest distributions, adjusted to the series pass-through
rate, on the respective pool. Because of the difference between the fractional
interests in principal and interest of each class, the effective rate of
interest on the principal of each class of Fannie Mae stripped mortgage-backed
securities may be significantly higher or lower than the series pass-through
rate and/or the weighted average interest rate of the underlying mortgage loans.
Unless otherwise specified by Fannie Mae, Fannie Mae certificates
evidencing interests in pools of mortgages formed on or after May 1, 1985 will
be available in book-entry form only. Distributions of principal and interest on
each Fannie Mae certificate will be made by Fannie Mae on the 25th day of each
month to the persons in whose name the Fannie Mae certificate is entered in the
books of the Federal Reserve Banks, or registered on the Fannie Mae certificate
register in the case of fully registered Fannie Mae certificates as of the close
of business on the last day of the preceding month. With respect to Fannie Mae
certificates issued in book-entry form, distributions on the Fannie Mae
certificates will be made by wire, and with respect to fully registered Fannie
Mae certificates, distributions on the Fannie Mae certificates will be made by
check.
Freddie Mac. The Federal Home Loan Mortgage Corporation (Freddie Mac) is a
shareholder-owned, United States government-sponsored enterprise created
pursuant to the Federal Home loan Mortgage Corporation Act, Title III of the
Emergency Home Finance Act of 1970, as amended. The common stock of Freddie Mac
is owned by the Federal Home loan Banks. Freddie Mac was established primarily
for the purpose of increasing the availability of mortgage credit for the
financing of urgently needed housing. It seeks to provide an enhanced degree of
liquidity for residential mortgage investments primarily by assisting in the
development of secondary markets for conventional mortgages. The principal
activity of Freddie Mac currently consists of the purchase of first lien
conventional mortgage loans FHA loans, VA loans or participation interests in
those mortgage loans and the sale of the loans or participations so purchased in
the form of mortgage securities, primarily Freddie Mac certificates. Freddie Mac
is confined to purchasing, so far as practicable, mortgage loans that it deems
to be of the quality, type and class which meet generally the purchase standards
imposed by private institutional mortgage investors.
Freddie Mac Certificates. Each Freddie Mac certificate included in a trust
fund for a series will represent an undivided interest in a pool of mortgage
loans that may consist of first
35
lien conventional loans, FHA loans or VA loans. Freddie Mac certificates are
sold under the terms of a mortgage participation certificate agreement. A
Freddie Mac certificate may be issued under either Freddie Mac's Cash Program or
Guarantor Program. Typically, mortgage loans underlying the Freddie Mac
certificates held by a trust fund will consist of mortgage loans with original
terms to maturity of from ten to 40 years. Each of those mortgage loans must
meet the applicable standards set forth in the law governing Freddie Mac. A
Freddie Mac certificate group may include whole loans, participation interests
in whole loans and undivided interests in whole loans and/or participations
comprising another Freddie Mac certificate group. Under the guarantor program,
any Freddie Mac certificate group may include only whole loans or participation
interests in whole loans.
Freddie Mac guarantees to each registered holder of a Freddie Mac
certificate the timely payment of interest on the underlying mortgage loans to
the extent of the applicable certificate rate on the registered holder's pro
rata share of the unpaid principal balance outstanding on the underlying
mortgage loans in the Freddie Mac certificate group represented by a Freddie Mac
certificate, whether or not received. Freddie Mac also guarantees to each
registered holder of a Freddie Mac certificate ultimate receipt by a holder of
all principal on the underlying mortgage loans, without any offset or deduction,
to the extent of that holder's pro rata share. However, Freddie Mac does not
guarantee, except if and to the extent specified in the prospectus supplement
for a series, the timely payment of scheduled principal. Under Freddie Mac's
Gold PC Program, Freddie Mac guarantees the timely payment of principal based on
the difference between the pool factor published in the month preceding the
month of distribution and the pool factor published in the related month of
distribution. Pursuant to its guarantees, Freddie Mac indemnifies holders of
Freddie Mac certificates against any diminution in principal by reason of
charges for property repairs, maintenance and foreclosure. Freddie Mac may remit
the amount due on account of its guarantee of collection of principal at any
time after default on an underlying mortgage loan, but not later than (x) 30
days following foreclosure sale, (y) 30 days following payment of the claim by
any mortgage insurer, or (z) 30 days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgage loans underlying Freddie Mac certificates, including the timing
of demand for acceleration, Freddie Mac reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgage
loans which it has purchased but not sold. The length of time necessary for
Freddie Mac to determine that a mortgage loan should be accelerated varies with
the particular circumstances of each borrower, and Freddie Mac has not adopted
standards which require that the demand be made within any specified period.
Freddie Mac certificates are not guaranteed by the United States or by any
Federal Home loan Bank and do not constitute debts or obligations of the United
States or any Federal Home loan Bank. The obligations of Freddie Mac under its
guarantee are obligations solely of Freddie Mac and are not backed by, nor
entitled to, the full faith and credit of the United States. If Freddie Mac were
unable to satisfy its obligations, distributions to holders of Freddie Mac
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, monthly distributions to holders of
Freddie Mac certificates would be affected by delinquent payments and defaults
on those mortgage loans.
36
Registered holders of Freddie Mac certificates are entitled to receive
their monthly pro rata share of all principal payments on the underlying
mortgage loans received by Freddie Mac, including any scheduled principal
payments, full and partial prepayments of principal and principal received by
Freddie Mac by virtue of condemnation, insurance, liquidation or foreclosure,
and repurchases of the mortgage loans by Freddie Mac or by the party that sold
the related mortgage loans to Freddie Mac. Freddie Mac is required to remit each
registered Freddie Mac certificateholder's pro rata share of principal payments
on the underlying mortgage loans, interest at the Freddie Mac pass-through rate
and any other sums like prepayment fees, within 60 days of the date on which
those payments are deemed to have been received by Freddie Mac.
Under Freddie Mac's Cash Program, with respect to pools formed prior to
June 1, 1987, there is no limitation on be amount by which interest rates on the
mortgage loans underlying a Freddie Mac certificate may exceed the pass-through
rate on the Freddie Mac certificate. With respect to Freddie Mac certificates
issued on or after June 1, 1987, the maximum interest rate on the mortgage loans
underlying the Freddie Mac certificates may exceed the pass-through rate of the
Freddie Mac certificates by 50 to 100 basis points. Under that program, Freddie
Mac purchases group of whole mortgage loans from sellers at specified
percentages of their unpaid principal balances, adjusted for accrued or prepaid
interest, which when applied to the interest rate of the mortgage loans and
participations purchased, results in the yield expressed as a percentage
required by Freddie Mac. The required yield, which includes a minimum servicing
fee retained by the servicer, is calculated using the outstanding principal
balance. The range of interest rates on the mortgage loans and participations in
a Freddie Mac certificate group under the Cash Program will vary since mortgage
loans and participations are purchased and assigned to a Freddie Mac certificate
group based upon their yield to Freddie Mac rather than on the interest rate on
the underlying mortgage loans.
Under Freddie Mac's Guarantor Program, the pass-through rate on a Freddie
Mac certificate is established based upon the lowest interest rate on the
underlying mortgage loans, minus a minimum servicing fee and the amount of
Freddie Mac's management and guaranty income as agreed upon between the seller
and Freddie Mac. For Freddie Mac certificate group formed under the Guarantor
Program with certificate numbers beginning with 18-012, the range between the
lowest and the highest annual interest rates on the mortgage loans in a Freddie
Mac certificate group may not exceed two percentage points.
Freddie Mac certificates duly presented for registration of ownership on or
before the last business day of a month are registered effective as of the first
day of the month. The first remittance to a registered holder of a Freddie Mac
certificate will be distributed so as to be received normally by the 15th day of
the second month following the month in which the purchaser became a registered
holder of the Freddie Mac certificates. Subsequent remittances will be
distributed monthly to the registered holder so as to be received normally by
the 15th day of each month. The Federal Reserve Bank of New York maintains
book-entry accounts with respect to Freddie Mac certificates sold by Freddie Mac
on or after January 2, 1985, and makes payments of principal and interest each
month to the registered holders of Freddie Mac certificates in accordance with
the holders' instructions.
Stripped Mortgage-Backed Securities. Agency Securities may consist of one
or more stripped mortgage-backed securities, each as described in this
prospectus and in the related
37
prospectus supplement. Each Agency Security of this type will represent an
undivided interest in all or part of either the principal distributions or the
interest distributions, or in some specified portion of the principal and
interest distributions, on particular Freddie Mac, Fannie Mae, Ginnie Mae or
other government agency or government-sponsored agency certificates. The
underlying securities will be held under a trust agreement by Freddie Mac,
Fannie Mae, Ginnie Mae or another government agency or government-sponsored
agency, each as trustee, or by another trustee named in the related prospectus
supplement. Freddie Mac, Fannie Mae, Ginnie Mae or another government agency or
government-sponsored agency will guarantee each stripped agency security to the
same extent as the applicable entity guarantees the underlying securities
backing the stripped Agency Security, unless otherwise specified in the related
prospectus supplement.
Other Agency Securities. If specified in the related prospectus supplement,
a trust fund may include other mortgage pass-through certificates issued or
guaranteed by Ginnie Mae, Fannie Mae, Freddie Mac or other government agencies
or government-sponsored agencies. The characteristics of any other mortgage
pass-through certificates issued or guaranteed by Ginnie Mae, Fannie Mae,
Freddie Mac or other government agencies or government-sponsored agencies will
be described in that prospectus supplement. If so specified, a combination of
different types of Agency Securities may be held in a trust fund.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate collection account will be established by the trustee, or by the
servicer in the name of the trustee, for each series of securities for receipt
of
o the amount of any cash specified in the related prospectus supplement
to be initially deposited by the depositor in the collection account,
o all amounts received with respect to the primary assets of the related
trust fund, and
o unless otherwise specified in the related prospectus supplement, income
earned on the foregoing amounts.
As provided in the related prospectus supplement, certain amounts on deposit in
the collection account and certain amounts available under any credit
enhancement for the securities of that series will be deposited into the
applicable distribution account for distribution to the holders of the related
securities. The trustee will establish a separate distribution account for each
series of securities. Unless otherwise specified in the related prospectus
supplement, the trustee will invest the funds in the collection account and the
distribution account in eligible investments including, among other investments,
obligations of the United States and certain of its agencies, federal funds,
certificates of deposit, commercial paper, demand and time deposits and banker's
acceptances, certain repurchase agreements of United States government
securities and certain guaranteed investment contracts, in each case acceptable
to the rating agencies named in the prospectus supplement. With certain
exceptions, all such eligible investments must mature, in the case of funds in
the collection account, not later than the day preceding the date when the funds
are due to be deposited into the distribution account or otherwise distributed
and, in the
38
case of funds in the distribution account, not later than the day preceding the
next distribution date for the related series of securities.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any deposit agreement or minimum principal payment
agreement that may be specified in the related prospectus supplement.
If specified in the related prospectus supplement, a trust fund will
include one or more pre-funding accounts that are segregated trust accounts
established and maintained with the trustee for the related series. If specified
in the prospectus supplement, a portion of the proceeds of the sale of the
securities equal to the pre-funded amount will be deposited into the pre-funding
account on the closing date and may be used to purchase additional primary
assets during the pre-funding period specified in the prospectus supplement. In
no case will the pre-funded amount exceed 50% of the total principal amount of
the related securities, and in no case will the pre-funding period exceed one
year. The primary assets to be purchased generally will be selected on the basis
of the same criteria as those used to select the initial primary assets of the
trust fund, and the same representations and warranties will be made with
respect to them. If any pre-funded amount remains on deposit in the pre-funding
account at the end of the pre-funding period, the remaining amount will be
applied in the manner specified in the related prospectus supplement to prepay
the notes and/or the certificates of that series.
If a pre-funding account is established, one or more capitalized interest
accounts that are segregated trust accounts may be established and maintained
with the trustee for the related series. On the closing date for the series, a
portion of the proceeds of the sale of the related securities will be deposited
into the capitalized interest account and used to fund the excess, if any, of
o the sum of
o the amount of interest accrued on the securities of the series, and
o if specified in the related prospectus supplement, certain fees or
expenses during the pre-funding period,
over
o the amount of interest available from the primary assets in the trust
fund.
Any amounts on deposit in the capitalized interest account at the end
of the pre-funding period that are not necessary for these purposes will be
distributed to the person specified in the related prospectus supplement.
CREDIT ENHANCEMENT
If so provided in the prospectus supplement relating to a series of
securities, simultaneously with the depositor's assignment of the primary assets
to the trustee, the depositor will obtain from an institution or by other means
acceptable to the rating agencies named in the prospectus supplement one or more
types of credit enhancement in favor of the trustee on behalf
39
of the holders of the related series or designated classes of the series. The
credit enhancement will support the payment of principal of and interest on the
securities, and may be applied for certain other purposes to the extent and
under the conditions set forth in the prospectus supplement. Credit enhancement
for a series may include one or more of the forms described below or any other
form as may be specified in the related prospectus supplement. If so specified
in the related prospectus supplement, the credit enhancement may be structured
so as to protect against losses relating to more than one trust fund.
SUBORDINATED SECURITIES
If specified in the related prospectus supplement, credit enhancement for a
series may consist of one or more classes of subordinated securities. The rights
of the holders of subordinated securities to receive distributions on any
distribution date will be subordinate in right and priority to the rights of
holders of senior securities of the same series, but only to the extent
described in the related prospectus supplement.
INSURANCE POLICIES, SURETY BONDS AND GUARANTIES
If so provided in the prospectus supplement for a series of securities,
deficiencies in amounts otherwise payable on the securities or on specified
classes will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Those instruments may cover, with
respect to one or more classes of securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related prospectus supplement. In addition, if specified in the
related prospectus supplement, a trust fund may also include bankruptcy bonds,
special hazard insurance policies, other insurance or guaranties for the purpose
of:
o maintaining timely payments or providing additional protection against
losses on the trust fund assets;
o paying administrative expenses; or
o establishing a minimum reinvestment rate on the payments made in
respect of those assets or principal payment rate on those assets.
Arrangements may include agreements under which securityholders are entitled to
receive amounts deposited in various accounts held by the trustee upon the terms
specified in the related prospectus supplement. A copy of any arrangement
instrument for a series will be filed with the SEC as an exhibit to a Current
Report on Form 8-K to be filed with the SEC following issuance of the securities
of the related series.
OVER-COLLATERALIZATION
If so provided in the prospectus supplement for a series of securities, a
portion of the interest payment on each loan included in the trust fund may be
applied as an additional distribution in respect of principal to reduce the
principal balance of a class or classes of
40
securities and, thus, accelerate the rate of payment of principal on that class
or those classes of securities.
OTHER INSURANCE POLICIES
If specified in the related prospectus supplement, credit enhancement for a
series may consist of pool insurance policies, special hazard insurance
policies, bankruptcy bonds and other types of insurance relating to the primary
assets, as described below and in the related prospectus supplement.
Pool Insurance Policy. If so specified in the related prospectus
supplement, the depositor will obtain a pool insurance policy for the loans in
the related trust fund. The pool insurance policy will cover any loss (subject
to the limitations described in the prospectus supplement) by reason of default,
but will not cover the portion of the principal balance of any loan that is
required to be covered by any primary mortgage insurance policy. The amount and
terms of any pool insurance coverage will be set forth in the related prospectus
supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to property securing a defaulted or foreclosed loan (title
to which has been acquired by the insured) and to the extent the damage is not
covered by a standard hazard insurance policy (or any flood insurance policy, if
applicable) required to be maintained with respect to the property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard hazard insurance policy, the special hazard insurer will
pay the lesser of
o the cost of repair or replacement of the property, and
o upon transfer of the property to the special hazard insurer, the unpaid
principal balance of the loan at the time of acquisition of the
property by foreclosure or deed in lieu of foreclosure, plus accrued
interest to the date of claim settlement and certain expenses incurred
by the servicer with respect to the property.
If the unpaid principal balance of the loan plus accrued interest and
certain expenses is paid by the special hazard insurer, the amount of further
coverage under the special hazard insurance policy will be reduced by that
amount less any net proceeds from the sale of the related property. Any amount
paid as the cost of repair of the property will reduce coverage by that amount.
Special hazard insurance policies typically do not cover losses occasioned by
war, civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the mortgaged property is in a federally designated flood area),
chemical contamination and certain other risks.
Restoration of the property with the proceeds described in the first bullet
of the second previous paragraph is expected to satisfy the condition under any
pool insurance policy that the property be restored before a claim under the
pool insurance policy may be validly presented with respect to the defaulted
loan secured by the property. The payment described in the second bullet of the
second previous paragraph will render unnecessary presentation of a claim in
respect of the loan under any pool insurance policy. Therefore, so long as a
pool insurance
41
policy remains in effect, the payment by the special hazard insurer of the cost
of repair or of the unpaid principal balance of the related loan plus accrued
interest and certain expenses will not affect the total amount in respect of
insurance proceeds paid to holders of the securities, but will affect the
relative amounts of coverage remaining under the special hazard insurance policy
and pool insurance policy.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the bankruptcy
court may establish the value of the property securing the related loan at an
amount less than the then-outstanding principal balance of the loan. The amount
of the secured debt could be reduced to that value, and the holder of the loan
thus would become an unsecured creditor to the extent the principal balance of
the loan exceeds the value assigned to the property by the bankruptcy court. In
addition, certain other modifications of the terms of a loan can result from a
bankruptcy proceeding. See "Material Legal Aspects of the Loans" in this
prospectus. If the related prospectus supplement so provides, the depositor or
other entity specified in the prospectus supplement will obtain a bankruptcy
bond or similar insurance contract covering losses resulting from proceedings
with respect to borrowers under the Federal Bankruptcy Code. The bankruptcy bond
will cover certain losses resulting from a reduction by a bankruptcy court of
scheduled payments of principal of and interest on a loan or a reduction by the
court of the principal amount of a loan and will cover certain unpaid interest
on the amount of any principal reduction from the date of the filing of a
bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the prospectus supplement for all loans in the trust fund for the related
series. The amount will be reduced by payments made under the bankruptcy bond in
respect of the loans, unless otherwise specified in the related prospectus
supplement, and will not be restored.
RESERVE FUNDS
If the prospectus supplement relating to a series of securities so
specifies, the depositor will deposit into one or more reserve funds cash, a
letter or letters of credit, cash collateral accounts, eligible investments, or
other instruments meeting the criteria of the rating agencies in the amount
specified in the prospectus supplement. Each reserve fund will be established by
the trustee as part of the trust fund for that series or for the benefit of the
credit enhancement provider for that series. In the alternative or in addition
to the initial deposit by the depositor, a reserve fund for a series may be
funded over time through application of all or a portion of the excess cash flow
from the primary assets for the series, to the extent described in the related
prospectus supplement. If applicable, the initial amount of the reserve fund and
the reserve fund maintenance requirements for a series of securities will be
described in the related prospectus supplement.
Amounts withdrawn from any reserve fund will be applied by the trustee to
make payments on the securities of the related series, to pay expenses, to
reimburse any credit enhancement provider for the series or for any other
purpose, in the manner and to the extent specified in the related prospectus
supplement.
Amounts deposited into a reserve fund will be invested by the trustee in
eligible investments maturing no later than the day specified in the related
prospectus supplement.
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CROSS-COLLATERALIZATION
If specified in the related prospectus supplement, the beneficial ownership
of separate groups of assets included in a trust fund may be evidenced by
separate classes of the related series of securities. In that case, credit
support may be provided by a cross-collateralization feature which requires that
distributions be made with respect to securities evidencing a beneficial
ownership interest in, or secured by, one or more asset groups within the same
trust fund prior to distributions to subordinated securities evidencing a
beneficial ownership interest in, or secured by, one or more other asset groups
within that trust fund. Cross-collateralization may be provided by
o the allocation of a portion of excess amounts generated by one or more
asset groups within the same trust fund to one or more other asset
groups within the same trust fund, or
o the allocation of losses with respect to one or more asset groups to
one or more other asset groups within the same trust fund.
Excess amounts will be applied and/or losses will be allocated to the class or
classes of subordinated securities of the related series then outstanding having
the lowest rating assigned by any rating agency or the lowest payment priority,
in each case to the extent and in the manner more specifically described in the
related prospectus supplement. The prospectus supplement for a series which
includes a cross-collateralization feature will describe the manner and
conditions for applying the cross-collateralization feature.
If specified in the related prospectus supplement, the coverage provided by
one or more forms of credit support described in this prospectus may apply
concurrently to two or more related trust funds. If applicable, the related
prospectus supplement will identify the trust funds to which credit support
relates and the manner of determining the amount of coverage the credit support
provides to the identified trust funds.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If provided in the prospectus supplement relating to a series of
securities, the depositor will enter into a minimum principal payment agreement
with an entity meeting the criteria of the rating agencies named in the
prospectus supplement under which the entity will provide certain payments on
the securities of the series in the event that aggregate scheduled principal
payments and/or prepayments on the primary assets for the series are not
sufficient to make payments on the securities of the series as provided in the
prospectus supplement.
DEPOSIT AGREEMENT
If specified in a prospectus supplement, the depositor and the trustee for
a series of securities will enter into a deposit agreement with the entity
specified in the prospectus supplement on or before the sale of the related
series of securities. The deposit agreement is intended to accumulate available
cash for investment so that the cash, together with income thereon, can be
applied to future distributions on one or more classes of securities. The
related prospectus supplement will describe the terms of any deposit agreement.
43
FINANCIAL INSTRUMENTS
If provided in the related prospectus supplement, the trust fund may
include one or more financial instruments that are intended to meet the
following goals:
o to convert the payments on some or all of the loans and Private Label
Securities from fixed to floating payments, or from floating to fixed,
or from floating based on a particular index to floating based on
another index;
o to provide payments if any index rises above or falls below specified
levels; or
o to provide protection against interest rate changes, certain types of
losses or other payment shortfalls to one or more classes of the
related series.
If a trust fund includes financial instruments of this type, the instruments may
be structured to be exempt from the registration requirements of the Securities
Act of 1933, as amended.
The related prospectus supplement will include, or incorporate by
reference, material financial and other information about the provider of the
financial instruments.
SERVICING OF LOANS
GENERAL
Under the pooling and servicing agreement or the servicing agreement for a
series of securities, the servicer will provide customary servicing functions
with respect to the loans comprising the primary assets of the related trust
fund.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The servicer will make reasonable efforts to collect all payments required
to be made under the loans and will, consistent with the terms of the related
governing agreement for a series and any applicable credit enhancement, follow
such collection procedures as it follows with respect to comparable loans held
in its own portfolio. Consistent with the above, the servicer has the discretion
to
o waive any assumption fee, late payment charge, or other charge in
connection with a loan, and
o to the extent provided in the related agreement, arrange with a
borrower a schedule for the liquidation of delinquencies by extending
the due dates for scheduled payments on the loan.
If the related prospectus supplement so provides, the servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
with respect to loans in which borrower payments for taxes, assessments,
mortgage and hazard insurance policy premiums and other comparable items will be
deposited. In the case of loans that do not require such payments under the
related loan documents, the servicer will not be required to establish any
escrow or
44
impound account for those loans. The servicer will make withdrawals from the
escrow accounts to effect timely payment of taxes, assessments and mortgage and
hazard insurance, to refund to borrowers amounts determined to be overages, to
pay interest to borrowers on balances in the escrow accounts to the extent
required by law, to repair or otherwise protect the related property and to
clear and terminate the escrow accounts. The servicer will be responsible for
the administration of the escrow accounts and generally will make advances to
the escrow accounts when a deficiency exists.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless the related prospectus supplement specifies otherwise, the trustee
or the servicer will establish a separate collection account in the name of the
trustee. Unless the related prospectus supplement provides otherwise, the
collection account will be
o an account maintained at a depository institution, the long-term
unsecured debt obligations of which at the time of any deposit are
rated by each rating agency named in the prospectus supplement at
levels satisfactory to the rating agency; or
o an account the deposits in which are insured to the maximum extent
available by the Federal Deposit Insurance Corporation or an account
secured in a manner meeting requirements established by each rating
agency named in the prospectus supplement.
Unless otherwise specified in the related prospectus supplement, the funds
held in the collection account may be invested in eligible investments. If so
specified in the related prospectus supplement, the servicer will be entitled to
receive as additional compensation any interest or other income earned on funds
in the collection account.
Unless otherwise specified in the related prospectus supplement, the
servicer, the depositor, the trustee or the seller, as appropriate, will deposit
into the collection account for each series, on the business day following the
closing date, all scheduled payments of principal and interest on the primary
assets due after the related cut-off date but received by the servicer on or
before the closing date, and thereafter, within two business days after the date
of receipt thereof, the following payments and collections received or made by
the servicer (other than, unless otherwise provided in the related prospectus
supplement, in respect of principal of and interest on the related primary
assets due on or before the cut-off date):
o all payments in respect of principal, including prepayments, on the
primary assets;
o all payments in respect of interest on the primary assets after
deducting, at the discretion of the servicer (but only to the extent of
the amount permitted to be withdrawn or withheld from the collection
account in accordance with the related agreement), related servicing
fees payable to the servicer;
o all Liquidation Proceeds after deducting, at the discretion of the
servicer (but only to the extent of the amount permitted to be
withdrawn from the collection account in accordance with the related
agreement), the servicing fee, if any, in respect of the related
primary asset;
45
o all Insurance Proceeds;
o all amounts required to be deposited into the collection account from
any reserve fund for the series pursuant to the related agreement;
o all advances of cash made by the servicer in respect of delinquent
scheduled payments on a loan and for any other purpose as required
pursuant to the related agreement; and
o all repurchase prices of any primary assets repurchased by the
depositor, the servicer or the seller pursuant to the related
agreement.
Unless otherwise specified in the related prospectus supplement, the
servicer is permitted, from time to time, to make withdrawals from the
collection account for each series for the following purposes:
o to reimburse itself for advances that it made in connection with that
series under the related agreement; provided that the servicer's right
to reimburse itself is limited to amounts received on or in respect of
particular loans (including, for this purpose, Liquidation Proceeds and
proceeds of insurance policies covering the related loans and Mortgaged
Properties ("Insurance Proceeds")) that represent late recoveries of
scheduled payments with respect to which the Advance was made;
o to the extent provided in the related agreement, to reimburse itself
for any advances that it made in connection with the series which the
servicer determines in good faith to be nonrecoverable from amounts
representing late recoveries of scheduled payments respecting which the
advance was made or from Liquidation Proceeds or Insurance Proceeds;
o to reimburse itself from Liquidation Proceeds for liquidation expenses
and for amounts expended by it in good faith in connection with the
restoration of damaged property and, in the event deposited into the
collection account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the principal
balance of the related loan, together with accrued and unpaid interest
thereon to the due date for the loan next succeeding the date of its
receipt of the Liquidation Proceeds, to pay to itself out of the excess
the amount of any unpaid servicing fee and any assumption fees, late
payment charges, or other charges on the related loan;
o in the event the servicer has elected not to pay itself the servicing
fee out of the interest component of any scheduled payment, late
payment or other recovery with respect to a particular loan prior to
the deposit of the scheduled payment, late payment or recovery into the
collection account, to pay to itself the servicing fee, as adjusted
pursuant to the related agreement, from any scheduled payment, late
payment or other recovery to the extent permitted by the related
agreement;
46
o to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related agreement;
o to pay to the applicable person with respect to each primary asset or
related real property that has been repurchased or removed from the
trust fund by the depositor, the servicer or the seller pursuant to the
related agreement, all amounts received thereon and not distributed as
of the date on which the related repurchase price was determined;
o to make payments to the trustee of the series for deposit into the
related distribution account or for remittance to the holders of the
series in the amounts and in the manner provided for in the related
agreement; and
o to clear and terminate the collection account pursuant to the related
agreement.
In addition, if the servicer deposits into the collection account for a
series any amount not required to be deposited therein, the servicer may, at any
time, withdraw the amount from the collection account.
ADVANCES AND LIMITATIONS ON ADVANCES
The related prospectus supplement will describe the circumstances, if any,
under which the servicer will make advances with respect to delinquent payments
on loans. If specified in the related prospectus supplement, the servicer will
be obligated to make advances. Its obligation to make advances may be limited in
amount, or may not be activated until a certain portion of a specified reserve
fund is depleted. 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, any funds advanced are recoverable by the
servicer out of amounts received on particular loans that represent late
recoveries of scheduled payments, Insurance Proceeds or Liquidation Proceeds
respecting which an advance was made. If an advance is made and subsequently
determined to be nonrecoverable from late collections, Insurance Proceeds or
Liquidation Proceeds from the related loan, the servicer may be entitled to
reimbursement from other funds in the collection account or distribution
account(s), as the case may be, or from a specified reserve fund, as applicable,
to the extent specified in the related prospectus supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related prospectus supplement, the servicer will be required to maintain
(or to cause the borrower under each loan to maintain) a standard hazard
insurance policy providing the standard form of fire insurance coverage with
extended coverage for certain other hazards as is customary in the state in
which the related property is located. The standard hazard insurance policies
will provide for coverage at least equal to the applicable state standard form
of fire insurance policy with extended coverage for property of the type
securing the related loans. In general, the standard form of fire and extended
coverage policy will cover physical damage to, or destruction of, the related
property caused by fire, lightning, explosion, smoke, windstorm, hail, riot,
strike and civil commotion, subject to the conditions and exclusions in each
policy. Because the
47
standard hazard insurance policies relating to the loans will be underwritten by
different hazard insurers and will cover properties located in various states,
the policies will not contain identical terms and conditions. The basic terms,
however, generally will be determined by state law and generally will be
similar. Most such policies typically will not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all inclusive. Uninsured risks not covered by a special hazard insurance policy
or other form of credit enhancement will adversely affect distributions to
holders. When a property securing a loan is located in a flood area identified
by HUD pursuant to the Flood Disaster Protection Act of 1973, as amended, the
servicer will be required to cause flood insurance to be maintained with respect
to the property, to the extent available.
The standard hazard insurance policies covering properties typically will
contain a "coinsurance" clause, which in effect will require that the insured at
all times carry hazard insurance of a specified percentage (generally 80% to
90%) of the full replacement value of the property, including any improvements
on the property, in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, the coinsurance clause
will provide that the hazard insurer's liability in the event of partial loss
will not exceed the greater of
o the actual cash value (i.e., replacement cost less physical
depreciation) of the property, including the improvements, if any,
damaged or destroyed, and
o such proportion of the loss, without deduction for depreciation, as the
amount of insurance carried bears to the specified percentage of the
full replacement cost of the property and improvements.
Since the amount of hazard insurance to be maintained on the improvements
securing the loans declines as their principal balances decrease, and since the
value of the properties will fluctuate over time, the effect of this requirement
in the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damage to the affected property.
Unless otherwise specified in the related prospectus supplement, coverage
will be in an amount at least equal to the greater of
o the amount necessary to avoid the enforcement of any co-insurance
clause contained in the policy, and
o the outstanding principal balance of the related loan.
Unless otherwise specified in the related prospectus supplement, the servicer
will also maintain on REO property a standard hazard insurance policy in an
amount that is at least equal to the maximum insurable value of the REO
property. No earthquake or other additional insurance will be required of any
borrower or will be maintained on REO property other than pursuant to such
48
applicable laws and regulations as shall at any time be in force and shall
require the additional insurance.
Any amounts collected by the servicer under insurance policies (other than
amounts to be applied to the restoration or repair of the property, released to
the borrower in accordance with normal servicing procedures or used to reimburse
the servicer for amounts to which it is entitled to reimbursement) will be
deposited into the collection account. In the event that the servicer obtains
and maintains a blanket policy insuring against hazard losses on all of the
loans, written by an insurer then acceptable to each rating agency named in the
prospectus supplement, it will conclusively be deemed to have satisfied its
obligations to cause to be maintained a standard hazard insurance policy for
each loan or related REO property. This blanket policy may contain a deductible
clause, in which case the servicer will be required, in the event that there has
been a loss that would have been covered by the policy absent the deductible
clause, to deposit into the collection account the amount not otherwise payable
under the blanket policy because of the application of the deductible clause.
REALIZATION UPON DEFAULTED LOANS
The servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the properties
securing the related loans that come into and continue in default and as to
which no satisfactory arrangements can be made for collection of delinquent
payments. In this connection, the servicer will follow such practices and
procedures as it deems necessary or advisable and as are normal and usual in its
servicing activities with respect to comparable loans that it services. However,
the servicer will not be required to expend its own funds in connection with any
foreclosure or towards the restoration of the property unless it determines that
o the restoration or foreclosure will increase the Liquidation Proceeds
of the related loan available to the holders after reimbursement to
itself for its expenses, and
o its expenses will be recoverable either through Liquidation Proceeds or
Insurance Proceeds.
However, in the case of a trust fund for which a REMIC election has been made,
the servicer will be required to liquidate any REO property by the end of the
third calendar year after the trust fund acquires beneficial ownership of the
REO property. While the holder of an REO property can often maximize its
recovery by providing financing to a new purchaser, the trust fund will have no
ability to do so and neither the servicer nor the depositor will be required to
do so.
The servicer may arrange with the borrower on a defaulted loan a change in
the terms of the loan to the extent provided in the related prospectus
supplement. This type of modification may only be entered into if it meets the
underwriting policies and procedures employed by the servicer in servicing
receivables for its own account and meets the other conditions set forth in the
related prospectus supplement.
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ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related prospectus supplement for a
series, when any property is about to be conveyed by the borrower, the servicer
will, to the extent it has knowledge of the prospective conveyance and prior to
the time of the consummation of the conveyance, exercise its rights to
accelerate the maturity of the related loan under any applicable "due-on-sale"
clause, unless it reasonably believes that the clause is not enforceable under
applicable law or if enforcement of the clause would result in loss of coverage
under any primary mortgage insurance policy. In that event, the servicer is
authorized to accept from or enter into an assumption agreement with the person
to whom the property has been or is about to be conveyed. Under the assumption,
the transferee of the property becomes liable under the loan and the original
borrower is released from liability and the transferee is substituted as the
borrower and becomes liable under the loan. Any fee collected in connection with
an assumption will be retained by the servicer as additional servicing
compensation. The terms of a loan may not be changed in connection with an
assumption.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related prospectus supplement, the
servicer will be entitled to a periodic servicing fee 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, unless otherwise specified in the related prospectus supplement, the
servicer will be entitled to additional servicing compensation in the form of
assumption fees, late payment charges and similar items, and excess proceeds
following disposition of property in connection with defaulted loans.
Unless otherwise specified in the related prospectus supplement, the
servicer will pay certain expenses incurred in connection with the servicing of
the loans, including, without limitation, the payment of the fees and expenses
of each trustee and independent accountants, payment of security policy and
insurance policy premiums, if applicable, and the cost of any credit
enhancement, and payment of expenses incurred in preparation of reports to
holders.
When a borrower makes a principal prepayment in full between due dates on
the related loan, the borrower generally will be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the related prospectus supplement, in order that one or more classes of the
securities of a series will not be adversely affected by any resulting shortfall
in interest, the amount of the servicing fee may be reduced to the extent
necessary to include in the servicer's remittance to the applicable trustee for
deposit into the related distribution account an amount equal to one month's
interest on the related loan (less the servicing fee). If the total amount of
these shortfalls in a month exceeds the servicing fee for that month, a
shortfall to holders may occur.
Unless otherwise specified in the related prospectus supplement, the
servicer will be entitled to reimbursement for certain expenses that it incurs
in connection with the liquidation of defaulted loans. The related holders will
suffer no loss by reason of the servicer's expenses to the extent the 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
50
coverage under the policies has been exhausted, the related holders will suffer
a loss to the extent that Liquidation Proceeds, after reimbursement of the
servicer's expenses, are less than the principal balance of and unpaid interest
on the related loan that would be distributable to holders. In addition, the
servicer will be entitled to reimbursement of its expenses in connection with
the restoration of REO property This right of reimbursement is prior to the
rights of the holders to receive any related Insurance Proceeds, Liquidation
Proceeds or amounts derived from other credit enhancement. The servicer
generally is also entitled to reimbursement from the collection account for
advances.
Unless otherwise specified in the related prospectus supplement, 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
advances, expenses or otherwise, are not subordinate to the rights of holders of
securities of the series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related prospectus supplement, the applicable
governing 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 servicer and that, on the basis of the examination, the firm is of
the opinion that the servicing has been conducted in compliance with the
agreement, except for such exceptions as the firm believes to be immaterial and
any other exceptions set forth in the statement.
If so specified in the related prospectus supplement, the applicable
agreement will also provide for delivery to the trustee of an annual statement
signed by an officer of the servicer to the effect that the servicer has
fulfilled its obligations under the agreement throughout the preceding calendar
year.
CERTAIN MATTERS REGARDING THE SERVICER
The servicer for each series will be identified in the related prospectus
supplement. The servicer may be an affiliate of the depositor and may have other
business relationships with the depositor and its affiliates.
If an event of default occurs under either a servicing agreement or a
pooling and servicing agreement, the servicer may be replaced by the trustee or
a successor servicer. Unless otherwise specified in the related prospectus
supplement, the events of default and the rights of a trustee upon a default
under the agreement for the related series will be substantially similar to
those described under "The Agreements--Events of Default; Rights upon Event of
Default--Pooling and Servicing Agreement; Servicing Agreement" in this
prospectus.
Unless otherwise specified in the prospectus supplement, the servicer does
not have the right to assign its rights and delegate its duties and obligations
under the related agreement unless the successor servicer accepting such
assignment or delegation
o services similar loans in the ordinary course of its business;
51
o is reasonably satisfactory to the trustee;
o has a net worth of not less than the amount specified in the prospectus
supplement;
o would not cause the rating of the related securities by a rating agency
named in the prospectus supplement, as such rating is in effect
immediately prior to the assignment, sale or transfer, to be qualified,
downgraded or withdrawn as a result of the assignment, sale or
transfer; and
o executes and delivers to the trustee an agreement, in form and
substance reasonably satisfactory to the trustee, that contains an
assumption by the successor servicer of the due and punctual
performance and observance of each covenant and condition required to
be performed or observed by the servicer under the agreement from and
after the date of the agreement.
No assignment will become effective until the trustee or a successor
servicer has assumed the servicer's obligations and duties under the related
agreement. To the extent that the servicer transfers its obligations to a
wholly-owned subsidiary or affiliate, the subsidiary or affiliate need not
satisfy the criteria set forth above. In this instance, however, the assigning
servicer will remain liable for the servicing obligations under the agreement.
Any entity into which the servicer is merged or consolidated or any successor
corporation resulting from any merger, conversion or consolidation will succeed
to the servicer's obligations under the agreement provided that the successor or
surviving entity meets the requirements for a successor servicer set forth
above.
Except to the extent otherwise provided, each agreement will provide that
neither the servicer nor any director, officer, employee or agent of the
servicer will be under any liability to the related trust fund, the depositor or
the holders for any action taken or for failing to take any action in good faith
pursuant to the related agreement, or for errors in judgment. However, neither
the servicer nor any such person will be protected against any breach of
warranty or representations made under the agreement, or the failure to perform
its obligations in compliance with any standard of care set forth in the
agreement, or liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of their duties or by
reason of reckless disregard of their obligations and duties under the
agreement. Each agreement will further provide that the servicer and any
director, officer, employee or agent of the servicer is entitled to
indemnification from the related trust fund and will be held harmless against
any loss, liability or expense incurred in connection with any legal action
relating to the agreement or the securities, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or negligence in
the performance of duties under the agreement or by reason of reckless disregard
of those obligations and duties. In addition, the agreement will provide that
the servicer is not under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its servicing responsibilities under the
agreement that, in its opinion, may involve it in any expense or liability. The
servicer may, in its discretion, undertake any such action that it may deem
necessary or desirable with respect to the agreement and the rights and duties
of the parties thereto and the interests of the holders thereunder. In that
event, the legal expenses and costs of the action and any resulting liability
may be expenses, costs, and liabilities of the trust fund and the servicer may
be entitled to be reimbursed therefor out of the collection account.
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THE AGREEMENTS
The following summaries describe the material provisions of the pooling and
servicing agreement or trust agreement, in the case of a series of certificates,
and the indenture and servicing agreement, in the case of a series of notes. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the agreements applicable to
the particular series of securities. Where particular provisions or terms used
in the agreements are referred to, the provisions or terms are as specified in
the agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the securities of a series, the
depositor will transfer, convey and assign to the related trust fund all right,
title and interest of the depositor in the primary assets and other property to
be transferred to the trust fund. This assignment will include all principal and
interest due on or with respect to the primary assets after the cut-off date
(except for any retained interests). The trustee will, concurrently with the
assignment, execute and deliver the securities.
Assignment of Mortgage Loans. Unless otherwise specified in the related
prospectus supplement, the depositor will deliver to the trustee (or, if
specified in the prospectus supplement, a custodian on behalf of the trustee),
as to each Residential Loan and Home Equity Loan, the related note endorsed
without recourse to the order of the trustee or in blank, the original mortgage,
deed of trust or other security instrument with evidence of recording indicated
thereon (except for any mortgage not returned from the public recording office,
in which case a copy of the mortgage will be delivered, together with a
certificate that the original of the mortgage was delivered to such recording
office), and an assignment of the mortgage in recordable form. The trustee or,
if so specified in the related prospectus supplement, the custodian will hold
these documents in trust for the benefit of the holders.
If so specified in the related prospectus supplement, at the time of
issuance of the securities, the depositor will cause assignments to the trustee
of the mortgages relating to the loans 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. If specified in the prospectus
supplement, the depositor will cause the assignments to be recorded within the
time after issuance of the securities as is specified in the related prospectus
supplement. In this event, the prospectus supplement will specify whether the
agreement requires the depositor to repurchase from the trustee any loan the
related mortgage of which is not recorded within that time, at the price
described below with respect to repurchases by reason of defective
documentation. Unless otherwise provided in the prospectus supplement, 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.
Assignment of Home Improvement Contracts. Unless otherwise specified in the
related prospectus supplement, the depositor will deliver to the trustee or the
custodian each original Home Improvement Contract and copies of related
documents and instruments and, except in the case of unsecured Home Improvement
Contracts, the security interest in the related home improvements. In order to
give notice of the right, title and interest of holders to the Home
53
Improvement Contracts, the depositor will cause a UCC-1 financing statement to
be executed by the depositor or the seller identifying the trustee as the
secured party and identifying all Home Improvement Contracts as collateral.
Unless otherwise specified in the related prospectus supplement, the Home
Improvement Contracts will not be stamped or otherwise marked to reflect their
assignment to the trust fund. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Home Improvement Contracts without notice of the assignment, the interest of
holders in the Home Improvement Contracts could be defeated. See "Material Legal
Aspects of the Loans--The Home Improvement Contracts" in this prospectus.
Assignment of Manufactured Housing Contracts. If specified in the related
prospectus supplement, the depositor or the seller will deliver to the trustee
the original contract as to each Manufactured Housing Contract and copies of
documents and instruments related to each contract and, other than in the case
of unsecured contracts, the security interest in the property securing that
contract. In order to give notice of the right, title and interest of
securityholders to the contracts, if specified in the related prospectus
supplement, the depositor or the seller will cause a UCC-1 financing statement
to be executed by the depositor or the seller identifying the trustee as the
secured party and identifying all contracts as collateral. If so specified in
the related prospectus supplement, the contracts will not be stamped or
otherwise marked to reflect their assignment to the trustee. Therefore, if,
through negligence, fraud or otherwise, a subsequent purchaser were able to take
physical possession of the contracts without notice of the assignment, the
interest of securityholders in the contracts could be defeated. See "Material
Legal Aspects of the Loans -- The Contracts."
Loan Schedule. Each loan will be identified in a schedule appearing as an
exhibit to the related and will specify with respect to each loan:
o the original principal amount,
o its 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 note, and
o if the loan is an adjustable rate loan, the lifetime rate cap, if any,
and the current index.
Assignment of Agency and Private Label Securities. The depositor will cause
the Agency and Private Label Securities to be registered in the name of the
trustee (or its nominee or correspondent). The trustee (or its nominee or
correspondent) will take possession of any certificated Agency or Private Label
Securities. Unless otherwise specified in the related prospectus supplement, the
trustee will not be in possession of, or be assignee of record of, any loans
underlying the Agency or Private Label Securities. See "The Trust Funds--Private
Label Securities" in this prospectus. Each Agency and Private Label Security
will be identified in a
54
schedule appearing as an exhibit to the related agreement, which will specify
the original principal amount, principal balance as of the cut-off date, annual
pass-through rate or interest rate and maturity date for each Agency and Private
Label Security conveyed to the related trust fund. In the agreement, the
depositor will represent and warrant to the trustee that:
o the information contained in the Agency or Private Label Securities
schedule is true and correct in all material respects,
o immediately prior to the conveyance of the Agency or Private Label
Securities, the depositor had good title and was the sole owner of the
Agency or Private Label Securities (subject to any retained interest),
o there has been no other sale of the Agency or Private Label Securities,
and
o there is no existing lien, charge, security interest or other
encumbrance on the Agency or Private Label Securities (other than any
retained interest).
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related prospectus supplement, if any document in the
file relating to the primary assets delivered by the depositor to the trustee
(or custodian) is found by the trustee, within 90 days of the execution of the
related agreement (or promptly after the trustee's receipt of any document
permitted to be delivered after the closing date), to be defective in any
material respect and the depositor or seller does not cure such defect within 90
days (or within any other period specified in the related prospectus supplement)
the depositor or seller will, not later than 90 days (or within such any period
specified in the related prospectus supplement), after the trustee's notice to
the depositor or the seller, as the case may be, of the defect, repurchase from
the trustee the related primary asset or any property acquired in respect of the
asset. Unless otherwise specified in the related prospectus supplement, the
repurchase shall be effected at a price equal to the sum of:
o the lesser of
o the principal balance of the primary asset, and
o the trust fund's federal income tax basis in the primary asset;
plus
o accrued and unpaid interest to the date of the next scheduled payment
on the primary asset at the rate set forth in the related agreement.
However, the purchase price shall not be limited to the trust fund's federal
income tax basis in the asset, if the repurchase at a price equal to the
principal balance of the repurchased primary asset will not result in any
prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related prospectus supplement, the depositor or seller,
as the case may be, may, rather than repurchase the primary asset as described
above, remove the non-conforming primary asset from the trust fund and
substitute in its place one or more other
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qualifying substitute primary assets. If no REMIC election is made with respect
to the trust fund, the substitution must be effected within 120 days of the date
of initial issuance of the securities. If a REMIC election is made with respect
to the trust fund the trustee must have received after a specified time period 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.
Unless otherwise specified in the related prospectus supplement, any
qualifying substitute primary asset will, on the date of substitution, meet the
following criteria:
o it has a principal balance, after deduction of all scheduled payments
due in the month of substitution, not in excess of the principal
balance of the deleted primary asset (the amount of any shortfall to be
deposited to the collection account in the month of substitution for
distribution to holders),
o it has an interest rate not less than (and not more than 2% greater
than) the interest rate of the deleted primary asset,
o it has a remaining term-to-stated maturity not greater than (and not
more than two years less than) that of the deleted primary asset; and
o it complies with all of the representations and warranties set forth in
the applicable agreement as of the date of substitution.
Unless otherwise provided in the related prospectus supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the holders or the trustee for a material defect in the
documentation for a primary asset.
The depositor or another entity will make representations and warranties
with respect to primary assets for each series. If the depositor or the other
entity cannot cure a breach of any such representations and warranties in all
material respects within the time period specified in the related prospectus
supplement after notification by the trustee of such breach, and if the breach
is of a nature that materially and adversely affects the value of the primary
asset, the depositor or the other entity will be obligated to repurchase the
affected primary asset or, if provided in the prospectus supplement, provide a
qualifying substitute primary asset, subject to the same conditions and
limitations on purchases and substitutions as described above.
The depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations,
if any, of the responsible originator or seller of the non-conforming primary
assets. See "Risk Factors--Only the assets of the related trust fund are
available to pay your certificates" in this prospectus.
No holder of securities of a series, solely by virtue of the holder's
status as a holder, will have any right under the applicable agreement to
institute any proceeding with respect to agreement, unless holder previously has
given to the trustee for the series written notice of default and unless the
holders of securities evidencing not less than 51% of the aggregate voting
rights of the securities of the series have made written request upon the
trustee to institute the
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proceeding in its own name as trustee thereunder and have offered to the trustee
reasonable indemnity, and the trustee for 60 days has neglected or refused to
institute the proceeding.
REPORTS TO HOLDERS
The applicable trustee or other entity specified in the related prospectus
supplement will prepare and forward to each holder on each distribution date, or
as soon thereafter as is practicable, a statement setting forth, to the extent
applicable to any series, among other things:
o the amount of principal distributed to holders of the related
securities and the outstanding principal balance of the securities
following the distribution;
o the amount of interest distributed to holders of the related securities
and the current interest on the securities;
o the amount of any overdue accrued interest included in such
distribution, any remaining overdue accrued interest with respect to
the securities, or any current shortfall in amounts to be distributed
as accrued interest to holders of the securities;
o the amount of any overdue payments of scheduled principal included in
the distribution, any remaining overdue principal amounts with respect
to the securities, any current shortfall in receipt of scheduled
principal payments on the related primary assets, or any realized
losses or Liquidation Proceeds to be allocated as reductions in the
outstanding principal balances of the securities;
o the amount received under any related credit enhancement, and the
remaining amount available under the credit enhancement;
o the amount of any delinquencies with respect to payments on the related
primary assets;
o the book value of any REO property acquired by the related trust fund;
and
o other information specified in the related agreement.
In addition, within a reasonable period of time after the end of each
calendar year, the applicable trustee, unless otherwise specified in the related
prospectus supplement, will furnish to each holder of record at any time during
the calendar year:
o the total of the amounts reported pursuant to clauses under the first
and second bullets above and under the last clause of the fourth bullet
above for the calendar year, and
o the information specified in the related agreement to enable holders to
prepare their tax returns including, without limitation, the amount of
any original issue discount accrued on the securities.
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Information in the distribution date statements and annual statements
provided to the holders will not have been examined and reported upon by an
independent public accountant. However, the servicer will provide to the trustee
a report by independent public accountants with respect to its servicing of the
loans. See "Servicing of Loans--Evidence as to Compliance" in this prospectus.
If so specified in the prospectus supplement, the related series of
securities (or one or more classes of the series) will be issued in book-entry
form. In that event, owners of beneficial interests in those securities will not
be considered holders and will not receive such reports directly from the
trustee. The trustee will forward reports only to the entity or its nominee that
is the registered holder of the global certificate that evidences the book-entry
securities. Beneficial owners will receive reports from the participants and
indirect participants of the applicable book-entry system in accordance with the
policies and procedures of the participants and indirect participants.
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related prospectus supplement, "events of default" under the
pooling and servicing agreement for each series of certificates include:
o any failure by the servicer to deposit amounts in the collection
account and distribution account(s) to enable the trustee to distribute
to holders of securities of the series any required payment, provided
that this failure continues unremedied for the number of days specified
in the related prospectus supplement after the giving of written notice
to the servicer by the trustee, or to the servicer and the trustee by
holders having not less than 25% of the total voting rights of the
series;
o any failure by the servicer duly to observe or perform in any material
respect any other of its covenants or agreements in the agreement
provided that this failure continues unremedied for the number of days
specified in the related prospectus supplement after the giving of
written to the servicer by the trustee, or to the servicer and the
trustee by the holders having not less than 25% of the total voting
rights of the of the series; and
o certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings and certain actions by
the servicer indicating its insolvency, reorganization or inability to
pay its obligations.
So long as an event of default remains unremedied under the applicable
agreement for a series of securities relating to the servicing of loans, unless
otherwise specified in the related prospectus supplement, the trustee or holders
of securities of the series having not less than 51% of the total voting rights
of the series may terminate all of the rights and obligations of the servicer as
servicer under the applicable agreement (other than its right to recovery of
other expenses and amounts advanced pursuant to the terms of the agreement,
which rights the servicer will retain under all circumstances), whereupon the
trustee will succeed to all the responsibilities, duties and liabilities of the
servicer under the agreement and will be entitled to reasonable
58
servicing compensation not to exceed the applicable servicing fee, together with
other servicing compensation in the form of assumption fees, late payment
charges or otherwise as provided in the agreement.
In the event that the trustee is unwilling or unable so to act, it may
select (or petition a court of competent jurisdiction to appoint) a finance
institution, bank or loan servicing institution with a net worth specified in
the related prospectus supplement to act as successor servicer under the
provisions of the agreement. The successor servicer would be entitled to
reasonable servicing compensation in an amount not to exceed the servicing fee
as set forth in the related prospectus supplement, together with other servicing
compensation in the form of assumption fees, late payment charges or otherwise,
as provided in the agreement.
During the continuance of any event of default of a servicer under an
agreement for a series of securities, the trustee will have the right to take
action to enforce its rights and remedies and to protect and enforce the rights
and remedies of the holders of securities of the series, and, unless otherwise
specified in the related prospectus supplement, holders of securities having not
less than 51% of the total voting rights of the series may direct the time,
method and place of conducting any proceeding for any remedy available to the
trustee or exercising any trust or power conferred upon the trustee. However,
the trustee will not be under any obligation to pursue any such remedy or to
exercise any of such trusts or powers unless the holders have offered the
trustee reasonable security or indemnity against the cost, expenses and
liabilities that may be incurred by the trustee as a result. The trustee may
decline to follow any such direction if it determines that the action or
proceeding so directed may not lawfully be taken or would involve it in personal
liability or be unjustly prejudicial to the non-assenting holders.
Indenture. Unless otherwise specified in the related prospectus supplement,
"events of default" under the indenture for each series of notes include:
o a default for thirty (30) days or more in the payment of any principal
of or interest on any note of the series;
o failure to perform any other covenant of the depositor or the trust
fund in the indenture, provided that the failure continues for a period
of sixty (60) days after notice is given in accordance with the
procedures described in the related prospectus supplement;
o any representation or warranty made by the depositor or the trust fund
in the indenture or in any certificate or other writing delivered
pursuant to it or in connection with it with respect to or affecting
such series having been incorrect in a material respect as of the time
made, provided that the breach is not cured within sixty (60) days
after notice is given in accordance with the procedures described in
the related prospectus supplement;
o certain events of bankruptcy, insolvency, receivership or liquidation
of the depositor or the trust fund; and
o any other event of default specified with respect to notes of that
series.
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If an event of default with respect to the then-outstanding notes of any
series occurs and is continuing, either the indenture trustee or the holders of
a majority of the total amount of those notes may declare the principal amount
of all the notes of the series (or, if the notes of that series are zero coupon
securities, such portion of the principal amount as may be specified in the
related prospectus supplement) to be due and payable immediately. Under certain
circumstances of this type the declaration may be rescinded and annulled by the
holders of a majority of the total amount of those notes.
If, following an event of default with respect to any series of notes, the
related notes have been declared to be due and payable, the indenture trustee
may, in its discretion, and notwithstanding such acceleration, elect to maintain
possession of the collateral securing the notes and to continue to apply
distributions on the collateral as if there had been no declaration of
acceleration, provided that the collateral continues to provide sufficient funds
for the payment of principal of and interest on the notes as they would have
become due if there had not been a declaration. In addition, the indenture
trustee may not sell or otherwise liquidate the collateral securing the notes of
a series following an event of default (other than a default in the payment of
any principal of or interest on any note of the series for thirty (30) days or
more), unless:
o the holders of 100% of the total amount of the then-outstanding notes
of the series consent to the sale; or
o the proceeds of the sale or liquidation are sufficient to pay in full
the principal of and accrued interest due and unpaid on the outstanding
notes of the series at the date of sale; or
o the indenture trustee determines that the collateral would not be
sufficient on an ongoing basis to make all payments on the notes as
such payments would have become due if the notes had not been declared
due and payable, and the indenture trustee obtains the consent of the
holders of 66 2/3% of the total amount of the then-outstanding notes of
the series.
In the event that the indenture trustee liquidates the collateral in
connection with an event of default involving a default for thirty (30) days or
more in the payment of principal of or interest on the notes of a series, the
indenture provides that the indenture trustee will have a prior lien on the
proceeds of any liquidation for its unpaid fees and expenses. As a result, upon
the occurrence of an event of default of this type, the amount available for
distribution to the noteholders may be less than would otherwise be the case.
However, the indenture trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the indenture for the benefit of the noteholders
after the occurrence of the event of default.
Unless otherwise specified in the related prospectus supplement, in the
event that the principal of the notes of a series is declared due and payable as
described above, holders of the notes issued at a discount from par may be
entitled to receive no more than an amount equal to the unpaid principal amount
of those notes less the amount of the discount that remains unamortized.
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Subject to the provisions of the indenture relating to the duties of the
indenture trustee, in case an event of default shall occur and be continuing
with respect to a series of notes, the indenture trustee will be under no
obligation to exercise any of its rights or powers under the indenture at the
request or direction of any of the holders of notes of the series, unless the
holders offer security or indemnity satisfactory to the indenture trustee
against the costs, expenses and liabilities it might incur in complying with
their request or direction. Subject to the provisions for indemnification and
certain limitations contained in the indenture, the holders of a majority of
amount of the then-outstanding notes of the series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the indenture trustee or exercising any trust or power conferred on
the indenture trustee with respect to those notes, and the holders of a majority
of the amount of the amount of the then- outstanding notes of the series may, in
certain cases, waive any default with respect to the notes, except a default in
the payment of principal or interest or a default in respect of a covenant or
provision of the indenture that cannot be modified without the waiver or consent
of all affected holders of the outstanding notes.
THE TRUSTEES
The identity of the commercial bank, savings and loan association or trust
company named as the trustee or indenture trustee, as the case may be, for each
series of securities will be set forth in the related prospectus supplement.
Entities serving as trustee may have normal banking relationships with the
depositor or the servicer. In addition, for the purpose of meeting the legal
requirements of certain local jurisdictions, each trustee will have the power to
appoint co-trustees or separate trustees. In the event of an appointment, all
rights, powers, duties and obligations conferred or imposed upon the trustee by
the related agreement will be conferred or imposed upon that trustee and each
separate trustee or co-trustee jointly, or, in any jurisdiction in which the
trustee shall be incompetent or unqualified to perform certain acts, singly upon
the separate trustee or co-trustee who will exercise and perform such rights,
powers, duties and obligations solely at the direction of the trustee. The
trustee may also appoint agents to perform any of its responsibilities, which
agents will have any or all of the rights, powers, duties and obligations of the
trustee conferred on them by their appointment; provided, however, that the
trustee will continue to be responsible for its duties and obligations under the
agreement.
DUTIES OF TRUSTEES
No trustee will make any representations as to the validity or sufficiency
of the related agreement, the securities or of any primary asset or related
documents. If no event of default (as defined in the related agreement) has
occurred, the applicable trustee will be required to perform only those duties
specifically required of it under the agreement. Upon receipt of the various
certificates, statements, reports or other instruments required to be furnished
to it, the trustee will be required to examine them to determine whether they
are in the form required by the related agreement. However, the trustee will not
be responsible for the accuracy or content of any documents furnished to it by
the holders or the servicer under the agreement.
Each trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that no trustee will be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction
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of the related holders in an event of default. No trustee will be required to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties under the related agreement, or in the exercise
of any of its rights or powers, if it has reasonable grounds for believing that
repayment of such funds or adequate indemnity against such risk or liability is
not reasonably assured to it.
RESIGNATION OF TRUSTEES
Each trustee may, upon written notice to the depositor, resign at any time,
in which event the depositor will be obligated to use its best efforts to
appoint a successor trustee. If no successor trustee has been appointed and has
accepted such appointment within 30 days after the giving of such notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for appointment of a successor trustee. Each trustee may also be
removed at any time
o if the trustee ceases to be eligible to continue as such under the
related agreement, or
o if the trustee becomes insolvent, or
o the holders of securities having more than over 50% of the total voting
rights of the securities in the trust fund give written notice to the
trustee and to the depositor.
Any resignation or removal of a trustee and appointment of a successor trustee
will not become effective until the successor trustee accepts its appointment.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the prospectus supplement, the Agreement for
each series of securities may be amended by the depositor, the servicer (with
respect to a series relating to loans), and the trustee, without notice to or
consent of the holders, for the following purposes:
o to cure any ambiguity,
o to correct any defective provisions or to correct or supplement any
provision in the agreement,
o to add to the duties of the depositor, the applicable trustee or the
servicer,
o to add any other provisions with respect to matters or questions
arising under the agreement or related credit enhancement,
o to add or amend any provisions of the agreement as required by any
rating agency named in the prospectus supplement in order to maintain
or improve the rating of the securities (it being understood that none
of the depositor, the seller, the servicer or any trustee is obligated
to maintain or improve the rating), or
o to comply with any requirements imposed by the Code.
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In no event, however, shall any amendment (other than an amendment to comply
with Code requirements) adversely affect in any material respect the interests
of any holders of the series, as evidenced by an opinion of counsel delivered to
the trustee. Unless otherwise specified in the prospectus supplement, an
amendment 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 named in the prospectus supplement that the amendment will not
cause the rating agency to reduce its then-current rating.
Unless otherwise specified in the prospectus supplement, each agreement for
a series may also be amended by the applicable trustee, the servicer, if
applicable, and the depositor with the consent of the holders possessing not
less than 66 2/3% of the total outstanding principal amount of the securities of
the series (or, if only certain classes are affected by the amendment, 66 2/3%
of the total outstanding principal amount of each affected class), for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of the agreement, or modifying in any manner the rights of
holders of the series. In no event, however, shall any amendment
o reduce the amount or delay the timing of payments on any security
without the consent of the holder of the security, or
o reduce the percentage of the total outstanding principal amount of
securities of each class, the holders of which are required to consent
to any such amendment, without the consent of the holders of 100% of
the total outstanding principal amount of each affected class.
VOTING RIGHTS
The prospectus supplement will set forth the method of determining
allocation of voting rights with respect to the related series of securities.
LIST OF HOLDERS
Upon written request of three or more holders of record of a series for
purposes of communicating with other holders with respect to their rights under
the agreement (which request is accompanied by a copy of the communication such
holders propose to transmit), the trustee will afford them access during
business hours to the most recent list of holders of that series held by the
trustee.
No agreement will provide for the holding of any annual or other meeting of
holders.
BOOK-ENTRY SECURITIES
If specified in the related prospectus supplement for a series of
securities, the securities (or one or more of the securities) may be issued in
book-entry form. In that event, beneficial owners of those securities will not
be considered "Holders" under the agreements and may exercise the rights of
holders only indirectly through the participants in the applicable book-entry
system.
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REMIC ADMINISTRATOR
For any series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
trust fund may be performed by a REMIC administrator, which may be an affiliate
of the depositor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the pooling and servicing agreement or trust agreement for a series will
terminate upon the distribution to holders of all amounts distributable to them
under the agreement in the circumstances described in the related prospectus
supplement. See "Description of the Securities--Optional Redemption, Purchase or
Termination" in this prospectus.
Indenture. The indenture will be discharged with respect to a series of
notes (except with respect to certain continuing rights specified in the
indenture) upon the delivery to the indenture trustee for cancellation of all
the notes of that series or, with certain limitations, upon deposit with the
indenture trustee of funds sufficient for the payment in full of all of the
notes of the series.
In addition to such discharge with certain limitations, if so specified
with respect to the notes of any series, the indenture will provide that the
related trust fund will be discharged from any and all obligations in respect of
the notes of that series (except for certain obligations relating to temporary
notes and exchange of notes, registration of the transfer or exchange of those
notes, replacing stolen, lost or mutilated notes, maintaining paying agencies
and holding monies for payment in trust) upon the deposit with the indenture
trustee, in trust, of money and/or direct obligations of or obligations
guaranteed by the United States of America that, through the payment of interest
and principal in accordance with their terms, will provide money in an amount
sufficient to pay the principal of and each installment of interest on the notes
on the final scheduled distribution date for the notes and any installment of
interest on the notes in accordance with the terms of the indenture and the
notes. In the event of any such defeasance and discharge of notes of a series,
holders of notes of that series would be able to look only to such money and/or
direct obligations for payment of principal of and interest on, if any, their
notes until maturity.
MATERIAL LEGAL ASPECTS OF THE LOANS
The following discussion contains general summaries of material legal
matters mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements that are general in nature. Because the
legal matters are determined primarily by applicable state law and because state
laws may differ substantially, the summaries do not purport to be complete, to
reflect the laws of any particular state, or to encompass the laws of all states
in which the properties securing the loans may be situated.
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MORTGAGES
The Residential Loans and Home Equity Loans for a series will, and the Home
Improvement Contracts for a series may, be secured by mortgages or deeds of
trust or deeds to secure debt, depending upon the prevailing practice in the
state in which the property subject to a mortgage loan is located. We refer to
Residential Loans, Home Equity Loans and Home Improvement Contracts that are
secured by mortgages as "mortgage loans." 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 that instrument and represents the security for the
repayment of an obligation that is customarily evidenced by a promissory note.
It is not prior to the lien for real estate taxes and assessments or other
charges imposed under governmental police powers and may also be subject to
other liens pursuant to the laws of the jurisdiction in which the mortgaged
property is located. Priority with respect to the instruments depends on their
terms, the knowledge of the parties to the mortgage and generally on the order
of recording with the applicable state, county or municipal office. There are
two parties to a mortgage: the mortgagor, who is the borrower/property owner or
the land trustee (as described below), 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 land 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. A deed of trust transaction normally has
three parties: the trustor, who is the borrower/property owner; the beneficiary,
who is the lender; and the trustee, a third-party grantee. Under a deed of
trust, the trustor grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation. 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.
FORECLOSURE ON MORTGAGES
Foreclosure of a mortgage is generally 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, 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.
Foreclosure of a deed of trust generally is accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In certain states, foreclosure also may be
accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states, the trustee must record a notice of default and send
a copy to the
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borrower-trustor and to any person who has recorded a request for a copy of a
notice of default and notice of sale. In addition, the trustee in some states
must provide notice to any other individual having an interest in the real
property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property. The trustor, borrower or any person having a
junior encumbrance on the real estate may, during a reinstatement period, cure
the default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender.
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 its 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 certain 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, and sometimes requires 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 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, a
public sale is conducted by the referee or other designated officer or by the
trustee. 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 that 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. The lender may purchase the property
for a lesser amount in order to preserve its right against the borrower to seek
a deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the
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borrower in some states to remain in possession during the redemption period,
the lender will assume the burdens of ownership, including obtaining hazard
insurance, paying taxes and making such 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.
ENVIRONMENTAL RISKS
Federal, state and local laws and regulations impose a wide range of
requirements on activities that may affect the environment, health and safety.
These include laws and regulations governing air pollutant emissions, hazardous
and toxic substances, impacts to wetlands, leaks from underground storage tanks
and the management, removal and disposal of lead- and asbestos-containing
materials. In certain circumstances, these laws and regulations impose
obligations on the owners or operators of residential properties such as those
subject to the loans. The failure to comply with these laws and regulations may
result in fines and penalties.
Moreover, under various federal, state and local laws and regulations, an
owner or operator of real estate may be liable for the costs of addressing
hazardous substances on, in or beneath such property and related costs.
Liability may be imposed without regard to whether the owner or operator knew
of, or was responsible for, the presence of hazardous substances, and could
exceed the value of the property and the aggregate assets of the owner or
operator. In addition, persons who transport or dispose of hazardous substances,
or arrange for the transportation, disposal or treatment of hazardous
substances, at off-site locations may also be held liable if there are releases
or threatened releases of hazardous substances at such off-site locations.
In addition, under the laws of some states and under the Federal
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA),
contamination of property may give rise to a lien on the property to assure the
payment of the costs of clean-up. In several states, such a lien has priority
over the lien of an existing mortgage against the property. Under CERCLA, the
clean-up lien is subordinate to pre-existing, perfected security interests.
Under the laws of some states, and under CERCLA, there is a possibility
that a lender may be held liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances at a
property, regardless of whether or not the environmental damage or threat was
caused by the current or prior owner or operator. CERCLA and some state laws
provide an exemption from the definition of "owner or operator" for a secured
creditor who, without "participating in the management" of a facility, holds
indicia of ownership primarily to protect its security interest in the facility.
The Solid Waste Disposal Act (SWDA) provides similar protection to secured
creditors in connection with liability for releases of petroleum from certain
underground storage tanks. However, if a lender "participates in the management"
of the facility in question or is found not to have held its interest primarily
to protect a security interest, the lender may forfeit its secured creditor
exemption status.
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A regulation promulgated by the U.S. Environmental Protection Agency (EPA)
in April 1992 attempted to clarify the activities in which lenders could engage
both prior to and subsequent to foreclosure of a security interest without
forfeiting the secured creditor exemption under CERCLA. The rule was struck down
in 1994 by the United States Court of Appeals for the District of Columbia
Circuit in Kelley ex rel State of Michigan v. Environmental Protection Agency,
15 F.3d 1100 (D.C. Cir. 1994), reh'g denied, 25 F.3d 1088, cert. denied sub nom.
Am. Bankers Ass'n v. Kelley, 115 S.Ct. 900 (1995). Another EPA regulation
promulgated in 1995 clarifies the activities in which lenders may engage without
forfeiting the secured creditor exemption under the underground storage tank
provisions of SWDA. That regulation has not been struck down.
On September 30, 1996, Congress enacted the Asset Conservation, Limited
Liability and Deposit Insurance Protection Act (ACA) which amended both CERCLA
and SWDA to provide additional clarification regarding the scope of the lender
liability exemptions under the two statutes. Among other things, ACA specifies
the circumstances under which a lender will be protected by the CERCLA and SWDA
exemptions, both while the borrower is still in possession of the secured
property and following foreclosure on the secured property.
Generally, ACA states that a lender who holds indicia of ownership
primarily to protect a security interest in a facility will be considered to
participate in management only if, while the borrower is still in possession of
the facility encumbered by the security interest, the lender
o exercises decision-making control over environmental compliance related
to the facility such that the lender has undertaken responsibility for
hazardous substance handling or disposal practices related to the
facility or
o exercises control at a level comparable to that of a manager of the
facility such that the lender has assumed or manifested responsibility
for (a) overall management of the facility encompassing daily
decision-making with respect to environmental compliance or (b) overall
or substantially all of the operational functions (as distinguished
from financial or administrative functions) of the facility other than
the function of environmental compliance.
ACA also specifies certain activities that are not considered to be
"participation in management," including monitoring or enforcing the terms of
the extension of credit or security interest, inspecting the facility, and
requiring a lawful means of addressing the release or threatened release of a
hazardous substance.
ACA also specifies that a lender who did not participate in management of a
facility prior to foreclosure will not be considered an "owner or operator,"
even if the lender forecloses on the facility and after foreclosure sells or
liquidates the facility, maintains business activities, winds up operations,
undertakes an appropriate response action, or takes any other measure to
preserve, protect, or prepare the facility prior to sale or disposition, if the
lender seeks to sell or otherwise divest the facility at the earliest
practicable, commercially reasonable time, on commercially reasonable terms,
taking into account market conditions and legal and regulatory requirements.
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ACA specifically addresses the potential liability of lenders who hold
mortgages or similar conventional security interests in real property, such as
the trust fund does in connection with the mortgage loans and the Home
Improvement Contracts.
If a lender is or becomes liable under CERCLA, it may be authorized to
bring a statutory action for contribution against any other "responsible
parties," including a previous owner or operator. However, these persons or
entities may be bankrupt or otherwise judgment proof, and the costs associated
with environmental cleanup and related actions may be substantial. Moreover,
some state laws imposing liability for addressing hazardous substances do not
contain exemptions from liability for lenders. Whether the costs of addressing a
release or threatened release at a property pledged as collateral for one of the
loans would be imposed on the related trust fund, and thus occasion a loss to
the holders, therefore depends on the specific factual and legal circumstances
at issue.
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.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
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 related trust fund (and
therefore of the security 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 cause the property securing the mortgage loan to be
sold upon default of the mortgagor, thereby extinguishing the junior mortgagee's
lien unless the junior mortgagee asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the defaulted senior
mortgage. A junior mortgagee may satisfy a defaulted senior loan in full and, in
some states, may cure the default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In most
states, absent a provision in the mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee.
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The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply the proceeds and awards to any indebtedness secured by
the mortgage, in such order as the mortgagee may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the property is taken by condemnation, the mortgagee or
beneficiary under 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. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property that appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that 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.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
other states, the lender has the option of bringing a personal action against
the borrower on the debt without first exhausting the security. However, in some
of these states, the lender, following judgment on the personal action, may be
deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, when applicable, is that lenders will usually proceed first against
the security rather than bringing a personal action against the borrower.
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.
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In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the Federal Bankruptcy Code, the Soldiers'
and Sailors' Relief Act of 1940 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 Code, 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 rehabilitation plan under
chapter 13 of the Federal Bankruptcy Code to cure a monetary default with
respect to a loan on his 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 its
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 such 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 Federal 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 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 Federal Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted mortgage loan. 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 that originate loans and that fail
to comply with the provisions of the law. In some cases, this liability may
affect assignees of the loans.
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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 such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period" under the Garn-St. Germain Act,
which ended in all cases not later than October 15, 1982, and (ii) originated by
lenders other than national banks, federal savings institutions and federal
credit unions. Freddie Mac has taken the position in its published mortgage
servicing standards that, out of a total of eleven "window period states," five
states (Arizona, Michigan, Minnesota, New Mexico and Utah) have enacted statutes
extending, on various terms and for varying periods, the prohibition on
enforcement of due-on-sale clauses with respect to certain categories of window
period loans. Also, the Garn-St. Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
In addition, under the Federal Bankruptcy Code, due-on-sale clauses may not
be enforceable in bankruptcy proceedings and may, under certain circumstances,
be eliminated in any modified mortgage resulting from bankruptcy proceedings.
ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. 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 default
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
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temporary financial disability. In other cases, courts have limited the right of
a lender to realize upon its security if the default under the security
agreement is not monetary, such as the borrower's failure to 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. The regulations of the Office of Thrift Supervision
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
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 such mortgage loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 provides that state usury limitations shall not apply to certain
types of residential first mortgage loans originated by certain lenders after
March 31, 1980. Similar federal statutes were in effect with respect to mortgage
loans made during the first three months of 1980. The Office of Thrift
Supervision, as successor to the Federal Home Loan Bank Board, is authorized to
issue rules and regulations and to publish interpretations governing
implementation of Title V.
Title V authorizes any state to reimpose interest rate limits by adopting a
state law before April 1, 1983 or by certifying that the voters of such state
have voted in favor of any provision, constitutional or otherwise, which
expressly rejects an application of the federal law. Fifteen states adopted such
a law prior to the April 1, 1983 deadline. In addition, even where Title V is
not 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.
THE HOME IMPROVEMENT CONTRACTS AND THE MANUFACTURED HOUSING CONTRACTS
General
The Home Improvement Contracts and Manufactured Housing Contracts, other
than those that are unsecured or secured by mortgages on real estate, generally
are "chattel paper" or constitute "purchase money security interests," each as
defined in the Uniform Commercial Code (UCC) in effect in the applicable
jurisdiction. Pursuant to the UCC, the sale of chattel paper is treated in a
manner similar to perfection of a security interest in chattel paper. Under the
related agreement, the depositor will transfer physical possession of the
contracts to the trustee or a custodian or may retain possession of the
contracts as custodian for the trustee. In addition, the
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depositor will make an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the trustee's ownership of the contracts.
Unless otherwise specified in the related prospectus supplement, the contracts
will not be stamped or otherwise marked to reflect their assignment from the
depositor to the trustee. Therefore, if through negligence, fraud or otherwise,
a subsequent purchaser were able to take physical possession of the contracts
without notice of such assignment, the trustee's interest in the contracts could
be defeated.
Security Interests in Home Improvements
A Home Improvement Contract that is secured by the related home
improvements grants to the originator of the contract a purchase money security
interest in the related home improvements to secure all or part of the purchase
price of the home improvements and related services. A financing statement
generally is not required to be filed to perfect a purchase money security
interest in consumer goods. Purchase money security interests of this type are
assignable. In general, a purchase money security interest grants to the holder
a security interest that has priority over a conflicting security interest in
the same collateral and the proceeds of the collateral. However, to the extent
that the collateral subject to a purchase money security interest becomes a
fixture, in order for the related purchase money security interest to take
priority over a conflicting interest in the fixture, the holder's interest in
the home improvement must generally be perfected by a timely fixture filing. In
general, under the UCC, a security interest does not exist under the UCC in
ordinary building material incorporated into an improvement on land. Home
Improvement Contracts that finance lumber, bricks, other types of ordinary
building material or other goods that are deemed to lose their characterization,
upon incorporation of the materials into the related property, will not be
secured by a purchase money security interest in the home improvement being
financed.
Enforcement of Security Interest in Home Improvements
So long as the home improvement has not become subject to real estate law,
a creditor can repossess a home improvement securing a Home Improvement Contract
by voluntary surrender, by "self-help" repossession that is "peaceful" (i.e.,
without breach of the peace) or, in the absence of voluntary surrender and the
ability to repossess without breach of the peace, by judicial process. The
holder of a Home Improvement Contract must give the debtor a number of days'
notice, which varies from ten to 30 days depending on the state, prior to
commencement of any repossession. The UCC and consumer protection laws in most
states place restrictions on repossession sales, including requiring prior
notice to the debtor and commercial reasonableness in effecting the sale. The
law in most states also requires that the debtor be given notice of any sale
prior to resale of the unit that the debtor may redeem it at or before resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments, and in many cases the
defaulting borrower will have no assets from which to pay a judgment.
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Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Security Interests in the Manufactured Homes
The manufactured homes securing the Manufactured Housing Contracts may be
located in all 50 states and the District of Columbia. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
The security interests of the trustee in the manufactured homes will not be
noted on the certificates of title or by delivery of the required documents and
payment of fees to the applicable state motor vehicle authorities unless the
related prospectus supplement so requires. With respect to each transaction, a
decision will be made as to whether or not the security interests of the trustee
in the manufactured homes will be noted on the certificates of title and the
required documents and fees will be delivered to the applicable state motor
vehicle authorities based upon, among other things, the practices and procedures
of the related originator and servicer and after consultation with the
applicable rating agency or rating agencies. In some nontitle states, perfection
pursuant to the provisions of the UCC is required. As manufactured homes have
become large and often have been attached to their sites without any apparent
intention to move them, courts in many states have held that manufactured homes,
under particular circumstances, may become governed by real estate title and
recording laws. As a result, a security interest in a manufactured home could be
rendered subordinate to the interests of other parties claiming an interest in
the manufactured home under applicable state real estate law. In order to
perfect a security interest in a manufactured home under real estate laws, the
secured party must file either a "fixture filing" under the provisions of the
UCC or a real estate mortgage under the real estate laws of the state where the
home is located. These filings must be made in the real estate records office of
the county where the manufactured home is located. If so specified in the
related prospectus supplement, the Manufactured Housing Contracts may contain
provisions prohibiting the borrower from permanently attaching the manufactured
home to its site. So long as the borrower does not violate this agreement, a
security interest in the manufactured home will be governed by the certificate
of title laws or the UCC, and the notation of the security interest on the
certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the manufactured
home. If, however, a manufactured home is permanently attached to its site, the
related lender may be required to perfect a security interest in the
manufactured home under applicable real estate laws.
In the event that the owner of a manufactured home moves it to a state
other than the state in which the manufactured home initially is registered,
under the laws of most states the perfected security interest in the
manufactured home would continue for four months after relocation and, after
expiration of the four months, only if and after the owner re-registers the
manufactured home in the new state. If the owner were to relocate a manufactured
home to another state and not re-register a security interest in that state, the
security interest in the manufactured home would cease to be perfected. A
majority of states generally require surrender of a certificate of title to
re-register a manufactured home. Accordingly, the secured party must surrender
possession if it holds the certificate of title to the manufactured home or, in
the case of manufactured homes registered in states which provide for notation
of lien on the
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certificate of title, notice of surrender would be given to the secured party
noted on the certificate of title. In states which do not require a certificate
of title for registration of a manufactured home, re-registration could defeat
perfection.
Under the laws of most states, liens for repairs performed on a
manufactured home and liens for personal property taxes take priority over a
perfected security interest in the manufactured home.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract that is the seller of goods that gave rise to the transaction (and
certain related lenders and assignees) to transfer the contract free of notice
of claims by the related debtor. The effect of this rule is to subject the
assignee of the contract to all claims and defenses the debtor could assert
against the seller of goods. Liability under this rule is limited to amounts
paid under a contract; however, the obligor also may be able to assert the rule
to set off remaining amounts due as a defense against a claim brought by the
trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
contract.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 provides that, subject to the following conditions, state usury
limitations shall not apply to any contract that is secured by a first lien on
certain kinds of consumer goods. The Home Improvement Contracts or Manufactured
Housing Contracts would be covered if they satisfy certain conditions, among
other things, governing the terms of any prepayments, late charges and deferral
fees and requiring a 30-day notice period prior to instituting any action
leading to repossession of the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
INSTALLMENT SALES CONTRACTS
The loans may also consist of installment sales contracts. Under an
installment sales contract the seller/lender retains legal title to the property
and enters into an agreement with the purchaser/borrower for the payment of the
purchase price, plus interest, over the term of the contract. Only after full
performance by the purchaser/borrower of the contract is the seller/lender
obligated to convey title to the property to the borrower. As with mortgage or
deed of trust financing, during the effective period of the installment sales
contract, the borrower is
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generally responsible for maintaining the property in good condition and for
paying real estate taxes, assessments and hazard insurance policy premiums
associated with the property.
The method of enforcing the rights of the seller/lender under an
installment sales contract varies on a state-by-state basis depending upon the
extent to which state courts are willing, or able pursuant to state statute, to
enforce the contract strictly according to the terms. The terms of installment
sales contracts generally provide that upon a default by the borrower, the
borrower loses his right to occupy the property, the entire indebtedness is
accelerated, and the borrower's equitable interest in the property is forfeited.
The seller/lender in such a situation does not have to foreclose in order to
obtain title to the property, although in some cases a quiet title action is in
order if the borrower has filed the installment sales contract in local land
records and an ejectment action may be necessary to recover possession. In a few
states, particularly in cases of borrower default during the early years of an
installment sales contract, the courts will permit ejectment of the buyer and a
forfeiture of his interest in the property. However, most state legislatures
have enacted provisions by analogy to mortgage law protecting borrowers under
installment sales contracts from the harsh consequences of forfeiture. Under
these statutes, a judicial or nonjudicial foreclosure may be required, the
lender may be required to give notice of default and the borrower may be granted
some grace period during which the installment sales contract may be reinstated
upon full payment of the default amount and the borrower may have a
post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
installment sales contract for the sale of real estate to share in the proceeds
of sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an installment sales
contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
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,
o are entitled to have their interest rates reduced and capped at 6% per
year, on obligations (including loans) incurred prior to the
commencement of military service for the duration of military service,
and
o may be entitled to a stay of proceedings on any kind of foreclosure or
repossession action in the case of defaults on such obligations entered
into prior to military service for the duration of military service,
and
o may have the maturity of their 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, these benefits are subject to challenge by creditors and if, in the
opinion of the court, the ability of a person to comply with his obligations is
not materially impaired by military service, the court may apply equitable
principles accordingly.
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If a borrower's obligation to repay amounts otherwise due on a loan included in
a trust fund for a series is relieved pursuant to the Relief Act, none of the
trust fund, the servicer, the depositor or the trustee will be required to
advance such amounts, and any related loss may reduce the amounts available to
be paid to the holders of the related securities. Unless otherwise specified in
the related prospectus supplement, any shortfalls in interest collections on
loans (or underlying loans), included in a trust fund for a series resulting
from application of the Relief Act will be allocated to each class of securities
of the 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 the interest shortfall not occurred.
THE DEPOSITOR
The depositor, Bear Stearns Asset Backed Securities, Inc., was incorporated
in the state of Delaware in June 1995, and is a wholly-owned subsidiary of The
Bear Stearns Companies Inc. The depositor's principal executive offices are
located at 245 Park Avenue, New York, New York 10167. Its telephone number is
(212) 272-4095.
The depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts,
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments. The depositor securities must be
collateralized or otherwise secured or backed by, or otherwise represent an
interest in, among other things, receivables or pass-through certificates or
participations or certificates of participation or beneficial ownership in one
or more pools of receivables, and the proceeds of the foregoing, that arise in
connection with loans secured by senior or junior mortgages on real estate or
manufactured housing and any and all other commercial transactions and
commercial, sovereign, student or consumer loans or indebtedness. The depositor
may purchase, acquire, own, hold, transfer, convey, service, sell, pledge,
assign, finance and otherwise deal with such receivables, pass-through
certificates, or participations or certificates of participation or beneficial
ownership. Article Third of the depositor's Certificate of Incorporation limits
the depositor's activities to the above activities and certain related
activities, such as credit enhancement with respect to depositor securities, and
to any activities incidental to and necessary or convenient for the
accomplishment of those purposes.
USE OF PROCEEDS
The depositor will apply all or substantially all of the net proceeds from
the sale of each of the related trust fund series of securities for one or more
of the following purposes:
o to purchase the primary assets of the related trust fund,
o to repay indebtedness incurred to obtain funds to acquire the primary
assets of the related trust fund,
o to establish any reserve funds described in the related prospectus
supplement, and
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o to pay costs of structuring and issuing the securities, including the
costs of obtaining any credit enhancement.
If specified in the related prospectus supplement, the purchase of the
primary assets for a series may be effected by delivering the securities to the
seller in exchange for the primary assets.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following summary of the material federal income tax consequences of
the purchase, ownership, and disposition of the securities is based on the
opinion of Brown & Wood LLP, Morgan, Lewis & Bockius LLP or other tax counsel
designated in the prospectus supplement, as special counsel to the depositor.
This summary is based upon the provisions of the Internal Revenue Code, the
regulations promulgated thereunder, including, where applicable, proposed
regulations, and the judicial and administrative rulings and decisions now in
effect, all of which are subject to change or possible differing
interpretations. The statutory provisions, regulations, and interpretations on
which this interpretation is based are subject to change either prospectively or
retroactively.
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. This summary focuses primarily upon investors who will hold
securities as "capital assets" (generally, property held for investment) within
the meaning of section 1221 of the Code. Prospective investors may wish to
consult their own tax advisers concerning the federal, state, local and any
other tax consequences as relates specifically to such investors in connection
with the purchase, ownership and disposition of the securities.
The federal income tax consequences to security holders will vary depending
on whether
o the securities of a series are classified as indebtedness;
o an election is made to treat the trust fund relating to a particular
series of securities as a real estate mortgage investment conduit or
REMIC under the Code;
o the securities represent an ownership interest in some or all of the
assets included in the trust fund for a series;
o an election is made to treat the trust fund relating to a particular
series of certificates as a partnership; or
o an election is made to treat the trust fund relating to a particular
series of securities as a financial asset securitization investment
trust or FASIT under the Code.
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The prospectus supplement for each series of securities will specify how the
securities will be treated for federal income tax purposes and will discuss
whether a REMIC election, if any, will be made with respect to the series.
TAXATION OF DEBT SECURITIES
Status as Real Property Loans. Except to the extent otherwise provided in
the related prospectus supplement, if the securities are regular interests in a
REMIC or represent interests in a grantor trust, in the opinion of tax counsel:
o securities held by a domestic building and loan association will
constitute "loans... secured by an interest in real property" within
the meaning of section 7701(a)(19)(C)(v) of the Code; and
o securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of section 856(c)(4)(A) of the Code
and interest on securities will be considered "interest on obligations
secured by mortgages on real property or on interests in real property"
within the meaning of section 856(c)(3)(B) of the Code.
Interest and Acquisition Discount. In the opinion of tax counsel,
securities that are REMIC regular interests are generally taxable to holders in
the same manner as evidences of indebtedness issued by the REMIC. Stated
interest on the securities that are REMIC regular interests 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 securities that are REMIC
regular interests) which are characterized as indebtedness for federal income
tax purposes will be includible in income by holders thereof in accordance with
their usual methods of accounting. When we refer to "debt securities" in this
section, we mean securities characterized as debt for federal income tax
purposes and securities that are REMIC regular interests.
In the opinion of tax counsel, "compound interest securities" (i.e., debt
securities that permit all interest to accrue for more than one year before
payments of interest are scheduled to begin) will, and certain of the other debt
securities issued at a discount may, be issued with "original issue discount" or
OID. The following discussion is based in part on the OID Regulations. A holder
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the debt securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a debt security and its issue price. In the
opinion of tax counsel, a holder of a debt security must include OID in gross
income as ordinary interest income as it accrues under a method taking into
account an economic accrual of the discount. In general, OID must be included in
income in advance of the receipt of the cash representing that income. The
amount of OID on a debt security will be considered to be zero if it is less
than a de minimis amount determined under the Code.
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
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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
that class will be treated as the fair market value of that class on the closing
date. The issue price of a debt security also includes the amount paid by an
initial debt security holder for accrued interest that relates to a period prior
to the issue date of the debt security. The stated redemption price at maturity
of a debt security includes the original principal amount of the debt security,
but generally will not include distributions of interest if the distributions
constitute "qualified stated interest."
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below), provided that the interest payments are unconditionally payable at
intervals of one year or less during the entire term of the debt security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Debt securities may provide for default remedies in the
event of late payment or nonpayment of interest. Although the matter is not free
from doubt, the trustee intends to treat interest on such debt securities as
unconditionally payable and as constituting qualified stated interest, not OID.
However, absent clarification of the OID Regulations, where debt securities do
not provide for default remedies, the interest payments will be included in the
debt security's stated redemption price at maturity and taxed as OID. Interest
is payable at a single fixed rate only if the rate appropriately takes into
account the length of the interval between payments. Distributions of interest
on debt securities with respect to which deferred interest will accrue, will not
constitute qualified stated interest payments, in which case the stated
redemption price at maturity of such debt securities includes all distributions
of interest as well as principal thereon. Where the interval between the issue
date and the first distribution date on a debt security is longer than the
interval between subsequent distribution dates, the greater of (i) the interest
foregone and (ii) the excess of the stated principal amount over the issue price
will be included in the stated redemption price at maturity and tested under the
de minimis rule described below. Where the interval between the issue date and
the first distribution date on a debt security is shorter than the interval
between subsequent distribution dates, all of the additional interest will be
included in the stated redemption price at maturity and tested under the de
minimis rule described below. In the case of a debt security with a long first
period that has non-de minimis OID, all stated interest in excess of interest
payable at the effective interest rate for the long first period will be
included in the stated redemption price at maturity and the debt security will
generally have OID. Holders of debt securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a debt security.
Under the de minimis rule, OID on a debt security will be considered to be
zero if the OID is less than 0.25% of the stated redemption price at maturity of
the debt security multiplied by the weighted average maturity of the debt
security. For this purpose, the weighted average maturity of the debt security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the debt security and the
denominator of which is the stated redemption price at maturity of the debt
security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the debt security
is held as a capital asset. However, holders may elect to accrue all de minimis
OID as
81
well as market discount under a constant yield method. See "--Election to
Treat All Interest as Original Issue Discount" below.
Debt securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is generally treated as payable at a
qualified variable rate and not as contingent interest if
o the interest is unconditionally payable at least annually,
o the issue price of the debt instrument does not exceed the total
noncontingent principal payments, and
o interest is based on a "qualified floating rate," an "objective rate,"
or a combination of "qualified floating rates" that do not operate in a
manner that significantly accelerates or defers interest payments on
the debt security.
In the case of compound interest securities, certain interest weighted
securities, and certain of the other debt securities, none of the payments under
the instrument will be considered qualified stated interest, and thus the
aggregate amount of all payments will be included in the stated redemption price
at maturity.
The Internal Revenue Service issued contingent payment regulations
governing the calculation of OID on instruments having contingent interest
payments. These contingent payment regulations represent the only guidance
regarding the views of the IRS with respect to contingent interest instruments
and specifically do not apply for purposes of calculating OID on debt
instruments subject to section 1272(a)(6) of the Code, such as the debt
securities. Additionally, the OID Regulations do not contain provisions
specifically interpreting section 1272(a)(6) of the Code. Until the Treasury
issues guidance to the contrary, trustee intends to base its computation on
section 1272(a)(6) of the Code and the OID Regulations as described in this
prospectus. However, because no regulatory guidance currently exists under
section 1272(a)(6) of the Code, there can be no assurance that such methodology
represents the correct manner of calculating OID.
The holder of a debt security issued with OID must include in gross income,
for all days during its taxable year on which it holds the debt security, the
sum of the "daily portions" of OID. The amount of OID includible in income by a
holder will be computed by allocating to each day during an accrual period a pro
rata portion of the original issue discount that accrued during the accrual
period. In the case of a debt security that is not a REMIC 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 the debt security's 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.
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Certain classes of the debt securities may be "pay-through securities,"
which are debt instruments that are subject to acceleration due to prepayments
on other debt obligations securing those instruments. The amount of OID to be
included in the income of a holder of a pay-through security is computed by
taking into account the prepayment rate assumed in pricing the debt instrument.
The amount of OID that will accrue during an accrual period on a pay-through
security is the excess, if any, of the
o sum of
(a) the present value of all payments remaining to be made on the
pay-through security as of the close of the accrual period and
(b) the payments during the accrual period of amounts included in the
stated redemption price of the pay-through security,
over
o 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:
o 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),
o events that have occurred before the end of the accrual period and
o 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 of a pay-through security to take into account
prepayments with respect to the loans at a rate that exceeds the prepayment
assumption, and to decrease (but not below zero for any period) the portions of
OID required to be included in income by a holder of a pay-through security to
take into account prepayments with respect to the loans at a rate that is slower
than the prepayment assumption. Although OID will be reported to holders of
pay-through securities based on the prepayment assumption, no representation is
made to holders that loans will be prepaid at that rate or at any other rate.
The depositor may adjust the accrual of OID on a class of securities that
are REMIC regular interests in a manner that it believes to be appropriate, to
take account of realized losses on the loans, although the OID Regulations do
not provide for such adjustments. If the IRS were to require that OID be accrued
without such adjustments, the rate of accrual of OID for a class of securities
that are REMIC regular interests could increase.
Certain classes of securities may represent more than one class of REMIC
regular interests. Unless otherwise provided in the related prospectus
supplement, the applicable trustee
83
intends, based on the OID Regulations, to calculate OID on such 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 holder who purchases the debt security for an amount that
exceeds its adjusted issue price will be entitled (as will an initial holder who
pays more than a debt security's issue price) to offset such OID by comparable
economic accruals of portions of the excess.
Effects of Defaults and Delinquencies. In the opinion of tax counsel,
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 such amounts are
uncollectible. As a result, the amount of income (including OID) reported by a
holder of a security in any period could significantly exceed the amount of cash
distributed to the holder in that period. The holder will eventually be allowed
a loss (or will be allowed to report a lesser amount of income) to the extent
that the aggregate amount of distributions on the securities is reduced as a
result of a loan default. However, the timing and character of losses or
reductions in income are uncertain and, accordingly, holders of securities
should consult their own tax advisors on this point.
Interest Weighted Securities. An "interest weighted security" is a security
that is a REMIC regular interest or a "stripped" security (as discussed under
"--Tax Status as a Grantor Trust; General" below) the payments on which consist
solely or primarily of a specified portion of the interest payments on qualified
mortgages held by the REMIC or on loans underlying pass-through securities. It
is not clear how income should be accrued with respect to interest weighted
securities. The trustee intends to take the position that all of the income
derived from an interest weighted security should be treated as OID and that the
amount and rate of accrual of such OID should be calculated by treating the
interest weighted security as a compound interest security. However, in the case
of interest weighted securities that are entitled to some payments of principal
and are REMIC regular interests, the IRS could assert that income derived from
the interest weighted security should be calculated as if the security were a
security purchased at a premium equal to the excess of the price paid by the
holder for the security over its stated principal amount, if any. Under this
approach, a holder would be entitled to amortize such premium only if it has in
effect an election under section 171 of the Code with respect to all taxable
debt instruments held by such holder, as described below. Alternatively, the IRS
could assert that an interest weighted security should be taxable under the
rules governing bonds issued with contingent payments. This treatment may be
more likely in the case of interest weighted securities that are stripped
securities as described below. See "--Tax Status as a Grantor Trust--Discount or
Premium on Pass-Through Securities" below.
Variable Rate Debt Securities. In the opinion of tax counsel, in the case
of debt securities bearing interest at a rate that varies directly, according to
a fixed formula, with an objective index, it appears that the yield to maturity
of the debt securities and, in the case of pay-through securities, the present
value of all payments remaining to be made on the debt securities, should be
calculated as if the interest index remained at its value as of the issue date
of the securities. Because the proper method of adjusting accruals of OID on a
variable rate debt security is
84
uncertain, holders of variable rate debt securities should consult their own tax
advisers regarding the appropriate treatment of such securities for federal
income tax purposes.
Market Discount. In the opinion of tax counsel, a purchaser of a security
may be subject to the market discount rules of sections 1276 through 1278 of the
Code. A holder that acquires a debt security with more than a prescribed de
minimis amount of "market discount" (generally, the excess of the principal
amount of the debt security over the purchaser's purchase price) will be
required to include accrued market discount in income as ordinary income in each
month, but limited to an amount not exceeding the principal payments on the debt
security received in that month and, if the securities are sold, the gain
realized. This market discount would accrue in a manner to be provided in
Treasury regulations but, until such regulations are issued, market discount
would in general accrue either
o on the basis of a constant yield (in the case of a pay-through
security, taking into account a prepayment assumption) or
o in the ratio of (a) in the case of securities (or, in the case of a
pass-through security, as set forth below, the loans underlying the
security) not originally issued with OID, stated interest payable in
the relevant period to total stated interest remaining to be paid at
the beginning of the period or (b) in the case of securities (or, in
the case of a pass-through security, as described below, the loans
underlying the security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the 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 the 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 such excess is greater than the market
discount that accrued during the taxable year in which such interest expense was
incurred. In general, the deferred portion of any interest expense will be
deductible when such 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 such holder during the taxable year such election is made and
thereafter, in which case the interest deferral rule will not apply.
Premium. In the opinion of tax counsel, 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 no regulations
addressing the computation of premium accrual on comparable securities have been
issued, the legislative history of The Tax Reform Act of 1986 indicates that
premium is to be accrued in the same manner as market discount. Accordingly, it
appears that the accrual of premium on a class of pay-through securities will be
calculated using the prepayment assumption used in pricing the class. If a
holder makes an election to amortize premium on a debt security, the election
will
85
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 acquired
thereafter by the holder, and will be irrevocable without the consent of the
IRS. Purchasers who pay a premium for the securities should consult their tax
advisers regarding the election to amortize premium and the method to be
employed.
On December 30, 1997, the IRS issued final amortizable bond premium
regulations dealing with amortizable bond premium. The regulations specifically
do not apply to prepayable debt instruments subject to section 1272(a)(6) of the
Code. Absent further guidance from the IRS, the trustee intends to account for
amortizable bond premium in the manner described above. Prospective purchasers
of the debt securities should consult their tax advisors regarding the possible
application of the amortizable bond premium regulations.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit the holder of a debt security to elect to accrue all
interest, discount (including de minimis market discount or OID) and premium as
interest, based on a constant yield method for debt securities acquired on or
after April 4, 1994. If such 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 such holder of
the debt security acquires during the year of the election or thereafter.
Similarly, the 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.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of tax counsel, if a REMIC election is made with
respect to a series of securities, then the arrangement by which the securities
of that series are issued will be treated as a REMIC as long as all of the
provisions of the applicable governing agreement are complied with and the
statutory and regulatory requirements are satisfied. Securities will be
designated as "regular interests" or "residual interests" in a REMIC, as
specified in the related prospectus supplement.
Except to the extent specified otherwise in a prospectus supplement, if a
REMIC election is made with respect to a series of securities, in the opinion of
tax counsel:
o securities held by a domestic building and loan association will
constitute "a regular or a residual interest in a REMIC" within the
meaning of Section 7701(a)(19)(C)(xi) of the Code (assuming that at
least 95% of the REMIC's assets consist of cash, government securities,
"loans secured by an interest in real property," and other types of
assets described in Code Section 7701(a)(19)(C)); and
o securities held by a real estate investment trust will constitute "real
estate assets" within the meaning of Section 856(c)(4)(A) of the Code,
and income with respect to
86
the securities will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the
meaning of Section 856(c)(3)(B) of the Code (assuming, for both
purposes, that at least 95% of the REMIC's assets are qualifying
assets).
If less than 95% of the REMIC's assets consist of assets described in the
immediately preceding bullets, then a security will qualify for the tax
treatment described in the previous sentence in the proportion that such REMIC's
assets are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, in the opinion of tax counsel, all of the expenses of a
REMIC will be taken into account by holders of the residual interest securities.
In the case of a "single class REMIC," however, the expenses will be allocated
under Treasury regulations among the holders of the REMIC regular interest
securities and the holders of the REMIC 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 REMIC regular interest security who is an
individual or a "pass-through interest holder" (including certain pass-through
entities but not including real estate investment trusts), the expenses will be
deductible only to the extent that the expenses, plus other "miscellaneous
itemized deductions" of the holder, exceed 2% of the holder's adjusted gross
income. In addition, for taxable years beginning after December 31, 1990, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation for taxable years beginning after 1990)
will be reduced by the lesser of
o 3% of the excess of adjusted gross income over the applicable amount,
or
o 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
This reduction is scheduled to be phased-out over a five-year period beginning
in 2006. The reduction or disallowance of this deduction may have a significant
impact on the yield of the REMIC regular interest security to the holder. In
general terms, a single class REMIC is one that either
o would qualify, under existing Treasury regulations, as a grantor trust
if it were not a REMIC (treating all interests as ownership interests,
even if they would be classified as debt for federal income tax
purposes), or
o is similar to such a trust and is structured with the principal purpose
of avoiding the single class REMIC rules.
Unless otherwise specified in the related prospectus supplement, the expenses of
the REMIC will be allocated to holders of the related REMIC residual interest
securities.
87
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, in the opinion of tax counsel, 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 the REMIC residual interests. As described above,
the REMIC regular interests are generally taxable as debt of the REMIC.
Qualification as a REMIC requires ongoing compliance with certain conditions.
Although a REMIC is not generally subject to federal income tax, the Code
provides that failure to comply with one or more of the ongoing requirements of
the Code for REMIC status during any taxable year, including the implementation
of restrictions on the purchase and transfer of the residual interests in a
REMIC as described below under "--Taxation of Owners of Residual Interest
Securities", would cause the trust not to be treated as a REMIC for that year
and thereafter. In this event, the entity may be taxable as a separate
corporation and the related certificates may not be accorded the status or given
the tax treatment described below.
Calculation of REMIC Income. In the opinion of tax counsel, the taxable
income or net loss of a REMIC is determined under an accrual method of
accounting and in the same manner as in the case of an individual, with certain
adjustments. In general, the taxable income or net loss will be the difference
between
o the gross income produced by the REMIC's assets, including stated
interest and any OID or market discount on loans and other assets, and
o deductions, including stated interest and original issue discount
accrued on the REMIC regular interest securities, amortization of any
premium with respect to loans, and servicing fees and other expenses of
the REMIC.
A holder of a REMIC 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 2%
of the holder's adjusted gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the startup
day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of pay-through securities
accrue OID (i.e., under the constant yield method taking into account the
prepayment assumption). The REMIC will deduct OID on the regular interest
securities in the same manner that the holders of the regular interest
securities include such discount in income, but without
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regard to the de minimis rules. See "--Taxation of Debt Securities" above.
However, a REMIC that acquires loans at a market discount must include such
market discount in income currently, as it accrues, on a constant interest
basis.
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the prepayment assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before that date, it is possible that the
premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject to
a 100% tax on any net income derived from a "prohibited transaction." For this
purpose, net income will be calculated without taking into account any losses
from prohibited transactions or any deductions attributable to any prohibited
transaction that resulted in a loss. In general, prohibited transactions
include:
o subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
o subject to a limited exception, the sale or other disposition of a cash
flow investment;
o the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or
o the receipt of any fees or other compensation for services rendered by
the REMIC.
It is anticipated that a REMIC will not engage in any prohibited transactions in
which it would recognize a material amount of net income. In addition, subject
to a number of exceptions, a tax is imposed at the rate of 100% on amounts
contributed to a REMIC after the close of the three-month period beginning on
the startup day. The holders of REMIC residual interest securities will
generally be responsible for the payment of any taxes imposed on the REMIC.
However, to the extent not paid by the holders of the REMIC residual interest
securities or otherwise, taxes will be paid out of the trust fund and will be
allocated pro rata to all outstanding classes of securities of the REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
In the opinion of tax counsel, the holder of a certificate representing a
REMIC 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 that 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.
In the opinion of tax counsel, 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
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distributions from the REMIC attributable to income or loss. The reporting of
taxable income without corresponding distributions could occur, for example, if
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 securities 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.) The taxable
income of a REMIC may also be greater in earlier years as a result of the fact
that interest expense deductions, as a percentage of outstanding principal on
the 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 REMIC residual interest security is
taxed on the net income of the REMIC, the taxable income derived from the
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 a residual interest security may be less than that of a
corporate bond or stripped instrument.
Limitation on Losses. In the opinion of tax counsel, 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 REMIC residual interest security will initially
equal the holder's purchase price, and will subsequently be increased by the
amount of the REMIC's taxable income allocated to the holder, and decreased (but
not below zero) by the amount of distributions made and the amount of the
REMIC's net loss allocated to the holder. Any disallowed loss may be carried
forward indefinitely, but may be used only to offset income generated by the
same REMIC. The ability of holders of residual interest securities to deduct net
losses may be subject to additional limitations under the Code. Holders should
consult their tax advisers with respect to such additional limitations.
Distributions. In the opinion of tax counsel, distributions on a REMIC
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 the residual interest security. If the amount of the payment
exceeds the 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. In the opinion of tax counsel, the holder of a residual
interest security will recognize gain or loss on the sale or exchange of the
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 sale or exchange. A holder's adjusted basis in a residual interest
security generally equals the cost of the residual interest security increased
by the taxable income of the REMIC that was included in the income of the holder
and decreased by distributions received thereon by the holder and amounts of the
REMIC net loss allocated to the holder. 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
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disposition. In that event, the loss will be used to increase the residual
interest security holder's adjusted basis in the newly acquired asset.
Excess Inclusions. In the opinion of tax counsel, 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 Section 511 of the Code, the holder's
excess inclusion income will be treated as unrelated business taxable income of
the holder. In addition, under Treasury regulations yet to be issued, if a real
estate investment trust, a regulated investment company, a common trust fund, or
certain cooperatives were to own a residual interest security, a portion of
dividends (or other distributions) paid by the real estate investment trust (or
other entity) would be treated as excess inclusion income. If a residual
interest security is owned by a foreign person, excess inclusion income is
subject to tax at a rate of 30%, which may not be reduced by treaty, is not
eligible for treatment as "portfolio interest" and is subject to certain
additional limitations. See "--Tax Treatment of Foreign Investors" below. The
Small Business Job Protection Act of 1996 has eliminated the special rule
permitting Section 593 thrift institutions to use net operating losses and other
allowable deductions to offset their excess inclusion income from residual
interest securities that have "significant value" within the meaning of the
REMIC Regulations, effective for taxable years beginning after December 31,
1995, except with respect to residual interest securities continuously held by a
thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative minimum
taxable income of a residual holder.
o First, alternative minimum taxable income for the residual holder is
determined without regard to the special rule that taxable income
cannot be less than excess inclusions.
o Second, the residual holder's alternative minimum taxable income for a
tax year cannot be less than excess inclusions for the year.
o Third, the amount of any alternative minimum tax net operating loss
deductions must be computed without regard to any excess inclusions.
These rules are effective for tax years beginning after December 31, 1986,
unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of
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o REMIC taxable income for the quarterly period allocable to a residual
interest security,
over
o the daily accruals for such quarterly period of (i) 120% of the long
term applicable federal rate on the startup day multiplied by (ii) the
adjusted issue price of the residual interest security at the beginning
of the quarterly period.
The adjusted issue price of a residual interest 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, transfers of residual interest securities may
be disregarded in certain circumstances. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any "disqualified
organization" including the United States, any State or political subdivision
thereof, any foreign government, any international organization, or any agency
or instrumentality of any of the foregoing, a rural electric or telephone
cooperative described in Section 1381(a)(2)(C) of the Code, or any entity exempt
from the tax imposed by sections 1 through 1399 of the Code, if the entity is
not subject to tax on its unrelated business income. Accordingly, the applicable
pooling and servicing agreement will prohibit disqualified organizations from
owning a residual interest security. In addition, no transfer of a residual
interest security will be permitted unless the proposed transferee shall have
furnished to the trustee an affidavit representing and warranting that it is
neither a disqualified organization nor an agent or nominee acting on behalf of
a disqualified organization.
If a residual interest security is transferred to a disqualified
organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of the residual
interest security at the time of the transfer. In addition, if a disqualified
organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
residual interest security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a residual interest security is a
"noneconomic residual interest" as described below, the transfer of a residual
interest security to a U.S. Person will be disregarded for all federal tax
purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. Such a purpose exists if the transferor, at the
time of
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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 (i.e., the transferor had "improper knowledge"). However, a safe harbor
exists under which a transferor is presumed to lack such knowledge provided that
the following two conditions are met:
o the transferor conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and found
that the transferee had historically paid its debts as they became due
and found no significant evidence to indicate that the transferee will
not continue to pay its debts as they become due; and
o the transferee represents to the transferor that it understands that,
as the holder of the noneconomic residual interest, it may incur tax
liabilities in excess of any cash flows generated by the interest and
that it intends to pay taxes associated with holding the residual
interest as they become due.
A residual interest security is a "noneconomic residual interest" unless,
at the time of the transfer:
o the present value of the expected future distributions on the residual
interest security at least equals the product of the present value of
the anticipated excess inclusions and the highest rate of tax for the
year in which the transfer occurs; and
o the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which the taxes
accrue on the anticipated excess inclusions in an amount sufficient to
satisfy the accrued taxes.
If a transfer of a residual interest security is disregarded, the
transferor would be liable for any federal income tax imposed upon taxable
income derived by the transferee from the REMIC. A similar type of limitation
exists with respect to certain transfers of residual interests by foreign
persons to U.S. Persons. See "--Tax Treatment of Foreign Investors" below.
New proposed Treasury regulations issued on February 4, 2000 would add a
third condition to the safe harbor under which transfers of noneconomic residual
interests would not be disregarded for federal income tax purposes. Under the
new proposed regulations, a transfer of a noneconomic residual interest will
qualify under this safe harbor only if the present value of the anticipated tax
liabilities associated with holding the residual interest does not exceed the
present value of the sum of:
o any consideration given to the transferee to acquire the interest;
o future distributions on the interest; and
o any anticipated tax savings associated with holding the interest as the
REMIC generates losses. For purposes of this calculation, the present
value generally is calculated using a discount rate equal to the
applicable federal rate. The new proposed regulations have a proposed
effective date of February 4, 2000.
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A recently issued revenue procedure provides that, during the period in
which the IRS and Treasury consider comments on the new proposed regulations, a
transferor will be presumed to lack improper knowledge if:
o both conditions specified in the fourth preceding paragraph are met,
are satisfied; and
o either (x) the safe harbor specified in the immediately preceding
paragraph is satisfied or (y) the following three conditions are
satisfied:
o for financial reporting purposes, the transferee's gross assets
exceed $100 million and its net assets exceed $10 million for the
current year and prior two fiscal years, excluding certain related
party obligations;
o the transferee is an eligible corporation (i.e., a U.S. branch of a
domestic C corporation (other than a tax-exempt corporation, a RIC,
a REIT, a REMIC or cooperative)) that will not be subject to net tax
by a foreign country or U.S. possession in respect of the residual
interest security and agrees in writing that any subsequent transfer
of the residual interest will be to an eligible corporation and will
satisfy the requirements for the transferor of such subsequent
transfer to be presumed to lack improper knowledge; and
o the facts and circumstances known to the transferor, including any
payment actually made to the transferee, must not reasonably
indicate that the taxes associated with the residual interest will
not be paid. Prospective investors should consult their own tax
advisors as to the applicability and effect of the new proposed
regulations and the Revenue Procedure.
Mark-to-Market Rules. Prospective purchasers of a REMIC residual interest
security should be aware that the IRS recently issued final mark-to-market
regulations which provide that a REMIC residual interest security acquired after
January 3, 1995 cannot be marked-to-market. Prospective purchasers of a REMIC
residual interest security should consult their tax advisors regarding the
possible application of the mark-to-market regulations.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the IRS in a unified
administrative proceeding.
TAX STATUS AS A GRANTOR TRUST
General. As further specified in the related prospectus supplement, if a
REMIC election is not made and the trust fund is not structured as a
partnership, then, in the opinion of tax counsel, the trust fund relating to a
series of securities will be classified for federal income tax purposes as a
grantor trust under Subpart E, Part 1 of Subchapter J of the Code and not as an
association taxable as a corporation. We refer to the securities of a series of
this type as
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"pass-through securities". In some series there will be no separation of the
principal and interest payments on the loans. In these circumstances, a holder
will be considered to have purchased a pro rata undivided interest in each of
the loans. In the case of "stripped securities", sale of the securities will
produce a separation in the ownership of all or a portion of the principal
payments from all or a portion of the interest payments on the loans.
In the opinion of tax counsel, each holder must report on its federal
income tax return its share of the gross income derived from the loans (not
reduced by the amount payable as trust expense fees to the applicable trustee
and the servicer and similar fees), at the same time and in the same manner as
the items would have been reported under the holder's tax accounting method had
it held its interest in the loans directly, received directly its share of the
amounts received with respect to the loans, and paid directly its share of the
trust expense fees. In the case of pass-through securities other than stripped
securities, income will consist of a pro rata share of all of the income derived
from all of the loans and, in the case of stripped securities, income will
consist of a pro rata share of the income derived from each stripped bond or
stripped coupon in which the holder owns an interest. The holder of a security
will generally be entitled to deduct trust expense fees under section 162 or
section 212 of the Code to the extent that such fees represent "reasonable"
compensation for the services rendered by the applicable trustee and the
servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate holder, however, trust expense fees (to
the extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing the holder's regular tax liability
only to the extent that the fees, when added to other miscellaneous itemized
deductions, exceed 2% of adjusted gross income and may not be deductible to any
extent in computing the holder's alternative minimum tax liability. In addition,
for taxable years beginning after December 31, 1990, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation in taxable years beginning after 1990) will be reduced by
the lesser of:
o 3% of the excess of adjusted gross income over the applicable amount,
or
o 80% of the amount of itemized deductions otherwise allowable for that
taxable year.
This reduction is scheduled to be phased-out over a five-year period
beginning in 2006.
Discount or Premium on Pass-Through Securities. In the opinion of tax
counsel, the holder's purchase price of a pass-through security is to be
allocated among the loans in proportion to their fair market values, determined
as of the time of purchase of the securities. In the typical case, the trustee
(to the extent necessary to fulfill its reporting obligations) will treat each
loan as having a fair market value proportional to the share of the aggregate
principal balances of all of the loans that it represents, since the securities,
unless otherwise specified in the related prospectus supplement, will have a
relatively uniform interest rate and other common characteristics. To the extent
that the portion of the purchase price of a pass-through security allocated to a
loan (other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the principal balance of the loan allocable to the security, the interest in the
loan allocable to the pass-through security will be deemed to have been acquired
at a discount or premium, respectively.
95
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a loan with OID in excess of a
prescribed de minimis amount or a stripped security, a holder of the security
will be required to report as interest income in each taxable year its share of
the amount of OID that accrues during that year in the manner described above.
OID with respect to a loan could arise, for example, by virtue of the financing
of points by the originator of the loan, or by virtue of the charging of points
by the originator of the loan in an amount greater than a statutory de minimis
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a loan
will be includible in income, generally in the manner described above, except
that in the case of pass-through securities, market discount is calculated with
respect to the loans underlying the security, rather than with respect to the
security itself. A holder that acquires an interest in a loan originated after
July 18, 1984 with more than a de minimis amount of market discount (generally,
the excess of the principal amount of the loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See "--Taxation of Debt Securities --Market
Discount" and "--Premium" above.
In the case of market discount on a pass-through security attributable to
loans originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of the discount that is allocable to a loan
among the principal payments on the loan and to include the discount allocable
to each principal payment in ordinary income at the time the principal payment
is made. This treatment would generally result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described in the preceding paragraph.
Stripped Securities. A stripped security may represent a right to receive
only a portion of the interest payments on the loans, a right to receive only
principal payments on the loans, or a right to receive certain payments of both
interest and principal. Ratio stripped securities may represent a right to
receive differing percentages of both the interest and principal on each loan.
Pursuant to section 1286 of the Code, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from ownership
of the right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. Section 1286 of the Code applies the
OID rules to stripped bonds and stripped coupons. For purposes of computing OID,
a stripped bond or a stripped coupon is treated as a debt instrument issued on
the date that such stripped interest is purchased with an issue price equal to
its purchase price or, if more than one stripped interest is purchased, the
ratable share of the purchase price allocable to the stripped interest.
Servicing fees in excess of reasonable servicing fees will be treated under
the stripped bond rules. If the excess servicing fee is less than 100 basis
points (i.e., 1% interest on the loan's principal balance) or the securities are
initially sold with a de minimis discount (assuming no prepayment assumption is
required), any non-de minimis discount arising from a subsequent transfer of the
securities should be treated as market discount. The IRS appears to require that
reasonable servicing fees be calculated on a loan by loan basis, which could
result in some loans being treated as having more than 100 basis points of
interest stripped off.
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The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and OID rules are to apply to stripped securities and
other pass-through securities. Under the cash flow bond method described above
for pay-through securities, a prepayment assumption is used and periodic
recalculations are made that take into account with respect to each accrual
period the effect of prepayments during such period. However, the Tax Reform Act
of 1986 does not, absent Treasury regulations, appear specifically to cover
instruments such as stripped securities, which technically represent ownership
interests in the underlying loans, rather than being debt instruments "secured
by" those loans. Nevertheless, it is believed that the cash flow bond method is
a reasonable method of reporting income for such securities, and it is expected
that OID will be reported on that basis unless otherwise specified in the
related prospectus supplement. In applying the calculation to pass-through
securities, the trustee will treat all payments to be received by a holder with
respect to the underlying loans as payments on a single installment obligation.
The IRS could, however, assert that OID must be calculated separately for each
loan underlying a security.
Under certain circumstances, if the loans prepay at a rate faster than the
prepayment assumption, the use of the cash flow bond method may accelerate the
holder's recognition of income. If, however, the loans prepay at a rate slower
than the Prepayment Assumption, in some circumstances the use of this method may
decelerate the holder's recognition of income.
In the case of a stripped security that is an interest weighted security,
the applicable trustee intends, absent contrary authority, to report income to
holders as OID, in the manner described above for interest weighted securities.
Possible Alternative Characterizations. The characterizations of the
stripped securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the IRS could contend
that:
o in certain series, each non-interest weighted security is composed of
an unstripped undivided ownership interest in loans and an installment
obligation consisting of stripped principal payments;
o the non-interest weighted securities are subject to the contingent
payment provisions of the regulations; or
o each interest weighted stripped security is composed of an unstripped
undivided ownership interest in loans and an installment obligation
consisting of stripped interest payments.
Given the variety of alternatives for treatment of the stripped securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the securities for federal income tax
purposes.
Character as Qualifying Loans. In the case of stripped securities, there is
no specific legal authority existing regarding whether the character of the
securities, for federal income tax purposes, will be the same as the loans. The
IRS could take the position that the loans' character
97
is not carried over to the securities in such circumstances. Pass-through
securities will be, and, although the matter is not free from doubt, stripped
securities should be considered to represent:
o "real estate assets" within the meaning of section 856(c)(4)(A) of the
Code; and
o "loans secured by an interest in real property" within the meaning of
section 7701(a)(19)(C)(v) of the Code.
Interest income attributable to pass-through securities and stripped securities
should be considered to represent "interest on obligations secured by mortgages
on real property or on interests in real property" within the meaning of section
856(c)(3)(B) of the Code. Reserves or funds underlying the securities may cause
a proportionate reduction in the above-described qualifying status categories of
securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to any trust fund as to which
a partnership election is made, in the opinion of tax counsel, a holder's tax
basis in a security is the price the holder pays for the security, increased by
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 security, measured by the difference between the amount realized and the
security's basis as so adjusted, will generally be capital gain or loss,
assuming that the security is held as a capital asset and will generally be
long-term capital gain or loss if the holding period of the security is more
than one year and short-term capital gain or loss if the holding period of the
Security is one year or less. Non-corporate taxpayers are subject to reduced
maximum rates on long-term capital gains and are generally subject to tax at
ordinary income rates on short-term capital gains. The deductibility of capital
losses is subject to certain limitations. Prospective investors should consult
their own tax advisors concerning these tax law provisions.
In the case of a security held by a bank, thrift, or similar institution
described in section 582 of the Code, however, gain or loss realized on the sale
or exchange of a REMIC regular interest security will be taxable as ordinary
income or loss. In addition, gain from the disposition of a regular interest
security that might otherwise be capital gain will be treated as ordinary income
to the extent of the excess, if any, of:
o 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 such holder's holding
period,
over
o the amount of ordinary income actually recognized by the holder with
respect to the regular interest security.
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MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to any
trust fund as to which a partnership election is made, a holder, other than a
holder of a REMIC residual interest security, may, under certain 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 applicable trustee with its taxpayer
identification number;
o furnishes the applicable trustee an incorrect taxpayer identification
number;
o fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
o under certain circumstances, fails to provide the applicable trustee or
such 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.
Backup withholding will not apply, however, with respect to certain
payments made to holders, including payments to certain exempt recipients (such
as exempt organizations) and to certain nonresident alien individuals, foreign
partnerships or foreign corporations. Holders should consult their tax advisers
as to their qualification for exemption from backup withholding and the
procedure for obtaining the exemption.
The applicable trustee will report to the holders and to the servicer for
each calendar year the amount of any "reportable payments" during such 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 any trust fund as to which
a partnership election is made, under the Code, unless interest (including OID)
paid on a security (other than a residual interest security) is considered to be
"effectively connected" with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation,
in the opinion of tax counsel, interest will normally qualify as portfolio
interest, and will be exempt from federal income tax. However, interest will not
qualify as portfolio interest where:
o the recipient is a holder, directly or by attribution, of 10% or more
of the capital or profits interest in the issuer, or
o the recipient is a controlled foreign corporation to which the issuer
is a related person.
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For interest to qualify for the portfolio interest exemption from U.S.
withholding tax, the holder must generally complete a Form W-8BEN indicating
that the holder is a non-U.S. Person. The Form W-8BEN, or in certain
circumstances other documentation, must be provided to the person otherwise
required to withhold U.S. tax. If a foreign holder is a partnership or other
type of pass-through entity that is not treated for U.S. withholding tax
purposes as the beneficial owner of the income with respect to the security, the
holder generally must receive the Form W-8BEN as described in the previous
sentence from the holder's partners or other beneficial owners of the income
with respect to the security and may be required to provide the forms, and
certain additional information, to the person through whom the holder holds the
security. The forms provided by the holder or its interestholders regarding
status as a non-U.S. Person must generally be passed through the ownership chain
to the person otherwise required to withhold tax in order for the exemption to
apply. These provisions supersede the generally applicable provisions of United
States law that would otherwise require the issuer to withhold at a 30% rate
(unless such 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 nonresident alien individuals, foreign partnerships or foreign
corporations. Holders of pass-through securities and stripped securities,
including ratio strip securities, however, may be subject to withholding to the
extent that the loans were originated on or before July 18, 1984.
Interest and OID of holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the holder and appropriate documentation is provided to the person
otherwise required to withhold. They will, however, generally be subject to the
regular United States income tax.
Payments to holders of REMIC residual interest securities who are foreign
persons will generally be treated as interest for purposes of the 30% (or lower
treaty rate) United States withholding tax. Holders should assume that such
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, the
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 that would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. 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 nonresident alien individual, foreign partnership or foreign corporation
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 such 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 nonresident alien individual, foreign partnership
or foreign corporation transfers a residual interest security to a U.S. Person,
and if the transfer has the effect of allowing the transferor to avoid tax on
accrued excess inclusions, then the transfer is disregarded and the transferor
continues to be treated as the
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owner of the residual interest security for purposes of the withholding tax
provisions of the Code. See "--Excess Inclusions" above.
TAX CHARACTERIZATION OF THE TRUST FUND AS A PARTNERSHIP
Tax counsel is of the opinion that a trust fund structured as a partnership
will not be an association (or publicly traded partnership) taxable as a
corporation for federal income tax purposes. This opinion is based on the
assumption that the terms of the trust agreement and related documents will be
complied with, and on counsel's conclusions that the nature of the income of the
trust fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the certificates has
been structured as a private placement under an IRS safe harbor, so that the
trust fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the trust fund were taxable as a corporation for federal income tax
purposes, in the opinion of tax counsel, the trust fund would be subject to
corporate income tax on its taxable income. The trust fund's taxable income
would include all its income, possibly reduced by its interest expense on the
notes. Any such corporate income tax could materially reduce cash available to
make payments on the notes and distributions on the certificates, and holders of
certificates could be liable for any such tax that is unpaid by the trust fund.
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
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. As a result, tax counsel is, (except as
otherwise provided in the related prospectus supplement,) of the opinion that
the notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the notes are denominated in U.S. dollars, and that the notes are
not "indexed securities" or "strip notes." Moreover, the discussion assumes that
the interest formula for the notes meets the requirements for "qualified stated
interest" under the OID Regulations, and that any OID on the notes (i.e., any
excess of the principal amount of the notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID Regulations. If these conditions are not satisfied with respect to any given
series of notes, additional tax considerations with respect to the notes will be
disclosed in the applicable prospectus supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, in the opinion of tax counsel, the notes
will not be considered issued with OID. The stated interest on the notes will be
taxable to a noteholder as ordinary interest income when received or accrued in
accordance with the noteholder's method of tax accounting. Under the OID
Regulations, a holder of a note issued with a de minimis amount of OID must
include the OID in income, on a pro rata basis, as principal payments are made
on the note. It is believed that any prepayment premium paid as a result of a
mandatory redemption will be taxable as contingent interest when it becomes
fixed and unconditionally payable. A purchaser
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who buys a note for more or less than its principal amount will generally be
subject, respectively, to the premium amortization or market discount rules of
the Code.
A holder of a note that is a "short-term note" (i.e., it has a fixed
maturity date of not more than one year from the issue date) may be subject to
special rules. An accrual basis holder of a short-term note (and certain cash
method holders, including regulated investment companies, as set forth in
section 1281 of the Code) generally would be required to report interest income
as interest accrues on a straight-line basis over the term of each interest
period. Other cash basis holders of a short-term note would, in general, be
required to report interest income as interest is paid (or, if earlier, upon the
taxable disposition of the short-term note). However, a cash basis holder of a
short-term note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the short-term note until the taxable disposition of the
short-term note. A cash basis taxpayer may elect under section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
short-term note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a short-term note is purchased for more or less than its
principal amount.
Sale or Other Disposition. In the opinion of tax counsel, if a noteholder
sells a note, the holder will recognize gain or loss in an amount equal to the
difference between the amount realized on the sale and the holder's adjusted tax
basis in the note. The adjusted tax basis of a note to a particular noteholder
will equal the holder's cost for the note, increased by any market discount,
acquisition discount, OID and gain previously included by the noteholder in
income with respect to the note and decreased by the amount of bond premium (if
any) previously amortized and by the amount of principal payments previously
received by the noteholder with respect to the note. Any such gain or loss will
be capital gain or loss if the note was held as a capital asset, except for gain
representing accrued interest and accrued market discount not previously
included in income. Capital losses generally may be used only to offset capital
gains.
Foreign Holders. In the opinion of tax counsel, interest payments made (or
accrued) to a noteholder who is a "foreign person" (i.e., nonresident alien,
foreign corporation or other non-U.S. Person) generally will be considered
"portfolio interest," and generally will not be subject to United States federal
income tax and withholding tax, if the interest is not effectively connected
with the conduct of a trade or business within the United States by the foreign
person and the foreign person:
o is not actually or constructively a "10 percent shareholder" of the
trust fund or the seller (including a holder of 10% of the outstanding
certificates) or a "controlled foreign corporation" with respect to
which the trust fund or the seller is a "related person" within the
meaning of the Code; and
o provides the trustee or other person who is otherwise required to
withhold U.S. tax with respect to the notes with an appropriate
statement (on Form W-8BEN), signed under penalties of perjury,
certifying that the beneficial owner of the note is a foreign person
and providing the foreign person's name and address.
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If a foreign holder is a partnership or other type of pass-through entity that
is not treated for U.S. withholding tax purposes as the beneficial owner of the
income with respect to the certificate, the holder generally must receive the
Form W-8BEN as described in the previous sentence from the holder's partners or
other beneficial owners of the income with respect to the certificate and may be
required to provide the forms, and certain additional information, to the person
through whom the holder holds the certificates. The forms provided by the holder
or its interestholders regarding status as a non-U.S. Person must generally be
passed through the ownership chain to the person otherwise required to withhold
tax in order for the exemption to apply. If a note is held through a securities
clearing organization or certain other financial institutions, the foreign
person that owns the note should furnish such organization or institution with a
Form W-8BEN or a similar form. The organization or institution may then be
required to forward the Form W-8BEN to the withholding agent. If interest is not
portfolio interest and is not effectively connected with the conduct of a U.S.
trade or business, then it will be subject to United States federal income and
withholding tax at a rate of 30%, unless reduced or eliminated pursuant to an
applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax; provided, that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a note (other than an exempt holder such
as a corporation, tax-exempt organization, qualified pension and profit-sharing
trust, individual retirement account or nonresident alien who provides
certification as to status as a nonresident) will be required to provide, under
penalties of perjury, a certificate containing the holder's name, address,
correct federal taxpayer identification number and a statement that the holder
is not subject to backup withholding. Should a nonexempt noteholder fail to
provide the required certification, the trust fund will be required to withhold
31% of the amount otherwise payable to the holder, and remit the withheld amount
to the IRS as a credit against the holder's federal income tax liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of tax counsel, the IRS successfully asserted that one or more of the notes did
not represent debt for federal income tax purposes, the notes might be treated
as equity interests in the trust fund. If so treated, the trust fund might be
taxable as a corporation with the adverse consequences described above (and the
taxable corporation would not be able to reduce its taxable income by deductions
for interest expense on notes recharacterized as equity). Alternatively, and
most likely in the view of tax counsel, the trust fund might be treated as a
publicly traded partnership that would not be taxable as a corporation because
it would meet certain qualifying income tests. Nonetheless, treatment of the
notes as equity interests in such a publicly traded partnership could have
adverse tax consequences to certain holders. For example, income to certain
tax-exempt entities (including pension funds) may be "unrelated business taxable
income," income to foreign holders generally would be subject to U.S. tax and
U.S. tax return filing and withholding requirements, and individual holders
might be subject to certain limitations on their ability to deduct their share
of the trust fund's expenses.
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TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The trust fund and the
servicer will agree, and the certificateholders will agree by their purchase of
certificates, to treat the trust fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
trust fund, the partners of the partnership being the certificateholders, and
the notes being debt of the partnership. However, the proper characterization of
the arrangement involving the trust fund, the certificates, the notes, the trust
fund and the servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the certificates have certain features characteristic of debt, the
certificates might be considered debt of the trust fund. Any such
characterization would not result in materially adverse tax consequences to
certificateholders as compared to the consequences from treatment of the
certificates as equity in a partnership, described below. The following
discussion assumes that the certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all payments
on the certificates are denominated in U.S. dollars, none of the certificates is
an indexed security or a stripped certificate, 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 such certificates will be disclosed in the applicable prospectus
supplement.
Partnership Taxation. If the trust fund is a partnership, in the opinion of
tax counsel, the trust fund will not be subject to federal income tax. Rather,
in the opinion of tax counsel, each certificateholder will be required to
separately take into account the holder's allocated share of income, gains,
losses, deductions and credits of the trust fund. The trust fund's income will
consist primarily of interest and finance charges earned on the loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of loans. The trust fund's deductions will
consist primarily of interest accruing with respect to the notes, servicing and
other fees, and losses or deductions upon collection or disposition of loans.
In the opinion of tax counsel, the tax items of a partnership are allocable
to the partners in accordance with the Code, Treasury regulations and the
partnership agreement (here, the trust agreement and related documents). The
trust agreement will provide, in general, that the certificateholders will be
allocated taxable income of the trust fund for each month equal to the sum of:
o the interest that accrues on the certificates in accordance with their
terms for such month, including interest accruing at the pass-through
rate for that month and interest on amounts previously due on the
certificates but not yet distributed;
o 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;
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o prepayment premium payable to the certificateholders for that month;
and
o any other amounts of income payable to the certificateholders for that
month.
This allocation will be reduced by any amortization by the trust fund of
premium on loans that corresponds to any excess of the issue price of
certificates over their principal amount. All remaining taxable income of the
trust fund will be allocated to the depositor. Based on the economic arrangement
of the parties, in the opinion of tax counsel, this approach for allocating
trust fund income should be permissible under applicable Treasury regulations,
although no assurance can be given that the IRS would not require a greater
amount of income to be allocated to certificateholders. Moreover, in the opinion
of tax counsel, 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
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.
In the opinion of tax counsel, 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) may
constitute "unrelated business taxable income" generally taxable to the holder
under the Code.
In the opinion of tax counsel, 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. Such deductions might be disallowed
to the individual in whole or in part and might result in such holder being
taxed on an amount of income that exceeds the amount of cash actually
distributed to the holder over the life of the trust fund.
The trust fund intends to make all tax calculations relating to income and
allocations to certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each loan, the trust fund
might be required to incur additional expense but it is believed that there
would not be a material adverse effect on certificateholders.
Discount and Premium. It is believed that the loans were not issued with
OID, and, therefore, the trust fund should not have OID income. However, the
purchase price paid by the trust fund for the loans may be greater or less than
the remaining principal balance of the loans at the time of purchase. If so, in
the opinion of tax counsel, 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 discount in income currently as it accrues
over the life of the loans or to
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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. In the opinion of tax counsel, under section 708
of the 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. Pursuant to final Treasury
regulations issued May 9, 1997 under section 708 of the Code, if such a
termination occurs, the trust fund would be deemed to contribute its assets to a
new partnership in exchange for interests in the new partnership. Such interests
would be deemed distributed to the partners of the original trust fund in
liquidation thereof, which would not constitute a sale or exchange.
Disposition of Certificates. Generally, in the opinion of tax counsel,
capital gain or loss will be recognized on a sale of certificates in an amount
equal to the difference between the amount realized and the seller's tax basis
in the certificates sold. A certificateholder's tax basis in a certificate will
generally equal the holder's cost increased by the holder's share of trust fund
income (includible in income) and decreased by any distributions received with
respect to the certificate. In addition, both the tax basis in the certificates
and the amount realized on a sale of a certificate would include the holder's
share of the notes and other liabilities of the trust fund. A holder acquiring
certificates at different prices may be required to maintain a single aggregate
adjusted tax basis in the certificates, and, upon sale or other disposition of
some of the certificates, allocate a portion of the aggregate tax basis to the
certificates sold (rather than maintaining a separate tax basis in each
certificate for purposes of computing gain or loss on a sale of that
certificate).
Any gain on the sale of a certificate attributable to the holder's share of
unrecognized accrued market discount on the loans would generally be treated as
ordinary income to the holder and would give rise to special tax reporting
requirements. The trust fund does not expect to have any other assets that would
give rise to such special reporting requirements. Thus, to avoid those special
reporting requirements, the trust fund will elect to include market discount in
income as it accrues.
If a certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the certificates that exceeds the aggregate
cash distributions with respect thereto, this excess will generally give rise to
a capital loss upon the retirement of the certificates.
Allocations Between Transferors and Transferees. In general, the trust
fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the certificateholders
in proportion to the principal amount of certificates owned by them as of the
close of the last day of such 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 such 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
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certificateholders. The trust fund's method of allocation between transferors
and transferees may be revised to conform to a method permitted by future
regulations.
Section 754 Election. In the event that a certificateholder sells its
certificates at a profit (loss), the purchasing certificateholder will have a
higher (lower) basis in the certificates than the selling certificateholder had.
The tax basis of the trust fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the trust fund were to file an election under
section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the trust fund will not make such
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 trustee is required to keep or have kept
complete and accurate books of the trust fund. Books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the trust fund will be the calendar year. The trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
trust fund and will report each certificateholder's allocable share of items of
trust fund income and expense to holders and the IRS on Schedule K-1. The trust
fund will provide the Schedule K-l information to nominees that fail to provide
the trust fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the trust fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under section 6031 of the Code, any person that holds certificates as a
nominee at any time during a calendar year is required to furnish the trust fund
with a statement containing certain information on the nominee, the beneficial
owners and the certificates so held. Such information includes:
o the name, address and taxpayer identification number of the nominee;
and
o as to each beneficial owner (a) the name, address and identification
number of such person, (b) whether such person is a U.S. 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 (c) certain information on certificates that were
held, bought or sold on behalf of such 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 any such 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.
107
The depositor will be designated as the tax matters partner in the related
trust agreement and, as such, will be responsible for representing the
certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the trust fund by the appropriate taxing authorities
could result in an adjustment of the returns of the certificateholders, and,
under certain circumstances, a certificateholder may be precluded from
separately 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 herein. Although it is not expected
that the trust fund would be engaged in a trade or business in the United States
for such purposes, the trust fund will withhold as if it were so engaged in
order to protect the trust fund from possible adverse consequences of a failure
to withhold. The trust fund expects to withhold on the portion of its taxable
income that is allocable to foreign certificateholders pursuant to section 1446
of the Code, as if such 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. In determining a holder's
withholding status, the trust fund may rely on IRS Form W-8BEN or a similar
form, IRS Form W-9 or the holder's certification of nonforeign status signed
under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the trust fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the trust fund on Form W-8BEN in order to assure appropriate crediting of the
taxes withheld. A foreign holder generally would be entitled to file with the
IRS a claim for refund with respect to taxes withheld by the trust fund taking
the position that no taxes were due because the trust fund was not engaged in a
U.S. trade or business. However, interest payments made (or accrued) to a
certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the trust fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
"portfolio interest." As a result, certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30%, unless reduced
or eliminated pursuant to an applicable treaty. In such case, a foreign holder
would only be entitled to claim a refund for that portion of the taxes in excess
of the taxes that should be withheld with respect to the guaranteed payments.
Backup Withholding. Distributions made on the certificates and proceeds
from the sale of the certificates will be subject to a "backup" withholding tax
of 31% if, in general, the
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certificateholder fails to comply with certain identification procedures, unless
the holder is an exempt recipient under applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations described in this
prospectus under "Material 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, potential investors should consult their
own tax advisors with respect to the various state and local tax consequences of
an investment in the securities.
FASIT SECURITIES
General. The FASIT provisions of the Code were enacted by the Small
Business Job Protection Act of 1996 and create a new elective statutory vehicle
for the issuance of mortgage-backed and asset-backed securities effective on
September 1, 1997. On February 4, 2000, the IRS and Treasury issued proposed
Treasury regulations for FASITs. The regulations generally would not be
effective until final regulations are filed with the federal register. However,
it appears that certain anti-abuse rules would apply as of February 4, 2000.
Investors also should note that the FASIT discussions contained herein
constitutes only a summary of the federal income tax consequences to holders of
FASIT securities. With respect to each series of FASIT securities, the related
prospectus supplement will provide a detailed discussion regarding the federal
income tax consequences associated with the particular transaction.
FASIT securities will be classified as either FASIT "regular securities,"
which generally will be treated as debt for federal income tax purposes, or
FASIT "ownership securities," which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related series. The prospectus supplement for
each series of securities will indicate whether one or more FASIT elections will
be made for the series, and which securities of the series will be designated as
regular securities, and which, if any, will be designated as ownership
securities.
Qualification as a FASIT. The trust fund underlying a series (or one or
more designated pools of assets held in the trust fund) will qualify under the
Code as a FASIT in which the FASIT regular securities and the FASIT ownership
securities will constitute the "regular interests" and the "ownership
interests," respectively, if
o a FASIT election is in effect,
o certain tests concerning the composition of the FASIT's assets and the
nature of the holders' interests in the FASIT are met on a continuing
basis, and
o the trust fund is not a regulated investment company or RIC as defined
in section 851(a) of the Code.
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However, the qualification as a FASIT of any trust fund for which a FASIT
election is made depends on the trust's ability to satisfy the requirements of
the FASIT provisions on an ongoing basis, including, without limitation, the
requirements of any final Treasury regulations that may be promulgated in the
future under the FASIT provisions or as a result of any change in applicable
law. Thus, no assurances can be made regarding the qualification as a FASIT of
any trust for which a FASIT election is made at any particular time after the
issuance of securities by the trust.
Asset Composition. In order for a trust fund (on one or more designated
pools of assets held by a trust fund) to be eligible for FASIT status,
substantially all of the assets of the trust fund (or the designated pool) must
consist of "permitted assets" as of the close of the third month beginning after
the closing date and at all times thereafter. Permitted assets include
o cash or cash equivalents,
o debt instruments with fixed terms that would qualify as REMIC regular
interests if issued by a REMIC (generally, instruments that provide for
interest at a fixed rate, a qualifying variable rate, or a qualifying
interest-only type rate,
o foreclosure property,
o certain hedging instruments (generally, interest and currency rate
swaps and credit enhancement contracts) that are reasonably required to
guarantee or hedge against the FASIT's risks associated with being the
obligor on FASIT interests,
o contract rights to acquire qualifying debt instruments or qualifying
hedging instruments,
o FASIT regular interests, and
o REMIC regular interests.
o Permitted assets do not include any debt instruments issued by the
holder of the FASIT's ownership interest or by any person related to
the holder.
Interests in a FASIT. In addition to the foregoing asset qualification
requirements, the interests in a FASIT must meet certain requirements. All of
the interests in a FASIT must belong to either
o one or more classes of regular interests or
o a single class of ownership interest that is held by a fully taxable
domestic corporation. In the case of series that include FASIT
ownership securities, the ownership interest will be represented by the
FASIT ownership securities.
A FASIT interest generally qualifies as a regular interest if
o it is designated as a regular interest,
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o it has a stated maturity no greater than thirty years,
o it entitles its holder to a specified principal amount,
o the issue price of the interest does not exceed 125% of its stated
principal amount,
o the yield to maturity of the interest is less than the applicable
Treasury rate published by the IRS plus 5%, and
o if it pays interest, such interest is payable either at a fixed rate
with respect to the principal amount of the regular interest or at a
permissible variable rate with respect to the principal amount.
Permissible variable rates for FASIT regular interests are the same as those for
REMIC regular interest (i.e., certain qualified floating rates and weighted
average rates). See "Material Federal Income Tax Considerations--Taxation of
Debt Securities--Variable Rate Debt Securities" in this prospectus.
If a FASIT security fails to meet one or more of the requirements set out
in the third, fourth or fifth bullet in the preceding paragraph, but otherwise
meets the above requirements, it may still qualify as a type of regular interest
known as a "high-yield interest." In addition, if a FASIT security fails to meet
the requirements of the final bullet in the preceding paragraph, but the
interest payable on the security consists of a specified portion of the interest
payments on permitted assets and that portion does not vary over the life of the
security, the security also will qualify as a high-yield interest. A high-yield
interest may be held only by domestic corporations that are fully subject to
corporate income tax, other FASITs and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
high-yield interests are subject to limitations on offset of income derived from
such interest. See "--Tax Treatment of FASIT Regular Securities" and
"--Treatment of High-Yield Interests" below.
Anti-Abuse Rule. Under proposed Treasury regulations, the IRS Commissioner
may make appropriate adjustments with regard to the FASIT and any arrangement or
transaction involving the FASIT if a principal purpose of forming or using the
FASIT is to achieve results inconsistent with the intent of the FASIT provisions
and the FASIT regulations. This determination would be based on all of the facts
and circumstances, including a comparison of the purported business purpose for
a transaction and the claimed tax benefits resulting from the transaction.
Consequences of the Failure of the FASIT Trust to Qualify as a FASIT. If a
FASIT trust fails to comply with one or more of the Code's ongoing requirements
for FASIT status during any taxable year, proposed Treasury regulations provide
that its FASIT status would be lost for that year and the FASIT trust would be
unable to elect FASIT status without the Commissioner's approval. If FASIT
status is lost, under proposed Treasury regulations the entity classification of
the former FASIT would be determined under general federal income tax
principles. The holder of the FASIT ownership security would be treated as
exchanging the assets of the former FASIT for an amount equal to their value and
gain recognized would be treated as gain from a prohibited transaction that is
subject to the 100% tax, without exception. Loss, if any, would be disallowed.
In addition, the holder of the FASIT ownership security must recognize
cancellation
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of indebtedness income, on a regular interest by regular interest basis, in an
amount equal to the adjusted issue price of each FASIT regular security
outstanding immediately before the loss of FASIT status over its fair market
value. If the holder of the FASIT ownership security has a continuing economic
interest in the former FASIT, the characterization of this interest is
determined under general federal income tax principles. Holders of FASIT regular
securities are treated as exchanging their securities for interests in the new
entity classification of the former FASIT, which classification is determined
under general federal income tax principles. Gain is recognized to the extent
the new interest either does not qualify as debt or differs either in kind or
extent. The basis of the interest in the new entity classification of the former
FASIT equals the basis in the FASIT regular security increased by any gain
recognized on the exchange.
Tax Treatment of FASIT Regular Securities. Payments received by holders of
FASIT regular securities generally should be accorded the same tax treatment
under the Code as payments received on other taxable corporate debt instruments
and on REMIC regular securities. As in the case of holders of REMIC regular
securities, holders of FASIT regular securities must report income from such
securities under an accrual method of accounting, even if they otherwise would
have used the cash receipts and disbursements method. Except in the case of
FASIT regular securities issued with original issue discount or acquired with
market discount or premium, interest paid or accrued on a FASIT regular security
generally will be treated as ordinary income to the holder and a principal
payment on the security will be treated as a return of capital to the extent
that the holder's basis is allocable to that payment. Holders of FASIT regular
securities issued with original issue discount or acquired with market discount
or premium generally will be required to treat interest and principal payments
on the securities in the same manner described for REMIC regular securities. See
"Material Federal Income Tax Considerations--Taxation of Debt Securities,"
"--Market Discount," and "--Premium" in this prospectus. High-yield interests
may be held only by fully taxable domestic corporations, other FASITs, and
certain securities dealers. Holders of high-yield interests are subject to
limitations on their ability to use current losses or net operating loss
carryforwards or carrybacks to offset any income derived from those securities.
If a FASIT regular security is sold or exchanged, the holder generally will
recognize gain or loss upon the sale in the manner described above for
securities other than REMIC regular interest securities. See "Material Federal
Income Tax Considerations--Sale or Exchange" in this prospectus. In addition, if
a FASIT regular security becomes wholly or partially worthless as a result of
default and delinquencies of the underlying assets, the holder of the security
should be allowed to deduct the loss sustained (or alternatively be able to
report a lesser amount of income). See "Material Federal Income Tax
Considerations--Taxation of Debt Securities--Effects of Default and
Delinquencies" in this prospectus.
FASIT regular securities held by a real estate investment trust or REIT
will qualify as "real estate assets" within the meaning of section 856(c) (4)(A)
of the Code, and interest on such securities will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of section 856(c)(3)(B) of the Code to the same
extent that REMIC securities would be so considered. FASIT regular securities
held by a thrift institution taxed as a "domestic building and loan association"
will represent qualifying assets for purposes of the qualification requirements
set forth in section 7701(a)(19) of the Code to the same extent that REMIC
securities would be so considered. See "Material Federal Income Tax
112
Considerations--Taxation of Debt Securities--Status as Real Property Loans" in
this prospectus. In addition, FASIT regular securities held by a financial
institution to which section 585 of the Code applies will be treated as
evidences of indebtedness for purposes of section 582(c)(1) of the Code. FASIT
securities will not qualify as "government securities" for either REIT - or RIC
- qualification purposes.
Treatment of High-Yield Interests. High-yield interests are subject to
special rules regarding the eligibility of holders of such interests, and the
ability of such holders to offset income derived from their FASIT security with
losses. High-yield interests may be held only by eligible corporations other
FASITs, and dealers in securities who acquire such interests as inventory. If a
securities dealer (other than an eligible corporation) initially acquires a
high-yield interest as inventory, but later begins to hold it for investment,
the dealer will be subject to an excise tax equal to the income from the
high-yield interest multiplied by the highest corporate income tax rate. In
addition, transfers of high-yield interests to disqualified holders will be
disregarded for federal income tax purposes, and the transferor still will be
treated as the holder of the high-yield interest.
The holder of a high-yield interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the high-yield interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
regular security that is held by a pass-through entity (other than another
FASIT) that issues debt or equity securities backed by the FASIT regular
security and that have the same features as high-yield interests.
Tax Treatment of FASIT Ownership Securities. A FASIT ownership security
represents the residual equity interest in a FASIT. As such, the holder of a
FASIT ownership security determines its taxable income by taking into account
all assets, liabilities and items of income, gain, deduction, loss and credit of
a FASIT. In general, the character of the income to the holder of a FASIT
ownership interest will be the same as the character of such income of the
FASIT, except that any tax-exempt interest income taken into account by the
holder of a FASIT ownership interest is treated as ordinary income. In
determining that taxable income, the holder of a FASIT ownership security must
determine the amount of interest, original issue discount, market discount and
premium recognized with respect to the FASIT's assets and the FASIT regular
securities issued by the FASIT according to a constant yield methodology and
under an accrual method of accounting. In addition, holders of FASIT ownership
securities are subject to the same limitations on their ability to use losses to
offset income from their FASIT security as are the holders of high-yield
interests. See "FASIT Securities--Treatment of High-Yield Interests."
Rules similar to the wash sale rules applicable to REMIC residual
securities also will apply to FASIT ownership securities. Accordingly, losses on
dispositions of a FASIT ownership security generally will be disallowed where,
within six months before or after the disposition, the seller of such security
acquires any other FASIT ownership security or, in the case of a FASIT holding
mortgage assets, any interest in a taxable mortgage pool described in section
7701 of the Code that is economically comparable to a FASIT Ownership Security.
In addition, if any security that is sold or contributed to a FASIT by the
holder of the related FASIT ownership
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security was required to be marked-to-market under section 475 of the Code by
such holder, then section 475 will continue to apply to such securities, except
that the amount realized under the mark-to-market rules will be a greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable federal rate, compounded semiannually.
The holder of a FASIT ownership security will be subject to a tax equal to
100% of the net income derived by the FASIT from any "prohibited transactions."
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any series for which a FASIT election is made generally will
be structured in order to avoid application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration. Holders of FASIT
securities will be subject to backup withholding to the same extent holders of
REMIC securities would be subject. See "Certain Federal Income Tax
Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes of
reporting and tax administration, holders of record of FASIT securities
generally will be treated in the same manner as holders of REMIC securities.
Under proposed Treasury regulations, if a non-U.S. Person holds (either
directly or through a vehicle which itself is not subject to U.S. federal income
tax, such as a partnership or a trust) a FASIT regular security and a "conduit
debtor" pays or accrues interest on a debt instrument held by such FASIT, any
interest received or accrued by the non-U.S. Person FASIT regular security
holder is treated as received or accrued from the conduit debtor. The proposed
Treasury regulations state that a debtor is a conduit debtor if the debtor is a
U.S. Person or the United States branch of a non-U.S. Person and the non-U.S.
Person FASIT regular security holder is (1) a "10 percent shareholder" of the
debtor, (2) a "controlled foreign corporation" and the debtor is a related
person with respect to the controlled foreign corporation or (3) related to the
debtor. As set forth above, the proposed Treasury regulations would not be
effective until final regulations are filed with the federal register.
Due to the complexity of the federal income tax rules applicable to holders
and the considerable uncertainty that exists with respect to many aspects of
those rules, potential investors should consult their own tax advisors regarding
the tax treatment of the acquisition, ownership, and disposition of the
securities.
ERISA CONSIDERATIONS
The following describes certain considerations under the Employee
Retirement Income Security Act of 1974, as amended and the Internal Revenue
Code, which apply only to securities of a series that are not divided into
subclasses. If securities are divided into subclasses, the related prospectus
supplement will contain information concerning considerations relating to ERISA
and the Code that are applicable to the related subclasses.
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ERISA and Section 4975 of the Code impose requirements on employee benefit
plans - and on certain other retirement plans and arrangements, including
individual retirement accounts and annuities, Keogh plans and collective
investment funds and separate accounts in which plans, accounts or arrangements
are invested - and on persons who are fiduciaries with respect to these types of
plans and arrangements. In this prospectus we refer to these types of plans and
arrangements as "Plans." Generally, ERISA applies to investments made by Plans.
Among other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans, such as the duty
to invest prudently, to diversify investments unless it is prudent not to do so,
and to invest in accordance with the documents governing the Plan. Under ERISA,
any person who exercises any authority or control respecting the management or
disposition of the assets of a Plan, or who renders investment advice for a fee,
is considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). Certain employee benefit plans, such as governmental plans (as
defined in Section 3(32) of ERISA) and, if no election has been made under
Section 410(d) of the Code, church plans (as defined in Section 3(33) of ERISA),
are not subject to ERISA's requirements. Accordingly, assets of such plans may
be invested in securities without regard to the ERISA considerations described
above and below, subject to the provisions of applicable federal or state law.
Any such plan that is qualified and exempt from taxation under Sections 401(a)
and 501(a) of the Code, however, is subject to the prohibited transaction rules
set forth in Section 503 of the Code.
On January 5, 2000, the United States Department of Labor (DOL) issued
final regulations under Section 401(c) of ERISA describing a safe harbor for
insurers that issued certain nonguaranteed policies supported by their general
accounts to Plans, and under which an insurer would not be considered an ERISA
fiduciary with respect to its general account by virtue of a Plan's investment
in such a policy. In general, to meet the safe harbor, an insurer must
o disclose certain specified information to investing Plan fiduciaries
initially and on an annual basis;
o allow Plans to terminate or discontinue a policy on 90 days' notice to
the insurer, and to elect, without penalty, either a lump-sum payment
or annual installment payments over a ten-year period, with interest;
and
o give Plans written notice of "insurer-initiated amendments" 60 days
before the amendments take effect.
In addition to the imposition of general fiduciary standards of investment
prudence and diversification, ERISA and Section 4975 of the Code prohibit a
broad range of transactions involving Plan assets and persons having certain
specified relationships to a Plan ("parties in interest"), and impose additional
prohibitions where parties in interest are fiduciaries with respect to a Plan.
Certain parties in interest that participate in a prohibited transaction may be
subject to excise taxes imposed pursuant to Section 4975 of the Code, or
penalties imposed pursuant to Section 502(i) of ERISA, unless a statutory,
regulatory or administrative exemption is available.
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The DOL has issued Plan asset regulations defining what constitutes the
assets of a Plan (Labor Reg. Section 2510.3-101). Under these regulations, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an "equity" investment could be
deemed for purposes of ERISA to be assets of the investing Plan in certain
circumstances.
Under the Plan asset regulations, the term "equity" interest is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features." If the trust fund issues notes that are not treated as equity
interests in the trust fund for purposes of the Plan asset regulations, a Plan's
investment in such notes would not cause the assets of the trust to be deemed
Plan assets. However, the seller, the servicer, the backup servicer, the
indenture trustee, the owner trustee, the underwriter and the depositor may be
the sponsor of or investment advisor with respect to one or more Plans. Because
such parties may receive certain benefits in connection with the sale of the
notes, the purchase of notes using Plan assets over which any of these parties
(or their affiliates) has investment authority might be deemed to be a violation
of the prohibited transaction rules of ERISA and the Code for which no exemption
may be available. Accordingly, notes may not be purchased using the assets of
any Plan if the seller, the servicer, the backup servicer, the indenture
trustee, the owner trustee, the underwriter, the depositor or any of their
affiliates
o has investment or administrative discretion with respect to such Plan
assets;
o has authority or responsibility to give, or regularly gives, investment
advice with respect to such Plan assets for a fee and pursuant to an
agreement or understanding that the advice will serve as a primary
basis for investment decisions with respect to the Plan assets and will
be based on the particular investment needs for the Plan; or
o is an employer maintaining or contributing to such Plan.
In addition, the trust fund, any underwriter, the trustee or their
affiliates might be considered or might become "parties in interest" with
respect to a Plan. Also, any holder of certificates of the trust fund, because
of its activities or the activities of its respective affiliates, may be deemed
to be a "party in interest" with respect to certain Plans, including but not
limited to Plans sponsored by the holder. In either case, whether nor not the
assets of the trust are considered to be Plan assets the acquisition or holding
of notes by or on behalf of a Plan could give rise to a prohibited transaction
within the meaning of ERISA and the Code, unless it is subject to one or more
exemptions such as:
o Prohibited Transaction Class Exemption (PTCE) 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified
professional asset manager;"
o PTCE 90-1, which exempts certain transactions involving insurance
company pooled separate accounts;
o PTCE 91-38, which exempts certain transactions involving bank
collective investment funds;
116
o PTCE 95-60, which exempts certain transactions involving insurance
company general accounts; or
o PTCE 96-23, which exempts certain transactions effected on behalf of a
Plan by certain "in-house asset managers."
There can be no assurance that any of these class exemptions will apply with
respect to any particular Plan's investment in notes, or, even if it did apply,
that any exemption would apply to all prohibited transactions that may occur in
connection with such an investment. Unless a different requirement is imposed in
the prospectus supplement, each prospective purchaser or transferee of a note
that is a Plan or a person acting on behalf or investing the assets of a Plan
shall be required to represent (or, with respect to any transfer of a beneficial
interest in a global note, shall be deemed to represent) to the indenture
trustee and the note registrar that the relevant conditions for exemptive relief
under at least one of the foregoing exemptions have been satisfied.
The Plan asset regulations provide that, generally, the assets of an entity
in which a Plan invests will not be deemed to be assets of the Plan for purposes
of ERISA if the equity interest acquired by the investing Plan is a
publicly-offered security, or if equity participation by benefit plan investors
is not significant. In general, a publicly-offered security, as defined in the
Plan asset regulations, is a security that is widely held, freely transferable
and registered under the Securities Exchange Act of 1934. Equity participation
in an entity by benefit plan investors is not significant if, after the most
recent acquisition of an equity interest in the entity, less than 25% of the
value of each class of equity interest in the entity is held by "benefit plan
investors," which include benefit plans described in ERISA or under Section 4975
of the Code, whether or not they are subject to ERISA, as well as entities whose
underlying assets include assets of a Plan by reason of a Plan's investment in
the entity.
If no exception under the Plan asset regulations applies and if a Plan (or
a person investing Plan assets, such as an insurance company general account)
acquires an equity interest in the trust, then the assets of the trust would be
considered to be assets of the Plan. Because the loans held by the trust may be
deemed assets of each Plan that purchases an equity interest, an investment in
an equity interest issued by the trust by a Plan might be a prohibited
transaction under ERISA and subject to an excise tax under Section 4975 of the
Code, and may cause transactions undertaken in the course of operating the trust
to constitute prohibited transactions, unless a statutory or administrative
exemption applies.
The DOL issued to Bear, Stearns & Co. Inc., an individual underwriter
exemption (Prohibited Transaction Exemption 90-30, 55 Fed. Reg. 21461 (1990)),
which exempts from the application of certain of the prohibited transaction
rules transactions relating to the acquisition, sale and holding by Plans of
certain securities, including certificates, representing an interest in
asset-backed pass-through entities, including trusts, that hold certain types of
receivables or obligations and with respect to which Bear, Stearns & Co. Inc. is
the underwriter, or the manager or co-manager of an underwriting syndicate.
The underwriter exemption sets forth the following general conditions which
must be satisfied before a transaction involving the acquisition, sale and
holding of the certificates or a
117
transaction in connection with the servicing, operation and management of the
trust fund may be eligible for exemptive relief thereunder:
o The acquisition of the certificates by a Plan is on terms (including
the price for the certificates) that are at least as favorable to the
investing Plan as they would be in an arm's-length transaction with an
unrelated party.
o The rights and interests evidenced by the certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by
other certificates of the same trust fund, other than in the case of a
"designated transaction" (as defined below).
o The certificates acquired by the Plan have received a rating at the
time of such acquisition that is in one of the three (or in the case of
a designated transaction, four) highest generic rating categories from
any of Fitch, Inc., Moody's Investors Service, Inc. and Standard &
Poor's.
o The trustee is not an affiliate of the underwriters, the depositor, the
servicer, any borrower whose obligations under one or more mortgage
loans constitute more than 5% of the aggregate unamortized principal
balance of the assets in the trust, the counterparty in a permitted
notional principal transaction, or any of their respective affiliates
(together with the trustee, the "restricted group").
o The sum of all payments made to and retained by the underwriters in
connection with the distribution of the certificates represents not
more than reasonable compensation for underwriting or placing such
certificates; the sum of all payments made to and retained by the
depositor pursuant to the sale of the mortgage loans to the trust
represents not more than the fair market value of such mortgage loans;
and the sum of all payments made to and retained by the servicers
represent not more than reasonable compensation for the servicers'
services under the pooling and servicing agreements and reimbursement
of the servicers' reasonable expenses in connection therewith.
o The Plan investing in the certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933.
For purposes of the underwriter exemption, a "designated transaction"
means, for certificates issued on or after August 23, 2000, a transaction in
which the assets underlying the certificates consist of single-family
residential, multi-family residential, home equity, manufactured housing and/or
commercial mortgage obligations that are fully secured by single-family
residential, multi-family residential or commercial real property or leasehold
interests in the foregoing.
Moreover, the underwriter exemption provides relief from certain
self-dealing/conflict of interest prohibited transactions that may occur when a
fiduciary causes a Plan to acquire certificates in a trust containing
receivables on which such person (or its affiliate) is an obligor; provided,
that among other requirements:
118
o the person (or its affiliate) is not an obligor with respect to more
than 5% of the fair market value of the obligations or receivables
contained in the trust;
o the Plan is not a plan with respect to which any member of the
restricted group is the "plan sponsor" (as defined in Section 3(16)(B)
of ERISA);
o in the case of an acquisition in connection with the initial issuance
of certificates, at least 50% of each class of certificates in which
Plans have invested is acquired by persons independent of the
restricted group and at least 50% of the aggregate interest in the
trust fund is acquired by persons independent of the restricted group;
o a Plan's investment in certificates of any class does not exceed 25% of
all of the certificates of that class outstanding at the time of the
acquisition; and
o immediately after the acquisition, no more than 25% of the assets of
any Plan with respect to which such person has discretionary authority
or renders investment advice are invested in certificates representing
an interest in one or more trusts containing assets sold or serviced by
the same entity.
The underwriter exemption issued to Bear, Stearns & Co., Inc. was amended
by Prohibited Transaction Exemption 97-34, 62 Fed. Reg. 39021 (1997), in part,
to provide exemptive relief to certain mortgage-backed and asset-backed
securities transactions that utilize pre-funding accounts and that otherwise
satisfy the requirements of the underwriter exemption. Mortgage loans or other
secured receivables supporting payments to certificateholders, and having a
value equal to no more than 25% of the total principal amount of the
certificates being offered by the trust, may be transferred to the trust within
a 90-day or three-month funding period following the closing date instead of
being required to be either identified or transferred on or before the closing
date. The relief is available when the following conditions are met:
o The funding limit (i.e., the ratio of the amount allocated to the
pre-funding account to the total principal amount of the certificates
being offered) must not exceed 25%.
o All the additional obligations transferred after the closing date must meet
the same terms and conditions for eligibility as the original obligations
used to create the trust, which terms and conditions have been approved by
a rating agency; provided, that the terms and conditions for determining
the eligibility of an obligation may be changed if such changes receive
prior approval either by a majority vote of the outstanding
certificateholders or by a rating agency.
o The transfer of additional obligations to the trust during the funding
period must not result in the certificates to be covered by the underwriter
exemption receiving a lower credit rating from a rating agency upon
termination of the funding period than the rating that was obtained at the
time of the initial issuance of the certificates by the trust.
o Solely as a result of the use of pre-funding, the weighted average annual
percentage interest rate for all of the obligations in the trust at the end
of the funding period must not be more
119
than 100 basis points lower than the average interest rate for the
obligations transferred to the trust on the closing date.
o In order to insure that the characteristics of the additional obligations
are substantially similar to the original obligations which were
transferred to the trust fund:
(i) the characteristics of the additional obligations must be
monitored by an insurer or other credit support provider
that is independent of the depositor; or
(ii) an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided to
each rating agency rating the certificates, the related
underwriter and the related trustee) stating whether or not
the characteristics of the additional obligations conform to
the characteristics described in the related prospectus or
prospectus supplement and/or pooling and servicing
agreement. In preparing the letter, the independent
accountant must use the same type of procedures as were
applicable to the obligations transferred to the trust as of
the closing date.
o The period of pre-funding must end no later than three months or 90
days after the closing date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the
pooling and servicing agreement or an event of default occurs.
o Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be
invested only in certain permitted investments.
o The related prospectus or prospectus supplement must describe:
(i) any pre-funding account and/or capitalized interest account
used in connection with a pre-funding account;
(ii) the duration of the period of pre-funding;
(iii) the percentage and/or dollar amount of the funding limit for
the trust; and
(iv) that the amounts remaining in the pre-funding account at the
end of the funding period will be remitted to
certificateholders as repayments of principal.
o The related pooling and servicing agreement must describe the permitted
investments for the pre-funding account and/or capitalized interest account
and, if not disclosed in the related prospectus or prospectus supplement,
the terms and conditions for eligibility of additional obligations.
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On November 13, 2000, the DOL published in the Federal Register an
amendment (Prohibited Transaction Exemption 2000-58) to the underwriter
exemption (65 Fed. Reg. 67765 (2000)) that, effective as of August 23, 2000,
generally permits Plans to purchase securities, including subordinated
securities, rated in any of the four highest ratings categories (provided that
all other requirements of the underwriter exemption are met). The description
above reflects this amendment.
In general, neither PTCE 83-1, which exempts certain transactions involving
Plan investments in mortgage trusts, nor the underwriter exemption applies to a
trust which contains unsecured obligations. However, PTE 2000-58 provides that,
for purposes of the underwriter exemption, residential and home equity loan
receivables issued in designated transactions may be less than fully secured if
o the rights and interests evidenced by the certificates issued in the
designated transaction are not subordinated to the rights and interests
evidenced by other securities of the same trust fund,
o the certificates have received a rating at the time of acquisition that
is in one of the two highest generic rating categories from a rating
agency, and
o the receivables are secured by collateral whose fair market value on
the closing date of the designated transaction is at least 80% of the
sum of the outstanding principal balance due under the receivable and
the outstanding principal balance of any other receivable of higher
priority which is secured by the same collateral.
Any Plan fiduciary that proposes to cause a Plan to purchase securities
should consult with counsel concerning the impact of ERISA and the Code, the
applicability of PTCE 83-1, the underwriter exemption, or any other exemption
and the potential consequences in their specific circumstances, prior to making
an investment. Moreover, each Plan fiduciary should determine whether, under the
general fiduciary standards of investment prudence and diversification, an
investment in the securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
LEGAL MATTERS
The legality of the securities of each series, including the material
federal income tax consequences with respect to the securities, will be passed
upon for the depositor by Brown & Wood LLP, New York, New York, Morgan, Lewis &
Bockius LLP, New York, New York, or other counsel designated in the prospectus
supplement.
FINANCIAL INFORMATION
A new trust fund will be formed for each series of securities. No trust
fund will engage in any business activities or have any assets or obligations
prior to the issuance of the related series of securities. Accordingly, no
financial statements with respect to any trust fund will be included in this
prospectus or in the related prospectus supplement.
121
AVAILABLE INFORMATION
The depositor has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the securities. This
prospectus, which forms a part of the registration statement, and the prospectus
supplement relating to each series of securities contain summaries of the
material terms of the documents referred to herein and therein, but do not
contain all of the information set forth in the registration statement pursuant
to the Rules and Regulations of the SEC. For further information, reference is
made to the registration statement and its exhibits. The registration statement
and exhibits can be inspected and copied at prescribed rates at the public
reference facilities maintained by the SEC at its Public Reference Section, 450
Fifth Street, N.W., Washington, D.C. 20549, and at its Regional Offices located
as follows: Midwest Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048. In addition, the SEC maintains a
Web site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the depositor,
that file electronically with the SEC.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
This prospectus incorporates by reference all documents and reports filed
by the depositor, Bear Stearns Asset Backed Securities, Inc., with respect to a
trust fund pursuant to Section 13(a), 14 or 15(d) of the Securities Exchange Act
of 1934, as amended, prior to the termination of the offering of the related
securities. Upon request by any person to whom this prospectus is delivered in
connection with the offering of one or more classes securities, the depositor
will provide or cause to be provided without charge a copy of any of the
documents and/or reports incorporated herein by reference, in each case to the
extent the documents or reports relate to those classes of securities, other
than the exhibits to the documents (unless the exhibits are specifically
incorporated by reference in such documents). Requests to the depositor should
be directed in writing to: Bear Stearns Asset Backed Securities, Inc., 245 Park
Avenue, New York, New York 10167, telephone number (212) 272-4095. The depositor
has determined that its financial statements are not material to the offering of
any securities.
Investors may read and copy the documents and/or reports incorporated
herein by reference at the Public Reference Room of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains a website at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding issuers, including each trust fund, that file
electronically with the SEC.
RATINGS
It is a condition to the issuance of the securities of each series offered
by this prospectus and the accompanying prospectus supplement that they shall
have been rated in one of the four highest rating categories by the nationally
recognized statistical rating agency or agencies specified in the prospectus
supplement.
122
Each such rating will be based on, among other things, the adequacy of the
value of the trust fund assets and any credit enhancement with respect to the
related class and will reflect the rating agency's assessment solely of the
likelihood that the related holders will receive payments to which they are
entitled. No rating will constitute an assessment of the likelihood that
principal prepayments on the related loans will be made, the degree to which the
rate of prepayments might differ from that originally anticipated or the
likelihood of early optional termination of the securities. A rating should not
be deemed a recommendation to purchase, hold or sell securities, inasmuch as it
does not address market price or suitability for a particular investor. A rating
will not address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor purchasing a security at a significant
premium might fail to recoup its initial investment under certain prepayment
scenarios.
There is also no assurance that any rating will remain in effect for any
given period of time or that it may not be lowered or withdrawn entirely by the
applicable rating agency in the future if in its judgment circumstances so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of trust fund assets or any credit enhancement with
respect to a series, a rating might also be lowered or withdrawn because of,
among other reasons, an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of the credit enhancement
provider's long-term debt.
The amount, type and nature of any credit enhancement established with
respect to a series of securities will be determined on the basis of criteria
established by each rating agency named in the related prospectus supplement.
These criteria are sometimes based upon an actuarial analysis of the behavior of
mortgage loans in a larger group. Such analysis is often the basis upon which
each rating agency determines the amount of credit enhancement required with
respect to each class of securities. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately reflect
future experience nor any assurance that the data derived from a large pool of
mortgage loans will accurately predict the delinquency, foreclosure or loss
experience of any particular pool of loans. No assurance can be given that
values of any properties have remained or will remain at their levels on the
respective dates of origination of the related loans. If residential real estate
markets should experience an overall decline in property values such that the
principal balances of the loans in a particular trust fund and any secondary
financing on the related properties become equal to or greater than the value of
those properties, the rates of delinquencies, foreclosures and losses could be
higher than those now generally experienced in the mortgage lending industry. In
additional, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by borrowers of scheduled
payments of principal of and interest on the loans and, accordingly, the rates
of delinquencies, foreclosures and losses with respect to any trust fund. To the
extent that losses are not covered by credit enhancement, losses will be borne,
at least in part, by the holders of one or more classes of the securities of the
related series.
LEGAL INVESTMENT CONSIDERATIONS
Unless otherwise specified in the related prospectus supplement, the
securities will not constitute "mortgage-related securities" within the meaning
of the Secondary Market Mortgage Credit Enhancement Act of 1984, as amended.
Accordingly, investors whose investment
123
authority is subject to legal restrictions should consult their own legal
advisors to determine whether and to what extent the securities constitute legal
investments for them.
PLAN OF DISTRIBUTION
The depositor may offer each series of securities through Bear, Stearns &
Co. Inc. (BS&Co.) or one or more other firms that may be designated at the time
of the related offering. The participation of BS&Co. in any offering will comply
with Schedule E to the By-Laws of the National Association of securities
Dealers, Inc. The prospectus supplement relating to each series of securities
will set forth the specific terms of the offering of the series and of each
class within the series, the names of the underwriters, the purchase price of
the securities, the proceeds to the depositor from the sale, any securities
exchange on which the securities may be listed, and, if applicable, the initial
public offering prices, the discounts and commissions to the underwriters and
any discounts and concessions allowed or reallowed to dealers. The place and
time of delivery of each series of securities will also be set forth in the
related prospectus supplement. BS&Co. is an affiliate of the depositor.
124
GLOSSARY OF TERMS
Agency Securities. Mortgage-backed securities issued or guaranteed by
Ginnie Mae, Fannie Mae or Freddie Mac.
Asset Value. Unless otherwise specified in the related prospectus
supplement with respect to the primary assets in the trust fund, the product of
the Asset Value percentage set forth in the related indenture multiplied by the
lesser of
o the stream of remaining regularly scheduled payments in the primary
assets net of certain amounts payable as expenses, together with income
earned on each regularly scheduled payment received through the day
preceding the next distribution date at the Assumed Reinvestment Rate,
if any, discounted to present value at the highest interest rate on the
notes of the series over periods equal to the interval between payments
on the notes and
o the then outstanding principal balance of the primary assets.
Assumed Reinvestment Rate. With respect to a series of securities, the
highest rate permitted by the rating agencies named in the related prospectus
supplement or a rate insured by means of a surety bond, guaranteed investment
contract, reinvestment agreement or other arrangement satisfactory to the rating
agencies.
Home Equity Loans. Closed-end loans and/or revolving credit line loans
secured by mortgages, deeds of trust or other similar security instruments
creating senior or junior liens on one- to four-family residential properties or
mixed-use properties.
Home Improvement Contracts. Home Improvement installment sales contracts
and installment loan agreements which are either unsecured or secured by
mortgages, deeds of trust or similar security instruments creating generally
junior liens on one- to four-family residential properties or mixed-use
properties or secured by purchase money security interests in the related home
improvements.
Insurance Proceeds. Amounts received by the related servicer under any
title insurance policy, hazard insurance policy or other insurance policy
covering any primary asset in a trust fund, other than amounts to be applied to
the restoration or repair of the related property or released to the borrower
under the related agreement.
Liquidation Proceeds. Amounts received by the related servicer in
connection with the liquidation of the primary assets or related real property
in a trust fund, whether through foreclosure sale, repossession or otherwise,
including payments in connection with the primary assets received from the
borrower, other than amounts required to be paid or refunded to the borrower
under the applicable loan documents or pursuant to law, net of the related
liquidation expenses.
125
OID Regulations. Sections 1271 through 1275 of the Internal Revenue Code of
1986, as amended, and the Treasury regulations issued thereunder on February 2,
1994 and amended on June 11, 1996.
Manufactured Housing Contracts. Manufactured housing installment sales
contracts and installment loan agreements secured by senior or junior liens on
the related manufactured homes or secured by mortgages, deeds of trust or other
similar security instruments creating senior or junior liens on the real estate
on which the related manufactured homes are located.
Private Label Securities. Private mortgage-backed securities, other than
Agency Securities, backed or secured by underlying loans that may be Residential
Loans, Home Equity Loans, Home Improvement Contracts and/or Manufactured Housing
Contracts.
Residential Loans. Loans secured by mortgages, deeds of trust or other
similar security instruments creating senior or junior liens on one- to
four-family residential properties.
U.S. Person: Any of the following:
o a citizen or resident of the United States;
o a corporation or a partnership (including an entity treated as a
corporation or partnership for U.S. federal income tax purposes)
organized in or under the laws of the United States, or any State
thereof or the District of Columbia (unless in the case of a
partnership Treasury regulations are adopted that provide otherwise);
o an estate whose income from sources outside the United States is
includible in gross income for federal income tax purposes regardless
of its connection with the conduct of a trade or business within the
United States; or
o 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 U.S.
Persons have the authority to control all substantial decisions of the
trust.
In addition, certain trusts which would not qualify as U.S. Persons under the
above definition but which are eligible to and make an election to be treated as
U.S. Persons will also be treated as U.S. Persons.
$674,427,000
(APPROXIMATE)
HOME EQUITY LOAN-BACKED TERM NOTES,
SERIES 2001-2
IRWIN HOME EQUITY LOAN TRUST 2001-2
ISSUER
IRWIN UNION BANK AND TRUST COMPANY
ORIGINATOR AND MASTER SERVICER
IRWIN HOME EQUITY CORPORATION
SUBSERVICER
BEAR STEARNS ASSET BACKED SECURITIES, INC.
DEPOSITOR
------------------
PROSPECTUS SUPPLEMENT
------------------
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
------------------
SEPTEMBER 25, 2001
No person has been authorized to give any information or to make any
representation other than those contained in this prospectus supplement or the
prospectus and, if given or made, such information or representation must not be
relied upon. This prospectus supplement and the prospectus do not constitute an
offer to sell or a solicitation of an offer to buy any securities other than the
notes offered hereby, nor an offer of the notes in any State or jurisdiction in
which, or to any person to whom, such offer would be unlawful. The delivery of
this prospectus supplement or the prospectus at any time does not imply that
information herein or therein is correct as of any time subsequent to its date;
however, if any material change occurs while this prospectus supplement or the
prospectus is required by law to be delivered, this prospectus supplement or the
prospectus will be amended or supplemented accordingly.